One of the best ways to maximize profit is by setting prices according to the best available data. Even a small 1% change in price can yield over a 10% increase in profitability. So how do you price products effectively? It comes down to a few key factors: calculating costs, identifying which customers you’re after and following your competitors’ lead.
The cost of a product might sound like a simple thing to measure, but it’s actually made up of several distinct elements. It’s important to incorporate all of these elements into an overall assessment of your costs, so you’re not eating into your profit margin without realizing it. The total cost of a product is a combination of the costs of raw materials, labor, assembly, storage, shipping, marketing, returns, taxes and FBA fees. FBA fees in particular can be difficult to manage, so we’ll break down how to accurately assess these fees later.
Once you know your combined costs, you’ll want to divide this number by the number of products you plan on producing to get your average cost per item. Next, you’ll want to determine your gross profit margin target to ensure you’re staying profitable. Simply subtract your product’s cost from its price, then divide the result by the product’s price. If you can hit a gross profit margin target of between 30 and 50%, you’re on the right track.
Identifying Which Customers You’re After
Another important factor in figuring out the best price for your products is identifying which customers you’re after. This might sound odd at first—aren’t you after as many customers as possible? But depending on what kind of customers are most likely to buy your product, different prices will work better than others. Some customers, for example, buy products on a whim when listings catch their eye. If this is the kind of customer most likely to buy your product, then you’ll want to make a dazzling listing (with a higher price). Other customers are bargain-hunters: you’ll win these customers over if you have the same listing as your competitors at an even marginally better price.
Following Your Competitors’ Lead
When in doubt, follow your competitors’ lead. If you’re completely at a loss as to how to price your products, you can always rifle through your competitors’ listing to get an idea of where to start. Look for competitors with positive reviews and professional-looking