How to set your recommended retail price

Deciding on your recommended retail price is often a tricky consideration. 

Many online store owners find themselves spending far too much antagonising over.

‘Will I make more sales if my prices are cheaper?’

‘If I set my prices too high will I scare people away?’

Or

‘Would I be better to serve fewer customers but at a higher profit margin?’

These are just a few of the difficult decisions we face as e-commerce business owners.

After running my own successful online fashion store iland co. for more than 5 years, plus working with many other e-commerce brands,  this is what I’ve discovered: 

• There are many hidden expenses that eat into your profit margins. If you set your prices too low, you will make zero profits, or worse - a loss on most of your sales.

• Acquiring a customer who spends $20 is just as costly and difficult as it is to acquire a $200 customer. If I want to make $2,000 in revenue (sales) and I’m selling  $200 dollar dresses, I need to sell 10 dresses. Versus, if I’m selling $20 dollar dresses I will need to sell 100 to make the same revenue.  It’s clear that selling less at a higher price point is the easiest way to achieve the same goal revenue!

• Advertising costs eat into profit margins very quickly. For example, I can expect to spend between $20 to $60 dollars on Facebook advertising to make one sale.  If I’m selling $200 dollar dresses and my manufacturing costs are low, this is acceptable. If I’m selling $20 dollar dresses I’m in big trouble.

• Some of the most successful e-commerce fashion stores I’ve worked with sell higher-priced items, eg more than $150 dollars per item. This means their average order cart value is a lot higher. They also have a lot more profit margin to play with, which supports investing in more advertising budget to increase the volume of orders they receive.

• Many online store business owners forget that a large proportion of their customers use some sort of discount code, which again eats into your profit margins. If your customer has signed up to your newsletter to get free shipping or 10% off on their first order, that cost of shipping/discount dollar amount comes straight off your bottom line.  

So, how do you set your prices?

In order to set your retail price, you need to first consider the following:

1.WHO are you serving?  

2. What is your NICHE? 

3. What is your COST OF GOODS SOLD? 

You see, if you are planning on targeting teenage girls, trying to sell a $200 beach dress to them is going to be a difficult business model to make succeed. 

Your products and prices need to reflect the demographic you are selling them to.

Unless of course, you have built your business and brand around a particular niche or demographic were $200 beach dresses are affordable for your particular teenage market - an affluent suburb or city, or a celebrity market for example. In that case, your price makes sense for the audience you are serving.

The next step is to calculate the cost of goods sold or (COGS) for short.

Your COGS will include:

• The finished/ landed cost of producing or sourcing the product.

• Any shipping costs including sending samples to/from the factory.

• The cost of shipping the product to the customer (if you offer free shipping).

• The cost of any design work, contractors or consultants hired during the product creation process.

• Screens, if you are doing screen printing (these add up!).

• Bags, tags and any sort of packaging you use or add to the garment prior to delivery to the customer.

I like to add the total costs incurred in producing the items, including shipping and then dividing by the number of units I have ordered.  

For example, if the unit price is $15 dollars and I’m ordering 100, the cost for the finished products is $1,500.  I then tally up the costs incurred to bring that design to life, shipping samples to/from the factory, screen costs, sample costs and designer costs plus shipping the bulk production to me which might be another $1,500.  So my total costs for 100 units in this example is $3,000 - so the true cost of the item to me is $30 dollars. Which is very different from the $15 dollars at first glance, quoted by the factory.

Once you have this number, write it down, as we haven’t finished working out the full RRP. There are still more costs to consider before considering our final Recommend Retail Price.

We also need to consider the transaction fees per order, especially if you offer “AfterPay” or similar who can charge up to 8% of the sale price. Be sure to make space in your profit margins for those sneaky ‘Free Shipping’ or ‘10%’ off discounts too!

Don’t forget the need to consider your time in bringing the products to life and selling them which might include an hourly rate calculation.  

And lastly, we need to consider advertising and marketing costs required to make the sale! The cost of Facebook ads, for example, is ever-increasing as more businesses join the advertising platform, pushing up the auction price. I can spend up to $60 to get one sale!

When setting your retail price, I encourage you to consider your overall business model. Are you aiming for a volume of sales, ie 100 sales a day at $20 a sale, or a higher value order, with less volume, eg,10 sales a day at $200 an item. 

I encourage you to not undervalue your time in bringing your business and products to life and the hidden expenses that eat into our profits. 

Always remember you can start higher and later discount your prices if need be. 

It’s very tricky to justify raising your prices after the fact unless you’ve made significant “value add”/ modifications to the product your selling.

I hope my tips have given you a realistic base to work from when it comes to calculating your retail prices. If you need an exact formula for pricing your products, feel free to check out my 8-week program Online Store Success, where we delve even deeper into pricing for profits.

Best of luck in your business,

Until next time,

Jodie,

xo