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Gandalf's Guide To ECommerce Pricing

This guide is not a definitive guide to pricing, it is merely a primer to help you avoid common mistakes made by amateurs. Forget everything you know about supply and demand. This guide outlines typical incomes and outgoings and simple working relationship between them. It describes how to calculate an objective price for a product with minimal risk.

Typical practices and ideas for investigation are given. Some of the following information is sourced from the "Lazy Man's Guide To Riches", a small but informative book which describes how to run a mail order business. Some of the information from this book is very relevant to ECommerce.

We begin by investigating each component of income and outgoings:

Expenses

It is very easy to under-estimate the cost of producing your product. This section describes some common expenses of time, effort and typical overheads. This is not a complete list; there may be expenses specific to your product, service or industry.

The Product

The easiest product to sell is an existing product made by some-one else. This provides no research and developent risk and is already likely to be economically viable, although by no means certain. There are unexploited niche markets for existing products and changing prices create new markets.

Lateral thinking may be all that is required to discover a viable niche market. Your experience, your hobbies and interests, make you uniquely positioned for the task. Your "product" can be anything, although it is a tremendous benefit if it is a lightweight object.

• Services can only be performed by trained individuals or enthusiasts and possibly requires specialist equipment. Services may be limited by geography. This makes a service business harder to scale. It is possible to replicate such an enterprise as a chain or a franchise, such is the case with fast food.
• Heavy objects and fragile objects are expensive to deliver. This increases costs significantly.
• Software and other forms of useful information are the other extreme. There are minimal "transport" costs which can be partially offset or made into an additional revenue stream. People forget that software is too easy to copy. Not only do you compete against free software and competitors' software, but you compete against illegal copies of your own software. Additionally, it is hard to compete in a market where unit costs decrease to zero with increased volume and progressive versions.

The reason that successful ECommerce businesses retail light objects is they are easy to sell worldwide. Such an enterprise is harder to copy once the volume of sales is established.

Labour

It may be hard to quantify the work required to sell one item. This is especially true for craftwork. Take the average amount of time it takes one unskilled person to perform the task as the basis for your calculations. Err on the side of caution because it is easy to forget the overhead of labour entirely. Fortunately for mail order and ECommerce, the cost of employees is lower than a shop. Rather than employing enough people for brisk periods, such as seasonal sales, simply employ enough people required to work throughout a slow day. Recruit temporary staff when required. This partially eliminates the need to employ extra people to cope with surges and spikes in demand.

Taken to extreme, it is possible to advertise a product without immediately having any resources to fulfill orders, although this significantly increases risk because it becomes much harder to quantify expenses. It is possible to take advantage of mail order laws (check your local laws first). Many countries allow four or maybe six weeks for delivery.

Typical orders do not take this long to complete. It is possible to obtain staff and many supplies within this time, as well. This makes it is possible to market many products without immediately having staff to fulfill demand. Should it not be possible to fulfill orders, the minimal losses are those of promotion and administration to refund money. The proposition of running a mail order business in parallel or instead of ECommerce business should not be dismissed. Promotional costs may benefit your existing activities regardless of the success of new revenue streams.

Work Space

Remember to include the cost of your working environment. This is mostly a fixed cost of many components, making it easy to under-estimate. If you do under-estimate this cost and you work from home, you may find it difficult to expand your business. Working from home may minimise fixed costs, although you may find that the potential to increase throughput does not justify re-location. The cost per item varies with volume, so you will need to estimate demand to estimate cost per item. You should under-estimate demand. For example, assume an advertising response rate of vastly less than one percent.

If you start a business from home, you may infringe existing agreements, such as your rent or mortgage. Conversely, you may be elegible for financial incentives either for allocating part of your home to the business or to assist establishing a business premises. Seek legal and financial advice.

Packaging And Instructions

Ensuring that you have adequate packaging and instructions will reduce the proportion failed products returned and minimise disappointment. There is scope to reduce costs with novel packaging and instructions. For example, it may be possible to add these features to the product itself. There is also the aspect of unpackaging. It may be possible to reduce construction, packaging and storage cost by considering unpacking of the product, such is the case of self assembly furniture.

It is probably cheaper, per item, to package multiple items. For this reason you may want to include a fixed "packaging" charge below costs and amortise the variable cost with each product. This may not work well if you sell products of vastly different sizes or weights, so you may need to take into account the quantities and frequencies of each product being ordered. This can only be gained from experience, although you should encourage repeat business. If you expect to sell multiple items with each order, allow a single item to be sold with less profit. Customers typically "risk" less money with their first order.

Tax And Postage

Only people geographically local to your organisation may be subject to tax. Therefore you either have to provide two prices, surcharge local residents, or provide a discount. Providing two prices is a usual practice because no-one likes to see that someone else is paying less for the same. It is possible to surcharge and this is simplified for the customer because the computer system does the calcalution. Unfortunately, to apply the calculation, it requires an approximate location of the customer. This is impractical due to the following argument.

The typical customer values privacy. Systems that fail to take this into account will have significantly reduced usage. Additionally, many people will use an intuitive shopping system without serious intention of completing a transaction, such is the nature of an open, easy to use, interactive system. (You can only accomodate this usage pattern because any barriers placed on usage reduces customer interest to the point that they go elsewhere. Even where the system is bearable, they will be less willing to purchase additional items or refer your web site to friends.) No matter how you view your web site, the end users typically have a casual approach to access. You may only intend to close sales via your web site but your audience may merely be using it to research your products. (This may result in additional sales via other channels.)

Any increase in the initial advertised price and the final price will discourage purchases. Any decrease will lower profit margins. A decrease will also reduce sales where people are able to determine a difference in price, no matter how the difference is justified. This is the reason that many leading companies absorb tax and postage costs entirely. Absorbing costs is a widely debated topic within the mail order industry. Some argue that is standard practice for mail order companies to charge extra for postage and packaging, usually at profit. (A well known ploy is to offer "free" products with this additional charge.) Others argue that any difference between advertised product and the prominently advertised price is disconcerting to potential customers. Heavy items should include all of the transport cost, eliminating the surcharge.

Most regions and countries only levy tax when the sale is local, so as to encourage commerce beyond the area. Fortunately, this tax incentive partially offsets the additional delivery cost - so take advantage of it. Calculate the final, packaged cost of your product to be sent locally (with local taxes included). Repeat the calculation for global shipping with relevant taxes included. Your listed priced should be the higher price.

Promotion

You may be able to receive financial incentives for some promotion. For example, advertising may be tax deductable. This may include all expense on your web site, so seek financial advice immediately!

This is a compact guide to advertising in various media:

• Print media: Don't advertise at the bottom or on the left side. Don't use reverse print. Don't advertise in supplements or near the back, unless it is a television guide, event guide or suchlike. Use a similar font face and size if possible. Don't have empty space. Duplicate your advert in the classified adverts. Repeat your advert in multiple issues.
• press releases: Write in the third person.
• video media: Don't.
• audio media: Don't advertise detailed contact information unless advert is repeated frequently. Don't have distracting background noise.
• Postal mail: Start small. Be informal. Limit colour.
• EMail: Don't.
• Web: Make reciprocal hyperlinks and hyperlink to other web sites. Hyperlink to other web sites, including competitors. Include as much useful text as possible, such as old documents. Ensure your web site works on small screens, when printed and is accessible to people with disabilities. Don't use reverse print. Target banner adverts. Ensure your web site works from floppy disk, CDROM or suchlike.

There is an important volume rule to consider when developing a web site. The average person spends less than 20 minutes accessing any web site. Of this time, less than half is spent waiting for data to be accessed, at a transfer rate which may be as low as 3KB per second. (The transfer rate will increase over time.) So, the average person accesses less than 1800KB, although there are exceptions. A web site may be of any size, but above 1800KB, people will see a diminishingly small proportion of it. The nature of your web site may influence matters but the connection speed has the most influence.

Surplus products and waste material could be given to charity. This may be tax deductable; it may also provide promotion for both organisations.

Return On Investment

There are very simple rules for mail order business which also applies to ECommerce. You must sell products at three times or more the price they cost. Half of the money from sales is for promotion through all channels. Better sales allow better promotion. Up to 2/3 of the remaining money covers total costs. Some of the remaining money covers contingencies, such as replacing faulty items.

It can be seen that less than1/6 of turnover is potential profit at the minimum 3:1 price ratio. This increases to nearly 2/5 at 5:1 price ratio. It can also be seen that there are significant initial expensives to re-pay before profit occurs. These costs can be reduced almost to one person's time, in the case of ECommerce, but risk remains.

Summary

It remains prudent to choose a single product or small range of similar products that are likely to be profitable. The best example is small, light objects readily available in bulk, that can be sold to the public with potential for repeat business.