Selling directly to customers has its benefits. By setting up an online ecommerce store, you can save a lot in profits. But how much should you charge for your products to sell online? What are the expenses an online D2C store incurs? Let’s dig into the details.
In this article, we’re using custom t-shirts business as an example to understand the different costs associated with online sales. It will help you figure out the pricing of your online products to generate maximum profits.
So, without further ado, let’s begin
1. Know the production costs
To set a profitable retail price for your products, the first thing to know is the cost of producing them. The production costs include several variables which differ from product to product.
If you’re setting up an online custom t-shirt website, for example, production costs will include:
- Cost of blank t-shirt
- Cost of ink and printing supplies
- Cost of packaging and shipping
Apart from those, you’ll also need to factor in the labour costs. Usually, labour charges are paid on an hourly, daily or weekly basis. And to calculate the labour cost per t-shirt piece, you’ll have to divide the total amount paid and the total finished t-shirts.
Alternately, you can outsource the entire printing process to print-on-demand services. They might handle packaging and shipping too, relieving you of tracking different production costs separately.
Once you know the costs involved, you’ll be able to price your products for what they’re worth.
2. Research the market
After calculating the production costs, take a look at other businesses selling similar products. It’s because, unless you have something unique or exclusive, you can’t sell your products at 10x of what people are willing to spend. Also, you can’t price them half the market rate. It will make your customers doubt your products’ quality.
Apart from regional competitors, check international businesses too. It will help you find both the highest price and lowest price you can ask for. By researching your competitors, you can have a ballpark range for your product’s retail price.
As you understand your costs and the probable retail price, you can set your profits margin appropriately.
3. Determine profit margin
Next, to set an apt profit margin, you got to factor in the overhead expenses and operation costs in your product’s price.
For example, if you’re selling t-shirts online, you’ll incur costs like:
- Website hosting/maintenance fees
- Payment processing and transaction charges
- Copywriting and content creation charges
- Social media promotion charges
- Designing, SEO and other marketing expenses
Then, you’ll also need to handle after-sales support.
Additionally, you should also set up separate reserve for ad expenses. To sell products online profitably, social media ads and search engine marketing are necessities. And you should be able to calculate your return on ad spends and other marketing expenses.
When determining profit margin for online t-shirts, losses because of misprints should also be considered.
What’s a good profit margin for t-shirts?
Profit margin is the percentage of profits earned compared to the total costs incurred in selling a product. And in case of custom t-shirts, a gross profit margin of 40-60% is considered good. This price markup over the production costs will take care of the overhead expenses and other operation costs.
A gross profit margin of 40-60% will give you a net profit of about 12-15% on average after you subtract your expenses.
The markup, however, will vary from product to product. For example, t-shirts with trending designs can sell at a high price. But the less popular ones might need to be sold at discounted rates.
How to calculate t-shirt profit percentage?
If you want a profit of 50% off the retail price, the calculation is straightforward. Let’s say the production cost of your t-shirt amount to ₹300. When you multiply it by two, you get ₹600. And that would be the retail price of each t-shirt piece.
But when you want a profit percentage more or less than 50%, the price formula would be:
Retail price = (production cost) ÷ (100-profit%) x 100
Let’s take the t-shirt production cost as ₹300 and a profit margin of 70% as example:
Retail price = ₹300 ÷ (100-70) x 100
= ₹300 ÷ 30 x 100
= ₹10 x 100
So, for a profit margin of 70%, you’ll need to sell your t-shirts at ₹1000. Then, if you want a profit margin of 60%, the retail price would have to be ₹750. For 40%, it would be ₹500.
The average profit percentage varies from industry to industry. But whatever profit margin you set, make sure it covers all the expenses incurred in product marketing, handling and sales.
4. Understand pricing psychology
Understanding the psychology of pricing is also essential when you’re launching your products online. You should know how can prices affect people’s decision to buy. The pricing needs to trigger an emotional response.
So, following are a few pricing tactics you can follow:
Have non-round prices:
Rather than pricing a t-shirt, for example, ₹580 or ₹730, a price tag like ₹577 or ₹729 performs better. If you think about it, ₹580 feels like paying ₹600. But ₹577, instead, feels a little above ₹500. Similarly, just one-point lesser price of ₹729 can seem a lot more affordable than ₹730.
Bundle products together:
Bundled packages with discounted prices sell comparatively better than individual products. For example, if you put three t-shirts worth ₹1500 for sale at ₹1400, you might see a better result than when selling them individually. However, you must also offer the products individually. It will help customers see they’re getting a deal by paying for the bundled offer.
Use anchor pricing:
This tactic comes handy when offering bundled product packages and for products put for sales. Say, you’re selling a t-shirt for ₹639. However, if you also put alongside that the actual price is ₹699, your customers would be more inclined to buy. It makes them feel they’re saving themselves a few bucks.
A lot goes into pricing the products right, generating sales, and making profits from your online store. However, we’re hoping you got the basic idea of how to price products to sell online from this article.
So, now, find out your production costs, research the market, and decide the apt profit margin you want. Then, understand the pricing psychology to set appropriate rates and improve your product sales.