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Your approach to pricing your products has a direct impact on your brand’s ability to sell your wares. Before we get ahead of ourselves, let’s quickly point out the difference between price and cost:
When you consider the total cost for your inventory, you should look beyond just what you pay for the goods. You also need to consider added costs, such as shipping charges, packaging costs and custom and duties fees.
Some merchants refer to these as “non-vendor” costs—meaning they aren’t included in the wholesale purchase price of the product in question. Using inventory management software allows you to add non-vendor costs to any purchase order as a dollar amount or as a percentage so you can track it properly.
There are a few methods that businesses use to price products appropriately:
The price multiplier method is a rather basic approach, in which you simply multiple the wholesale price of your items by a certain amount (typically 2-3x) to determine the price you’ll offer your retail customers.
For fledgling health and wellness eCommerce companies, the price multiplier method can be a simple way to start selling, as it allows you to concretely anticipate your per-sale profit margin.
However, this method is also rather arbitrary, as it doesn’t really take into consideration the real-world circumstances surrounding the price of your products. Moreover, taking this approach leaves you open to unintentionally price your products according to your operational costs, rather than the value said products provide to your customers.
Another common way of pricing your health and wellness products involves checking out your competitors’ prices, and adjusting your own accordingly.
On the plus side, this allows you to stay in-line with your target audience’s general expectations with regard to product price. Basically, your customers aren’t going to blindsided by your prices, as long as they fall somewhere within the range of your competitors’ prices.
Problems can arise if you aim to price your products above or below this expected range. Price them too high, and your target audience will likely check out similar products offered by your competitors at lower prices; price them too low, and your audience might assume your products are of much poorer quality than that of the competition.
As the name suggests, value-based pricing is the process of pricing your products according to the value they bring to your customers. That last part is most important:
Factors to consider when determining what this value is include:
While it’s a much more involved process to price your products according to their value, doing so is an effective way of communicating this value to your audience before they’ve even used the products in the first place.
Once your new customers use your products—and see that they were well worth the initial cost—they’ll be even more likely to trust your brand moving forward.
Inventory accounting allows you to evaluate your Cost of Goods Sold (COGS)—and, ultimately, your profitability.
There are a few inventory valuation methods to choose from, each having different potential impacts on your bottom line. Let’s take a closer look at each option at your disposal.
Moving average cost measures the average unit cost of stock once it’s been purchases. The formula is straightforward:
This valuation method works best for “individually-valued” items. When new inventory is priced higher or lower than existing items, moving average cost should be adjusted to the new selling price.
Within an inventory management platform, moving average cost is determined automatically—including price differences. Automation allows you to adjust prices in order to ensure a healthy profit margin for every SKU.
As the name suggests, this method is when you keep track of your inventory costs by manually assigning the cost to your items. This method opens up the risk of human error and creates more work for you, especially if vendor prices change regularly.
FIFO (or, First-In, First-Out) costing is a method that assumes each item is sold in the order in which they were manufactured or purchased (i.e., the oldest inventory items are sold first).
The FIFO method is widely used because companies typically sell products in the order in which they’re purchased.
LIFO (or, Last-in, Last-Out) is the exact opposite of FIFO. Here, you assign a higher cost to inventory, working under the assumption that the newest inventory is sold first. This means your ending inventory balance is relatively lower.
There’s no one-size-fits-all approach when it comes to inventory valuation methods and pricing strategies. However, there are some standards to take into consideration based on where your business is located.
First, companies in the US operate under the Generally Accepted Accounting Principles (GAAP), while other countries follow the International Financial Reporting Standards (IFRS).
The GAAP accepts FIFO, LIFO, and the moving average cost inventory valuation methods. However, IFRS doesn’t accept the LIFO method. This means if your business is based anywhere other than the US, you can’t use the LIFO valuation method.
Also take note that GAAP and IFRS have different standards when it comes to the way your inventory is recorded.
It’s recommended that you speak to your accountant to work out the best method for your business.
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