Forum Moderators: buckworks
Anyways, my questions relates to product pricing. I have read most posts on this forum regarding pricing, but still an uncertain on how I want to adjust my business pricing model. How important is price? Is low price king?
I've tried medium prices w/ free shipping and didn't notice an increase. Also, I recently performed a test, raising my website prices by an additional 25% (from 25% - 50% mark up). Typically I receive anywhere from 8-25 orders per day, revenue totaling anywhere from $1000-$3500. During my 3 day test, little to no consumer's purchased from my website... Once I brought prices down to where they used to be at, the orders started coming in again.
Now here is my question... there are about 3-4 major companies I compete with -- these guys eat up most of the market share. Their pricing is bare bottom (Maybe a 10-15% profit margin if that), they focus on low margins but high volume. I receive 18,000 unique visitors a month -- I'm thinking on dropping all my prices to be a few bucks above my major competitors and see if the volume increase. The hope is the increased volume would make up for the smaller profit margin.
I rank above many of them for target keywords, so there is no doubt I could steal much of their business, BUT here is where i'm hesitant on this plan. These top competitors have bare bone prices, but their shipping fees are enormous -- i.e. $17.99 to ship a 2 lb. item via ground shipping. Their goal is to make back some profit by upcharging their shipping fees. I would follow their lead if i dropped prices, but I think consumer's might abandon their cart if I do so. What do you think? They basically cheat the system, show low prices and hit the consumer w/ a jacked shipping fee during the end of checkout. Granted, their prices are still probably the lowest on the net -- but it's not as great of a deal to the consumer once they see the shipping fees. This tactic they use also screws me on the comparison websites, an item may appear to be $25 cheaper on bizrate but in reality the consumer only saves $5 after they pay their jacked shipping fees.
Do you think 10-15% max profit margin is worth a try? I guess if my volume atleast tripples it will be worth it, on the other hand I will become a lot more busier and my call center fees will deffinitely increase due to more calls. I guess I will need to test this out and see how it goes.
Would love to hear others opinions on my ramblings above. Thanks in advance! :)
Call in " Spring Inventory Clean Up " or some such, using the low prices
and moderately increased S & H charge.
That way you can test your pricing theory but are not locked into a permanent
low price format...KF
My competitors show cheaper prices than I do. It's not until the buyer gets to the checkout page that he realizes that the $99 item will cost him $119 with shipping, whereas my price was $115.95.
I wish I knew what the cart abandonment rate was for the stores that hide the shipping costs until the last minute.
One competitor who really frustrates me advertises the same Acme Widgets that I do. His ad says "Acme #123 Widget--$310." Well, my price on the #123 Widget is $359.
If you click on his ad, the page you're taken to has several models, radio buttons. The cheapest model--the #120--is the one that's priced at $310. Check the model #123 and--surprise--the price is $379.
I was advised by my distributor that many sites start out offering free shipping, but later switch to adding shipping costs because of the tactics of sites like the ones mentioned.
Let's assume each widget costs you 60$, normal sales price is 100$.
Now let's take a look. How many widgets do you need to sell to earn 1200$
Price 100$: 30 widgets (40$ profit/widget * 30 widgets = 1200$)
Price 90$: 40 widgets (30$ * 40 = 1200$)
Price 80$: 60 widgets (20$ * 60 = 1200$)
This means if you lower your prices by 20% you have to increase your turnover by 100% already!
And to handle the larger amount of order you need more people, if you offer free shipping your shipping costs increase also.
Imagine you offer free shipping and have now to pay for 60 parcels instead for 30 parcels! If each parcel costs 10$ thats 300$ additional shipping costs in our example! That would reduce your profit dramatically. So you would have to increase your turnover even more.
That's the reason I have a no discount policy on my own website.
Instead I try to compete with:
- better usability of the website
- faster shipping
- adding free samples
- better service
So ask yourself the question: Is your website already at its optimum? Could you increase your sales with better usabilty or better service? If you look at your website and it's not the best website out there in your field of business - change that before even thinking about lowering your prices.
Also what you have to keep in mind is this: If you sell to cheap pcustomers will start to ask themselves questions: Why can he afford to sell so cheap? Is he ripping of his customers, is he selling old products, does he get his products from dubious sources, are they even genuine?
Price 100$: 30 widgets (40$ profit/widget * 30 widgets = 1200$) - Regular shipping (no profit)
Price 90$: 40 widgets (30$ * 40 = 1200$) - (shipping + $10 handling fee) = $10 profit, which brings you back up to $40 profit.
Price 80$: 60 widgets (20$ * 60 = 1200$) - Same as above, but you'd be down $10 less, so $30 profit.
I dropped my prices last night, and jacked the shipping fee for a few high volume items we sell. I'm going to see if the volume increases, and whether the profit earned is greater than before when my prices were higher.
Also, you mentioned competing for better usasbility, faster shipping, service, etc... Most of my competitiors already offer this. I believe my website to be one of the most professional looking in my industry, but my competitors are either right behind me or equal. We all offer customer service, fast shipping, etc.
IMO when you have 3 websites that appear professional, promise fast shipping, have a good bizrate rating, etc. -- the consumer is going to then go w/ the site that has the lowest price for the product they're looking for.
With 18,000 visitors a month, if you can run the tests you would only need 3 to 4 weeks to determine the optimal scenario. Pick 5 or 6 " price/shipping combos" that you feel make sense and figure out the conversion rate for each. Then you can determine your profit margins and returns given PPC costs for each of the tested scenarios. In our case, we found that an 8% increase in price resulted in a 58% increase in profits!
Lastly, regarding free shipping, I've heard repeated studies showing that it is an overall money losing tactic. Interestingly, that tidbit came from a Fedex seminar, and if anyone would be trying to push free shipping, it would be them! Having said that, I still offer free shipping anyway because we don't use price comparison engines for traffic; since you do, you will find it to be difficult to compete with those who build all costs into the cart and not the product price.
Example of current tax brackets on income:
$77,000 is 25% bracket = $19250
$78,000 is 28% bracket = $21840
Sure, you made and additional $1000 but ended up paying $2590 more in taxes so actually you lost money because you jumped a tax bracket.
Always keep that in the back of your mind when you plan changes like that.
US taxes are calculated on a marginal basis, meaning that in your example, the 28% rate is paid on the amount above the $77,000 25% bracket cutoff. So, the extra $1000 would result in a 3% marginal tax increase on that $1000, ie $30 extra in tax on that $1000 compared to the 25% bracket. The higher bracket is not calculated on the entire $78,000. You will make less profit per dollar of income as you move from one bracket to the next, but this should not deter your goal of maximizing profitability.
