Don't Forget to Make a Profit!

Posted by Paul on January 14, 2016

If you're just starting out in ecommerce, knowing how to price your products is going to be one of the most difficult things to get right. With so much competition and demands from customers for discounts, free delivery, guarantees, refunds etc. it's easy to end up not making any money.

So as with any business, it's important to know your numbers. Here are some of the things you'll need to know.

Variable Costs
Each time you sell a product, it costs you something, including:

• Cost of the Product
• Postage
• Packaging
• Storage
• Time (your own or employee's)
• eBay/Amazon Fees
• Payment Gateway Fees
• Risk of Return
• Risk of Lost/Damaged in Post

Fixed Costs
Whether you sell any products or not, you'll still incur these costs:

• Premises (even if that's just a bedroom)
• Payment Gateway Fees (many have a fixed monthly fee)
• Equipment (computers and other office expenses that don't depend on sales volume)

Market Research
Unless you're relying on luck, which we don't recommend, you'll need to know:

• What's the cheapest anyone is selling your product
• What's the average price for your product
• Who is selling the most of your product

Breakeven Pricing
Here's a quick question: If you're selling a product and you've calulcated that the cost you pay for it, the postage, packaging, storage and selling fees come to £10, how much do you sell it for to break even and make no profit at all? Most people starting out would say £10 and of course they'd be right purely in money terms at that point in time, but they haven't accounted for returns. Thanks to the Consumer Contracts Regulations (CCR, previously the DSR) you must allow customers to return goods bought online for any reason.

However good your products are, someone will return them at some point, and you will have paid for postage, and may not be able to re-sell the goods. You need to factor this in by estimating the cost to you when this happens multiplied by the percentage that it happens. If it costs you £10 each time you get a return and 1 in 100 items get returned, your should add an extra 10p to the variable costs of each sale, on average.

You'll also need to factor in your time at an hourly rate equivalent to the hourly rate you could get by doing something else. If you left a job on £50k for example, your hourly rate would be around £25. Of course this is just the time taken additionally for each product. Assuming it takes 3 minutes to label and pack, that's an extra £1.25. Ouch.

The price you come up with after all this, still won't be the lowest price you should sell at though, unless you have no fixed costs of course. Once we factor fixed costs in, your breakeven price will be affected by the quantity you sell. If your profit after all variable costs on each item is £10 and you're paying £1000 per month for storage, you'll need to sell at least 100 of them just to break even.

But of course, the price itself will affect the number of products you sell. It would be great if there was a way you could find out that if you dropped your price by x pounds, you'd make y more sales. Unfortunately, there isn't, but you can see how other eBay sellers are doing with a piece of software called www.terapeak.co.uk. Otherwise you may just have to use trial and error.

Meet Jeff
Let's think about an example: Jeff is starting out selling table lamps. He calculates that all his variable costs, including risk of return to be £15. He sees some bigger companies selling very similar lamps online for £29.99 and some dodgy-looking startups selling a similar product (although it's hard to tell from the shady photos) for £19.99. He's a professional kind of guy so he takes decent photography, writes detailed listings and presents them well on his website at £24.99. At that price he'll make about £10 per sale. He's working from home to start with and has calculated monthly fixed costs to be £500 to include home office costs, the website hosting, SEO and AdWords.

Sales in the first month go well and he sells an average of nearly 2 lamps per day, for a monthly total of 40 lamps sold. His profit before fixed costs is £400 but after paying all the bills, he's down £100.

Jeff knows it's early days but decides he must sell at a higher price to cover his fixed costs, so he matches one of the bigger companies at £29.99. His SEO campaign is starting to have a small affect and his AdWords can be tweaked and improved a little now there's some data. Jeff knew he might not sell as many lamps but that he'd make more on each one. At the end of the month, he's sold 25 lamps for a profit of £375. Oh no! Even though he's sold his lamps for more money, he's made less and incurred a net loss of £125.

In a panic for month 3, Jeff decides he needs to shift more stock and that he'll go all out competing on price at £18.99. The orders come in faster than ever before and be the end of the month, Jeff has sold a record 100 lamps at £18.99 each. He's been feeling like he's cracked this ecommerce malarkey all month, and begins to add things up. Something's not right though, even though he sold 2.5 times more lamps than in month 1, he's still made exactly the same gross profit and after the monthly costs are included, he is again down £100.

For month 3, Jeff knows he needs to think again about his pricing. He needs to think like his customers. He looks at "his" lamp there on the Homebase website in all its glory with the price tag of a "whopping" £29.99. They must shift plenty of them at that price he thinks, but then they're a well-established, household name. So he looks again at the cheapest competitor. Their website hangs together, is very hard to use, and sometimes it even shows an error message! How rude! But Jeff's a curious sort, so he looks at their contact page and finds only a gmail email address and a mobile number. He looks again at his own website and thinks of the pains he went through to get that beautiful photography, those seductive descriptions and the easy one-page-checkout process. He left his well-paid job to do this and answers the landline phone number to customer enquiries. He decides that if he was a customer, he'd stay well away from the £19.99 lamp but if he could find it more than a fiver cheaper than Homebase from a fairly reputable looking site, he might give it a go. He'd be covered by the CCR anyway and all the contact details were clear in case of any issues. So he adjusts the price of his lamp again, this time to a reasonable £22.99 for a profit of £8 on each one. The month seems to go okay keeping him busy enough. He's now £2 cheaper than month 1 which has had the unintended side effect of getting him on to the first page of Google Shopping - albeit not the very top. At the end of the month, Jeff sees he's sold 75 lamps which is an improvement, and he nervously begins to add everything up. The gross profit of £600 turns in to his first net profit of £100 and he sees for the first time that money can be made selling his lamp!