Pricing & Product Lineup Strategies for Sustainable Business Growth
One of the things that really sets eCommerce web design apart from just regular, old, everyday web design is that there’s a lot of science and strategy that needs to go into almost every decision.
On an informational, brochure website most of the decisions have to do with either aesthetics or making sure your message is being communicated well.
On an eCommerce site, you have to do those things PLUS make sure you’re pricing your products right and choosing the best inventory lineup possible.
And while there’s lots of information out there on these topics I think a lot of it misses an important factor and that is: how to select the right inventory lineup, at the right price points in order to build a sustainable, long-term eCommerce business.
Because it can’t all be about discounts and cost savings and how to low you can set your prices. Those things do nothing but pave the way to insolvency. You simply cannot expect to grow and scale a business that’s based on unsustainable profit margins.
The math simply does not work.
Pricing & inventory are so important to the success of your business now and into the future. How you price your products and what products you choose to sell ultimately impact everything from your cash flow to your profits. Ultimately pricing and inventory impact every single aspect of your business and I’m here to help you get them right.
First, some words of encouragement!
Ok, I definitely made pricing and inventory sound super scary in that last paragraph, didn’t I? Eek! Don’t worry! Because here’s the good news that I hope prevents you from stalling out at this phase in your eCommerce journey:
You can always revise.
That’s right - you can always update your prices. Change your inventory lineup. Modify your messaging. Revamp your sales strategies. All of it.
Nothing is set in stone.
The best thing you can do is launch something and the tips I’m going to give you about pricing and inventory are great places to start.
That’s one of the best things about running your own small business; you can respond swiftly to feedback and changes in the market. You can be nimble and flexible when the big guys are stuck jumping through a bureaucratic series of hoops to make one small change.
I talk a bit more about responding to feedback and analytics a little more down below but I think it’s important enough to mention it in this post twice!
The best thing you can do is launch something and the tips I’m going to give you about pricing and inventory are great places to start.
I want you to have a solid footing for a jumping-off point but where you begin should definitely not be where you end.
There’s a lot of science that goes into pricing and inventory but it’s also a little bit of an art. So the best thing you can do is just begin and then be open to adjusting as you go along!
Ready to jump in? Let’s start first with pricing!
Pricing Factors to Consider
I think by now you definitely get that this post is not going to be about discount strategies you can use to boost sales in the short run. (I’ve got other posts for that!)
Nope, we’re going to talk pricing from a business standpoint - one that takes your long-term viability into consideration. So bust open a spreadsheet (or get a notepad, or whatever - you do you) because it’s time to do some math.
Step 1: What are your costs?
To understand what you need to price something at, you first need to know what it costs you to acquire (or produce) it. This seems simple but I see a lot of startups come and go because they failed to take allllll their costs into consideration.
Variable Costs
For each product that you offer, there’s a cost of goods sold. This is what it costs you to buy what you’re selling wholesale or to purchase the raw materials you need to make your product. This seems like a no-brainer. But there are lots of other variable costs that need to be factored into your prices as well. This includes things like:
Labor
Packaging
Shipping
Promotional Materials, etc.
Add all these costs up for each product.
Fixed Costs
It’s easy to do the math on variable costs because we can see how they directly relate to each product, however, it’s important to factor in the fixed costs of your business as well.
Fixed costs are things like your rent, insurance, the cost of your website - basically things that would stay the same whether you sold 1 unit or 10,000 units.
The best way to make sure you can cover your fixed costs is by doing a break-even analysis. In this process, you’ll add up all your fixed costs and determine how many units of each product you’ll need to sell in order to cover them. Everything above that point is profit.
The SBA offers an easy, free tool to help you with this here: Break-Even Calculator
Step 2: How much do you need to make?
Up until this point, pricing has just been about covering costs and breaking even. But that’s not what we’re here for - we need to make a profit!
You know your lifestyle and industry best so it’s going to be difficult for anyone else to tell you what your profit margins should be. And even though I’m going to tell you in a minute that you don’t really need to pay attention to your competitors, you definitely need to consider how much you can reasonably mark something up while still staying competitive and marketable.
Step 3: Putting It Together
Here are some calculations to help you put all the above together!
Variable Costs = Cost Per Unit / Total Number of Units
Break Even Point = Fixed Costs / (Price Per Unit - Variable Costs)
Target Price = Costs + Profit Margin %
Why what your competitors are charging doesn’t (really) matter
It’s really important that you do all of the above for YOUR business and let the outcome be what the outcome is. Why? Because there’s really no way at all that your competitors have the same costs as you.
This means that arbitrarily setting your price points without taking your own actual numbers into account does you no good. Remember, we want to make sure you’re setting your prices at a point that’s sustainable - and profitable! - for YOU!
Whether you’re able to market and sell the products you want to competitively only matters if you’re also able to do it without seeing red.
Now that we’ve learned all about how to make sure your prices are set so that you can grow your business profitably, let’s see how what you sell matters just as much!
How to Choose the Right Product Lineup
You know how at Costco they typically just sell one brand of something? Like, if you want some mayo, you’re gonna get a great deal on 7 gallons of it but they don’t have a million different varieties. It’s just the mayo. One brand. One size. One variety. The price is what the price is. Take it or leave it.
Costco has an easier time selling one of anything regardless of price.
At the regular grocery store, you can get mayo made with olive oil, mayo made with cage-free eggs, mayo in different flavors, all sorts of different brands and sizes and types. There’s a lot to choose from and maybe you don’t even think you think too much about it because you’re probably thinking that “choice is good” and “people like having options” and yadda yadda yadda.
Wrong.
Here’s the real truth: Costco has an easier time selling one of anything regardless of price than other stores have selling lots of everything, even when products are priced more affordably. Why? Because although we all say we like to have options to choose from, humans are notoriously bad at making decisions or at least get really fatigued and overwhelmed by having to make too many of them.
Using our mayo example, here’s the number of choices a shopper has to make:
At Costco
You want mayo? Y/N
At a regular grocery store
You want mayo? Y/N
What brand?
What size?
What are the ingredients?
Organic or not?
Special flavor?
On sale?
Coupon?
Etc...
I don’t know about you but I know that I can certainly make one decision (and feel better about it) than I can make 8 or more. And it’s not even about the price! Of course, there’s a little bit of selling psychology at play here that we can apply to eCommerce sites so let’s learn a bit about it!
What is Hick’s Law and what does it mean for eCommerce?
I promise this is more about psychology than math but Hick’s law is a principle that basically says that as the number of choices increases that the amount of time it takes to decide amongst those choices increases logarithmically.
Basically, more choices = more decision time.
When we combine with what we know about how long we have to capture people’s attention online (I.e. NOT LONG), what’s the verdict? Well, for me it’s that you should aim to be more like Costco and less like your traditional grocery store. And, no, this doesn’t just involve mayo.
Here’s how:
Tip 1: You’ll see higher conversion rates if you offer fewer choices.
In a famous experiment on decision-making that researchers always point to on this subject, grocers alternated between days where they sold just 6 varieties of jam and days where they offered 24. Four times the product must mean 4x the profit, right? Wrong.
As you can see, the days with fewer varieties had much higher conversion rates than those with more options available. There are a couple of different reasons for this (more tips on this below) but the takeaway for eCommerce is that sites that offer either a highly curated selection of products or who use navigation and menu organization strategically to only show the most profitable categories, while mitigating the others, will outperform those that put it all out there.
It’s also important to point out the obvious here and that’s that the boosting conversion had absolutely nothing to do with lowering prices!
Tip 2: Only offer distinct variations.
One of the lessons from the jam experiment is that people have a really hard time when there are too many options that aren’t clearly distinguishable from one another. It may seem nice to offer lots of options but customers will often feel overwhelmed by trying to suss out what the discrete differences are amongst them and are prone to just give up and go elsewhere.
This means that your products can be priced right and you can still miss out on the sale simply by offering too many choices that are indistinguishable from one another.
What to do instead? Pare down your offering to only distinct variations. Simple variations are easier to talk about, easier to sell, easier to market, and easier to buy!
Tip 3: If you have a complex product or service, bundle options together to minimize decisions.
If what you have to offer is inherently complex (for example: if it’s highly technical or super customizable) you may not be able to remove options or variations. They are what make your offering unique, after all! But you can help ease the decision-making burden by bundling together presets that make the most popular decisions for your customers.
What I’ve found for most shops that offer “customizable” products is that the majority of purchases can actually be boiled down to a few simple combos.
The lesson here is that just because you can offer infinitely customizable products doesn’t mean you should. Taking away decisions isn’t a bad thing! Customers will feel more confident in you telling them that the bundle you’ve put together represents the most popular combination of product features and you can’t put a price on that!
Fast decisions = happy customers!
We all want our customers and clients to be satisfied with what they’ve purchased from us and there are tons of things people do to try to improve customer service. It should be no surprise at this point though that one of the best things that you can do to make happy customers is helping them make fast decisions.
When people are paralyzed by too many options, they get stuck overthinking things, fearing they’ll make the wrong choice or over-analyzing their choices. Studies have shown that the longer it takes someone to make a decision, the less confident they are in the outcome. So, faster decision-making = happier customers, regardless of price!
There are easy ways to help reassure people that they are making a great choice by shopping with you; whether it’s by providing super clear shipping & return policies, simple forms that don’t ask for unnecessary info, or a streamlined checkout that keeps things on one page or auto-fills past info if you have it. The goal is to just make things as easy as possible for people, being empathetic to their situations and helping them feel confident in their purchase.
Launch, Get Feedback & Adjust Accordingly
I told you at the beginning of this post that the goal was going to be to just LAUNCH and that we’d be open to circling back later to revise things as needed. So what does that actually look like? It can mean a few things - here are some ideas:
Use your site’s analytics to see what products sell and which don’t. (Here’s a great article about how to understand the Squarespace Analytics panel to get you started.)
Take seasonality into account. Is what you’re selling more appealing at one time of year over another? Is there a companion product you can launch to round things out the rest of the year?
Are you making enough? After a few months, you’ll know whether your cash flow is feeling good or not. Could you adjust the profit margins in your pricing calculations to better optimize cash flow?
Have you considered not just the prices of your products but the product lineup itself? Is there room to simplify your offerings to help people make buying decisions faster?
If you sell multiple products, can you increase profits without raising prices by eliminating your underperformers? How would making different purchasing decisions affect your fixed or variable costs?
Bottom Line
In building your profitable eCommerce business, both pricing and inventory management are crucial to your success. You can price your products perfectly and still confuse buyers by offering too many options.
The good news is that you now have the tools (and formulas) to make sure that each product you sell doesn’t just get you to break even but makes sure to add a little to your bottom line. And I don’t know about you but just knowing that some of the best performing shops offer the simplest product lineups is such as relief - and not just because it makes all the math a whole lot easier! 😂 Keeping your product lineup simple is easier to manage, easier to market, and easier to sell!
Want more pricing strategy tips? Be sure to check out the free download below!
