IN THIS CHAPTER

Pricing your products appropriately

Identifying when the time is right for a sale

Creating a reduced sale price

Offering discounts and free shipping

Saving time by taking some discounting shortcuts

Your pricing is crucial to the success of your online business, and depending on your strategy, attractive pricing could be your point of difference; alternatively, you could be selling at a higher premium, and offering a higher quality product or a superior service. Some businesses use discounts to attract new customers or retain customers who haven’t shopped in a while. However you approach it, discounting should be used strategically rather than you handing out price reductions to customers here, there and everywhere.

In this chapter, I show you how to price your products and run sales and promotions. I also show you how to create discount codes that offer a certain percentage or dollar discount, and how to create offers that provide free shipping or allow customers to buy one get one free.

Pricing Your Products

Pricing isn’t a ‘feel’ thing; it’s more science than art. When you price your product, you need to ensure two things:

1. That the price you set is profitable now (in the early stages of your ecommerce journey, when the chances are you are operating alone or have a very small team)
2. That the price you set is profitable when you’re a bigger business with higher expenses

I always recommend budgeting (and operating) as though your business is already a larger scale operation, otherwise the danger is that you will never have enough margin in your profit to allow for hiring staff, accelerating your marketing spend and all the other costs that come with a growing business — including paying yourself! All these factors need to be considered when you price your products.

The profit (or product) margin, or mark-up (the mark-up on the cost price of your products — the price you paid for them), is the percentage profit you make, factoring in only the cost price of your product and the sales price you are selling at — not the other costs of sales. Your gross profit margin includes your costs of sales (such as shipping costs and merchant fees), not just the product costs, and so it is lower than the profit margin.

While I recommend aiming for a 70 per cent profit margin on the product’s cost price, I try and run my businesses by the 50/30/20 rule — aim for a 50 per cent gross profit margin, where 30 per cent covers operating expenses, leaving a 20 per cent net profit margin.

Johnny orders 100 new dog beds from Alibaba for $10 each. Landed, they come in at $15 each. Johnny has decided to sell the beds on his website for $25 because another seller on Amazon has sold over 1,000 units of a similar style at the same price. Johnny is looking at a profit margin of 40 per cent, and he’s pretty excited.

Johnny launches his website, but no sales come in. He picks up this book, flips to chapters 15, 16 and 17 to review marketing techniques, and realises he’s going to need to spend about 15 per cent of his projected revenue on marketing, or what’s known as a CPO (cost per order) of 15 per cent. In other words, he will need to spend 15 per cent of the sale price of $25 to get that sale. Johnny is then left with 25 per cent profit — so he doesn’t cancel the lease on his new BMW yet.

Johnny makes a few sales and posts them, only to realise he needs to allow 8 per cent for shipping, so he’s left with 17 per cent. Johnny’s bank wants 3 per cent of that sale for merchant fees, so he’s left with 14 per cent profit. Johnny dreams of having an online business with 50 staff, so he realises he’s got to budget at least around 8 per cent for wages, including his own, which means he’s down to 6 per cent. Johnny’s wife is a little sick of the sight of dog beds piling up in the unit, so he’s got to get a storage space — there goes another 5 per cent, and suddenly Johnny is down to 1 per cent. Now Johnny’s cancelled the seafood dinner, and he’s navigating the drive-through at McDonald’s.

Poor old Johnny has 1 per cent of that $25 sale left, and I haven’t even listed half of the expenses of a typical ecommerce business. Every business is different, but you can use common benchmarks when budgeting for your online store. If you don’t know your expected net profit, let alone your gross profit, it’s time to take a step back before you get started.

So, how do you price your goods to allow for all those expenses?

In my experience, a profit margin of 70 per cent or more on your products for a direct to consumer (D2C) business is a reasonable target.

In other words, if you are creating a new brand or a new product, you should target a 70 per cent profit margin on your products when you set your retail price, so your landed cost price should be 30 per cent of your retail price. This gives you enough of a buffer to allow for fixed expenses so you don’t end up like Johnny.

If you’re a business to consumer (B2C) seller, the profit margin on your products is typically smaller, as you’re likely to be the person in between the customer and the manufacturer. A B2C profit margin could be as low as 45 per cent but you would not want to see it any lower than that, and you are likely to have less control over the retail price as the manufacturer may not like seeing you heavily discount a product. Equally, if you over-price the product the customer may look elsewhere if you’re stocking a well-known brand. (I explain the differences between D2C and B2C sellers in Chapter 3.)

Here is an example of how to calculate your retail prices using these target profit margins when you’re launching a new product or brand.

• Landed cost: $30
• Target margin: 70%
• $30/0.3 = $100

In other words, your landed cost divided by 0.3 equals your retail price, not including tax. Add your country’s tax — for example, 10 per cent — and round your pricing to a round number (for example, $110 including tax).

To test the margin, you can reverse the equation as follows:

• (Retail Price, excluding tax – Landed Cost Price)/Retail Price = Profit Margin
• ($100 – $30)/$100 = 70%

If you take your retail price less tax, deduct your landed cost price, and then divide that total by your retail price, you are left with your profit margin.

If you are currently selling products, you can check your margin by following the same process.

The number that comes out is your product’s profit margin, which is hopefully above 70 per cent! Anything below 70 per cent means you are at risk of not being able to spend healthily on marketing, wages and the other things you’ll need as you grow. A bigger business with a margin of 70 per cent, selling in-demand products, should end up with a net profit margin of greater than 20 per cent — even as high as 40 per cent if it really catches fire.

Your net profit margin could be much higher in your early days if you take this approach to pricing as your expenses generally start lower — for example, if it’s just you and a couple of helpers in the business, or you are running it from home and not paying rent. However, if you really want to accelerate your sales and increase the sum of your net profits, you will need to spend more money, which will decrease your profit margin but put more money in your pocket — a smaller slice of a bigger pie! Pricing for a healthy profit margin sets you up to scale your business.

A good pricing model allows you to take a handsome profit in the early days, but it also sets you up to become a much bigger company, with higher sales, while still maintaining a healthy profit. If your goal is to stay small rather than think big, you could probably drop that margin down to 60 per cent or so, but anything less than that, for a new brand, leaves very little money for the typical ecommerce expenses you encounter.

Preparing to Run Sales and Promotions

So, when to go on sale? It’s a question I’ve been asked by retailers who are turning over tens of millions of dollars, as well as those just starting out. There’s no one-size-fits-all approach to discounting and promotions — although I do look at tactical promotions to win back lost or at-risk customers, as well as to acquire new customers, when I look at marketing techniques in chapters 15, 16 and 17.

Most online retailers go on sale at least once or twice throughout the year. It’s probably a customer expectation that around the Black Friday/Cyber Monday period just after Thanksgiving in the United States, most online retailers will be on sale, as well as on Boxing Day and around the end of the financial year (which varies by country).

Sales and promotional periods begin sooner than you might think. For example, Christmas occurs on 25 December every year; however, look at Figure 14-1, which depicts Google’s search volume in the United States for the search term ‘Christmas Gift Ideas’ — it starts trending up at the end of August!

If your margin doesn’t allow for discounting, there’s little point in making sales a part of your strategy. If you do plan on using sales and discounts, now is a good time to rethink your profit margins on your products and make sure they pass the stress test.

It’s a good idea to pencil the key promotional periods into your diary and to always plan at least three months in advance.

The following is a list of key promotional periods where online stores typically run sales and promotions:

• Christmas: The build-up may begin long before 25 December (see Figure 14-1), but you have a few opportunities for promotions over Christmas:
  • Green Monday: Green Monday is usually the second Monday in December and is usually the shipping cut-off for most postal outlets to get standard shipped packages to customers before Christmas.
  • Free Shipping Day: Free Shipping Day is a one-day event held annually in mid-December. Merchants are encouraged to offer free shipping with guaranteed delivery before Christmas.
  • Super Saturday: Super Saturday is the last Saturday before Christmas, a major day of revenue for American retailers, which marks the end of the shopping season they (and many customers) believe begins on Black Friday. Super Saturday targets last-minute shoppers. Typically, the day is ridden with one-day sales in an effort to accrue more revenue than any other day in the Christmas and holiday season.
  • Boxing Day: Post-Christmas sales begin from Boxing Day onwards. Traditionally used as an opportunity to clear last season’s stock, you can continue this sale through January to help boost what is often a quiet sales month.
• Black Friday/Cyber Monday: A huge few days for online retail, this Thanksgiving holiday weekend is celebrated with mass promotions across most online verticals. Held on the fourth Friday of November, many retailers extend to Cyber Monday, three days later, to form what has become known as Cyber Week! Many retailers start cyber sales one or two weeks before Cyber Week to get a start on the sales.
• Halloween: Big in the US, Halloween sales are commonplace, although they’re not as big in Europe or the Southern Hemisphere.
• Singles Day: Singles Day started in China as an unofficial holiday to celebrate those that aren’t in relationships. It is always held on 11 November. Singles Day has gone on to become the largest physical retail and online retail shopping day in the world.

Many of these dates are fairly universal, but there may be key dates and times in your region or country that work well for promotions too. Do some research to find out the key dates for celebrations and events in your local religious and cultural calendar!

Setting Sale Prices for Products: The ‘Compare At’ Price

In Chapter 5, I looked at how to enter a price into your products as you add them to your Shopify store. In this chapter, I’m going to show you how to mark down your price when you want to put your products on sale. In Shopify, this is called the Compare At price.

When you set a Compare At price, the product listing updates on your online store to show that the item is on sale. The way that a sale price is shown depends on the theme that you’re using; for example, you might see a Sale label on the product image, or you might see nothing at all in the product image, and just see the original price, crossed out, with the new sale (or Compare At) price in red text next to it.

Typically, the way that sale prices are shown depends on whether:

• Your product has variants at different prices
• The item is a single-variant product, or its variant prices are identical

A variant is an extension of a product, for example a size or color of a product. Sometimes stores have variants at different prices — for example, if a store is selling shoes and the red leather shoes are more expensive than the black variant, there are two prices within the same product; or, when one variant is put on sale and the other variant is left at full price, you have two prices listed for the same style. The important point to get right is which price gets shown when a customer is browsing your shoes collection!

For a product with variants whose prices are not identical, the lowest sale price is indicated at the collection level. So, the variant with the cheapest price is what will appear in that product when the customer is browsing through your collections. As a customer changes sizes or variants while on the product page, the displayed price changes accordingly.

For a single-variant product, or a product whose variant prices are all identical, the original and sale prices are shown as a comparison when a customer is browsing your collections, usually with the original price crossed out and the sale price next to it (the appearance of this depends on your theme — Chapter 4 covers choosing a theme for your online store).

Here’s how to set a Compare At (or sale) price for a product:

1. From your Shopify admin, go to Products → All Products.

   A list of all your store’s products appears.

2. Click on the name of the product you want to put on sale.

   The product’s page appears.

3. In the Pricing section, set the Compare At Price to be the same as the product’s original price (see Figure 14-2).

   For example, in Figure 14-2 you would add 299.00 to the Compare At Price field.

4. In the Price field, change the price to reflect the sale price you want to sell the product at in your sale.

   For example, you might reduce the sale price of the product in Figure 14-2 from 299.00 to 150.00.

5. Click on Save.

For another example, if a pair of jeans retails for $100 but you want to put them on sale for $80, you delete $100 from the Price field and enter it into the Compare At Price field, and then you enter $80 into the Price field and click on Save.

Here’s how to set a Compare At (or sale) price for a variant within a product:

1. From your Shopify admin, go to Products → All Products.

   A list of all your store’s products appears.

2. Click on the name of the product you want to put on sale.

   The product’s page appears.

3. Scroll down to the Variants section of the product’s page.
4. Find a variant you want to put on sale, such as a size or color, and click on Edit.
5. In the Pricing section, set the Compare At Price field to be the same as the product’s original price.
6. In the Price field, change the price of the product to the sale price you want to sell the product at in your sale.
7. Click on Save.

The value in Compare At Price must always be higher than the value in Price to show a sale price.

Delivering Discounts

Many online retailers view discounting as a necessary evil, although some hang their hats on it and make it a part of their core offering. The online retailer that discounts because everyone else is doing it is a lazy online retailer. It’s also not true that you can simply emulate what everyone else is doing because every business has its own strategy. I work with businesses who discount their products 365 days of the year because it’s a part of their strategy, and I also work with retailers who only go on sale twice a year. The upside for the high-discounting business is that conversion rates are very high; the downside is that gross margins are very low, meaning there is less money to spend on things like marketing and wages.

Heavy or frequent discounting can do irreparable damage to your brand, as customers may start to question the quality of your products — or they might wait for your next discount, without ever wanting to pay full price.

The challenge is to price your products optimally, ensuring you’re leaving enough wiggle room for running your business and taking a wage. Discounting can eat into that if you’re not careful.

Discounting is fine if it’s profitable and a deliberate part of your overall business strategy, including being factored into your profit margins. If you find yourself only getting sales when you run a discount, you may be discounting too frequently and training your customers to wait for your discounts. Resist the temptation to discount because you think everyone is doing it; only discount if it works for you — profit pays bills, not sales.

So, when to discount? The answer is to discount when your business can afford to do it as a means to increase profits, not just sales, and when it doesn’t have a negative impact on your brand. What is the point of driving heavy sales — putting a strain on your fulfillment and incurring high shipping costs with your increased volumes — if you haven’t actually increased your net profit?

Automatically increasing your revenue by discounting does not mean your profits go up, as many of your costs increase accordingly, such as shipping and staff, and you also need to factor in what you originally paid for your stock — something many retailers forget about.

Earlier in this chapter (in the section ‘Setting Sale Prices for Products: The ‘Compare At’ Price’), I looked at marking down the price of individual products. In the following sections, I’m going to show you how you can offer your customers a fixed amount, percentage or shipping discount on products, collections or variants. You can also offer more creative offers, such as ‘buy X get Y’ discounts to encourage customers to buy more items or spend more than they typically would (because they are rewarded with a discount for doing so).

Before diving further into discounting, you might want to go back to the earlier section ‘Pricing Your Product’ to ensure you have a healthy margin to begin with — one that actually allows you to discount as a means to drive higher profits.

Discounting Shortcuts

Here’s a few helpful discounting tips and shortcuts you can use to save time when managing discount codes in your Shopify store.

Filter discounts

You can filter your discounts in your Shopify admin so that you can check the discounts that are used most frequently, or check for all the enabled discount codes currently running in your online store.

To filter your discount codes, follow these steps:

1. From your Shopify admin, click on Discounts.

   The Discounts page appears, displaying all discount codes that have been created in your store over time (see Figure 14-7).

2. Choose how you want to filter your discounts from the list of options you can see after the Filter Discount Codes search field.

   You can filter by Discount Type or Status — or click on More Filters, where you can filter by the number of times a discount code has been used.

3. Select a filter option, and the Discounts page will refresh to show you the discount codes that match your search.

You may not need to do this much in your early days as you won’t have many discounts to filter through, but as you add more to your store this becomes a handy tool.