Use this equation to ensure you sell products & make a profit!
In this episode of the eCommerce Lifestyle podcast, Anton shares how to calculate profitability before sending visitors to your online store.
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What's Covered in This Episode:
How to price your products
Links From This Episode:
Hey, what's up, everybody? Anton Kraly here, and welcome back to the eCommerce Lifestyle podcast. So today we're going to be talking about how to price your products for profit. And basically I'm going to give you the equation that I use and that I recommend you use, to make sure you're going to make money when people buy from your store.
Now, before we get into this and I give you the equation, I just want to let you know that today is my birthday and all I want is a five star review on Apple Podcasts. So if you listen to this episode and get value, or if you've listened to any of our previous 200 plus episodes and gotten value, I'm going to post a link in the description of this podcast. If you can click it, go to Apple Podcasts and just quickly leave a review, it would mean a lot to me. I read all of them and I really do appreciate it. So check that link in the description.
So with that being said, let's talk about this. Now, this is something that I probably get asked, it's one of those questions that ever since I started helping people through my company Drop Ship Lifestyle, probably one of the questions that just comes up over and over and over again, and is one of the most frequent. And I get why. Nobody wants to sell products and not make any money and people definitely want to know how much money they're going to make when people buy from them.
So the first part of this answer is always the same. It's very simple. And the answer is how should you price your products? You should price them at MAP. Now, if you're unfamiliar with MAP, it stands for minimum advertised price. And when you reach out to let's just say, brand ABC, and you say you want to sell their products, and they approve you, they're going to send you a price list. The price list is going to contain three columns. The first price is going to be MSRP. And that stands for manufacturer's suggested retail price. Now almost nobody sells for MSRP. In fact, MSRP is normally what you see on eCommerce stores as the compare at price. So maybe MSRP is let's say $1,200. You might see $1,200 with a line through it, and then see the price that the product's actually for sale for.
So again, you have MSRP. That would be one of the columns. The next column is going to be MAP, and MAP stands for a minimum advertised price. Now with, I would say, 95% plus of the brands we sell for, we're selling at MAP, and that's almost always again what you should do. So that's MAP. That's the price that will be on your website that customers will actually pay when they buy from you.
Now, the third column in the price sheet will be wholesale, and wholesale is simply the cost that you pay your supplier for that specific product. So now that we know what the three prices are, let's talk about the next tier of this, so you can start to think, "Okay, how much money can I actually make both as a dollar amount, and as a percentage, every time I sell, let's just say product one, two, three from supplier ABC." So here's the equation. The first thing we do is take MAP for that specific product. So let's just use an actual product, make things easy. I'm a sitting at a standup desk now. So let's say I was selling this standup desk and MAP was $1,000. So the first thing I'm going to do is plug in $1,000, and I'm going to multiply that by 0.97. So 1000 times 0.97, gives me 970.
Now, why are we multiplying it times 0.97? Because the first fee that I take out, that you should take out too, is your merchant fee, the fee that you're going to pay to Shopify payments or Stripe or whatever merchant accounts you use. And this is the fee that they basically charge to allow you to accept credit cards and debit cards from customers and then for them to deposit that money in your bank account. It's typically about 2.9%, plus 30%, plus 30 cents I should say, not plus 30%, that'd be crazy, plus 30 cents per transaction. But just to use easy numbers, let's say it was 3%. That's why we do 1000 or whatever MAP is, times 0.97, which in this case would leave us with $970.
Now, the next part of this equation is we subtract our wholesale cost. So let's just say the wholesale cost for the standup desk was $500. I would do 970 minus 500, and now I would be left with 470. One more thing that's really important to note here that's going to give you a good sign or indication of if you should sell at MAP or not, is what is your wholesale cost compared to MAP? Now at the maximum, you want to see the wholesaler cost be half, be 50% of MAP. That's why in this example, I'm trying to go like on the lower end. But if MAP for this task was a $1000, my wholesale cost should be no more than 500. If it was 700, we'd have a problem. But again, we'll use I'd say an average number, but really as high as it should be, so that would give us $970 minus 500 product cost wholesale. Now we're left with 470.
Now the next part of this equation is we want to subtract the shipping cost because we offer free shipping on all of our stores. But that doesn't mean that nobody pays for shipping. It means that we pay for it. The customer doesn't pay for it. So in order to do this, it's going to be an average, and the reason we have to use averages is because you're going to have suppliers all over the country, wherever you're from. Let's just say you're in the states and you have a supplier that's in North Carolina. That's where their warehouse is. Well, if you get a sale for a product from the manufacturer, supplier, in North Carolina, and it's shipping to North Carolina, that's going to be a lot cheaper than if it was shipping to a customer in California.
So what we do to find our averages is simply go to a freight broker website, there's tons of them, and put in the shipping location as the suppliers warehouse. So in this case, whatever the address was in North Carolina, and then for the destination, we'll put in an address maybe in North Carolina, maybe an address in Florida, maybe an address in New York, and then address in California, and we'll try to find an average for what it would cost us to ship this thing. So let's just say in this hypothetical, we found our average shipping cost to be $150. Now, what we're going to do is subtract that 150 from our 470, that would leave us in this scenario with $320. Now $320 profit on a $1000 sale would be 32%. So we'd have a 32% net profit. But you're probably thinking that's because we didn't spend any money on ads yet. Which is true.
So what you'll do realize as you're doing this equation is what is that margin if you just got free traffic, because you will get free traffic too. If somebody found you through Google Product listings, the free one, or from a Google search, or because somebody bought your product, told their friend, and their friend then bought it from you. If any of that happens, then your margin would be that 32% in this example. But what I like to do here is now think about, "Okay, what am I willing to spend on ads to get that sale?" Because as you know, if you follow this podcast, eCommerce Lifestyle, or anything I talk about at Drop Ship Lifestyle, by the way, if you're new go to dropshipwebinar.com after this podcast, I'll link it in the description as well, got a free training there, it's awesome, dropshipwebinar.com.
But as you know, or as you'll learn, I am a huge fan of paid traffic. And I'm typically willing to spend up to 10% of MAP in order to get a sale. What that means is I'm willing to get a 10X return on ad spend. So with, let's say the $1000 product, that was MAP. That's what I would be willing to, I'm sorry, not willing, that's what I'd be selling the product at. So this standup desk would sell for a $1000. I'd be willing to spend up to 10% of that to get that sale. So in this case, 10% of 1000 is $100.
And my thought process here is maybe I start my ads for this desk and maybe I'm getting at first, sales for $50. So that'd be a five, I'd spend 50 to get a $1000 sale. And then maybe I tried it, okay, that's working. Let me spend a little bit more, a little bit more. And I try to get to the point where I'm getting all the sales I can get, at again, no less than a 10X return on ad spend. So again, let's use that worst case scenario here. That would mean my ad cost to sell this would be $100. So now if we subtract my $100 cost from that $320 net profit, now I make $220 net profit on the $1000 sale. And I'm able to spend up to a $100 over and over and over again to get that sale.
Now, personally, I like to see our margins a little bit bigger than that 22%. So for me, what this would tell me is I either need to have a better return on ad spend or most likely what I'd be trying to do is find a way to increase my average order value. So maybe on this stand up desk page, I do some things like add on different upsells and cross sells that people can add. Maybe things like a light that attaches to it. Maybe things like a monitor arm, maybe even things like, I don't know, a plant set or an office chair or a stool or a floor mat. I would try to put those things on the product page as well, to increase that average order value, to make sure that I was making at a bare minimum, if somebody only bought the desk, that 22% net profit, or in that case $220.
So that is how we do it guys. Again, the only real variable here is the shipping costs, which is why we use averages. But what this allows us to do is look at that margin before we spend any money on ads, think, "Is it acceptable? Is it not? Do we need to try to negotiate with the supplier more to lower our wholesale cost? Do we need to maybe not spend money on ads promoting this product because the margin's not there? Or do we have a great margin where we can include these products in our ads and really be able to drive as many sales as possible while maintaining really healthy margins?
So that's it guys. I hope you found this helpful. What I'm going to do, at a ecommercelifestyle.com/episodes, that's where you'll be able to find all the previous episodes, plus this one. Again, ecommercelifestyle.com/episodes, is I'll actually put this example as the equation because I know if you're listening to this, at the gym, on a run, in your car, whatever, it might be hard to remember it all. So go to ecommercelifestyle.com/episodes, and you'll be able to find this exact equation there, for this episode which is called How to Price your Products.
So that's it guys. Hope you got value. If you did, again, do me a favor, give me a little birthday gift here by clicking that link in the description, go to Apple Podcasts, leave a five star review. I appreciate you. And I will talk to you in the next episode of the podcast. See you everybody.