Pricing – why you should strategically determine your sales prices

Price calculation is one of the success factors for an online shop. The art is to calculate the price in such a way that it is attractive to the customer, remains competitive and at the same time allows sufficient profit to be made. Strategic pricing is therefore particularly important, but not infrequently a difficult undertaking.

This blog post is about successful price calculation for online shops. We have asked ourselves what pricing is in the first place, why it plays such a crucial role and what factors you need to consider in order to be competitive and profitable.

What is the price calculation?

Price calculation is about calculating a sales price to be achieved with which you offer your product or service on the market. The goal of every price calculation is to generate profits.

Why is price calculation so important for an online shop?

What makes price calculation so important for an online shop? The success of your online shop depends on the right pricing. If you set your price too low, it can lead to losses and you will face financial challenges quite quickly. Push it very high and you may lose your competitiveness and no one will buy the item or use the service. So, whichever way you look at it, pricing is the key to success in online retailing. Therefore, it is essential that you take all factors into account when setting prices and not only orientate yourself on the pure product costs and the margin.

With a thorough price calculation, you assess market prices, work out a price strategy and define your price floors. In the end, there should be a fair price with which everyone achieves their goals. We will tell you below how to successfully calculate prices in your online shop.

Hard factors of price calculation for online shops

As a pure online trader, you have the advantage that you do not have to take into account the rent of a local shop, for example, when calculating the price. On the other hand, you incur costs for the provision of the online shop, optimisation measures, shop system and legal security. The hard factors of the price calculation are used to calculate the cost price and take into account trade margins, margins and discounts that result, for example, from voucher marketing.

For the pure calculation of costs, you always pull together direct costs and overheads. Direct costs are directly linked to the product. Overhead costs are not directly linked to the product and are added as a percentage.

Direct costs

Direct costs that can be directly assigned to a product include material costs. You have to buy raw materials, ingredients or components for the production. The direct costs in the price calculation also include the manufacturing costs. For this purpose, the machine hourly rates are calculated with different types of costs such as wages, energy costs, repairs and maintenance, depreciation and auxiliary materials. Special direct costs such as licence fees or special packaging also count as direct costs.

Overhead costs

Overhead costs are also called indirect costs because they cannot be directly attributed to a product. Rather, they are things you need for ongoing processes. Overheads include shipping and marketing, sales or advertising costs such as for Google Ads or hosting. They are added to the direct costs on a pro rata basis and only as a percentage for price calculation. The entire calculation takes place within a cost centre accounting.

With the direct and overhead costs, you determine your cost of goods sold. Important to know: To make a profit, the sales price must be higher than the cost of goods sold. You can consider the cost price as the minimum price with which you can only cover your costs. However, the price calculation in the online shop has the goal that you should book profits. Therefore, the trade margin and the margin flow into the price calculation.

Trade margin and margin

The trade margin is the mark-up that you, as an online retailer, add to the production or purchase price. The margin indicates how much is left over from this mark-up. It is therefore the profit margin for products or services. This results from the difference between the production or purchase price and the actual sales price. The margin itself is not yet to be equated with profit. First and foremost, it only reflects the contribution margin, which covers all costs. You determine the profit only after deducting all costs.

However, you can also proceed the other way round and add the margin to the purchase price and thus determine the amount of the sales price.

Discounts

Whether on special occasions such as Christmas or to provide an incentive to buy in between, discounts are an integral part of e-commerce. If you work with the effective exit-intent pop-ups from uptain, the smart uptain® ALGORITHM determines the most attractive motivation for the customer to complete the purchase. For this purpose, discounts are also played out, which are demonstrably very well received and even bring back shopping cart abandoners. Therefore, take discounts into account in your price calculation so that you still make a profit even at the discounted price. You can use this leeway variably.

Soft factors of price calculation for online shops

Of course, you cannot calculate your product solely on the basis of costs and your margin. Other aspects such as customer buying behaviour and the competition must also be taken into account. For this purpose, you create another basis for the price calculation: a well-founded price strategy.

You can calculate the price of your goods or services lower in order to reach many customers or you can estimate a higher price that can be justified due to the high quality, your unique selling propositions and your service.

Price strategy

When forming a pricing strategy, you are not guided by production costs, but by factors such as the general market situation, the purchasing power of your target group and ultimately also in which segment you want to place yourself. To calculate the price, you bring the company, the market and the product into line.

A distinction is made between 4 pricing strategies:

Fixed pricing with the

• Low-price strategy
• High price strategy

Dynamic pricing with the

• Skimming strategy (high initial price, gradual reduction)
• Penetration strategy (low initial price, gradual increase).

Consider the price willingness of your target group, the competition and the market in every price calculation.

Price calculation with the target group analysis

Take a closer look at your target group to find out what your customers or potential customers are willing to spend on your product or service. After all, price can also be a buying motive. To do this, take the purchasing power into account and evaluate the customer benefits on the basis of well-founded data. If this is very high compared to the competition or if you offer outstanding quality, the willingness to pay will increase even if the price is high.

• Carry out a target group analysis.
• Conduct a survey.
• Have a selected group of customers test your product or service and ask them in a final evaluation what they would be willing to pay for it.

Price calculation on the basis of a competitor analysis

A competitor analysis opens up another perspective for price calculation. Are your competitors cheaper or more expensive? Depending on your pricing strategy, you set your price accordingly higher or lower. If you have good arguments for charging a higher price, you should do so. If the customer benefits predominate, the costs are often neglected. But be careful: don’t overdo it. A utopian price quickly has a negative effect. Therefore, use the results of the competitor analysis to approximate a sales price for your own price calculation.

• Do a competitor analysis.
• Approach the price of your competitors downwards or upwards.
• Keep a constant eye on prices in the market to be able to react quickly to market changes if necessary.

Use your sales price as a marketing tool

In the minds of customers, prices are often associated with the features of a product or service. Usually, a high-priced good is attributed a higher quality, even if it has not been used before. When calculating prices, choose your pricing strategy carefully and always take your target group into account. In this way, you contribute to sales promotion with your pricing.

Use repricing tools

If you sell your products on marketplaces such as Amazon in addition to your online shop, you can use so-called repricing tools. In order to stay on the ball in competitive market segments, a hard price calculation in marketplace environments is indispensable. Here it is even more important to keep an eye on your competitors. Special repricing tools take this work off your hands, analyse the competition every day and automatically adjust the price based on your limits.

Price calculation: The be-all and end-all of your success

With the price calculation you lay the foundation for your success and can thus optimise your online shop. The sales price is one of the central foundations so that your visitors convert into customers, you remain profitable and make profits. Once you have calculated a functioning sales price, you can implement appropriate measures in your marketing strategy. Today, a price calculation should be considered dynamically. The market changes by the minute. If you keep an eye on your sales prices, you will avoid losing your competitiveness.

You have carried out a price calculation and calculated a good sales price, but your customers often cancel the check-out? We at uptain are happy to help you. Many factors play together in an online shop. The price calculation is ultimately only one of them.