How to Price Your Products & Verify Solid Profit Margins
Okay, you now have a supplier for your model 1 store (see difference between the store models that we teach here). You're almost ready to start building your online store (where the real fun - and the money - begins)! Before we do that we need to verify that your wholesale supplier is going to give you good enough profit margins on the products they are offering.
We want to be able to list our products at competitive prices - so we actually get orders - while also netting a good amount of profit per order processed. The margin percent isn't what's important for a model 1 store, the amount of dollars per item (or order) is what's most vital. Ideally you can net $50+ per processed order as we discussed in Module 2.
The profit margin calculation
Your profit is determined by calculating the difference between a) the grand total you'll receive from your customer (i.e. the retail price, including shipping fees), and b) the grand total you'll pay your supplier (i.e. wholesale cost, including drop-ship fees, shipping fees, etc.). It's the amount of money you walk away with once an order is processed and paid for.
At this stage of the game, you're only going to do a profit margin analysis for a small sampling of the products, not every single product you intend to carry (unless this supplier has a very small catalog, in which case you can do it for all products). Randomly choose 3 low-end products, 3 mid-range products, and 3 high-end products. This will give you a good idea of whether or not your store will be profitable using your chosen supplier. From start to finish, this process really shouldn't take more than 45 minutes or so. Translation: You're only 1 hour away from being ready to build you store and start generating profits. Let's go!
Step 1: Determine Your Total Wholesale Cost
The first step is to calculate your all-inclusive wholesale cost (i.e how much you will be paying your supplier). To find your total wholesale cost for a product, you simply need to add up every cost you will incur when ordering that product, including:
- Product cost
- Shipping cost (if any)
- Drop-ship fee (if any)
- Handling fee (if any)
- Any other costs/charges (this is rare)
Most of this is really straightforward and likely already laid out for you in the price list your supplier provided. Really, the only potentially tricky part is the shipping cost.
I say "potentially tricky" because a lot of suppliers make it easy by either a) giving you free shipping (i.e. they're burying shipping into the product cost) OR b) charging you flat-rate shipping (i.e. $X per item or $X per order).
It's really only tricky if your supplier charges you "actual shipping" for each order (i.e. they make you pay whatever it costs them to actually ship each order). And even if this is the case, a lot of suppliers are nice enough to provide the "average" shipping cost for each product in the price list. If they do, just use that! If they don't (and if your rep isn't able to provide you with an average shipping cost), here's how you "guesstimate" that...
How to Calculate the Average Shipping Cost for a Product
If your supplier charges you actual shipping but isn't able/willing to provide you the "average" shipping cost for each product, you'll need to calculate the average shipping cost for each of the products you've chosen in your sampling. Here's how...
1) Obtain weight and shipping dimensions (not the dimensions of the product, but the dimensions of the box(es) the product is shipped in) from the price list (or your rep).
2) Go to UPS.com / FedEx.com / USPS.com (whichever one your supplier uses) and enter the shipment information...
Select residential delivery.
Use the supplier’s ZIP code for the ship-from location.
For the ship-to location, plug in the ZIP code for 3 different locations (one at a time): 1) West coast (CA), 2) East coast (NY) and 3) central USA (TX).
3) Record the 3 shipping amounts and calculate the average.
NOTE: If your supplier is located smack-dab in the middle of the United States - somewhere like Kansas, Nebraska or Missouri - you really only need to get the price of shipping to either of the coasts to determine your average (we usually just pick a zip code in Los Angeles).
Step 2: Determine Your Total Retail Price
Now that you know how much you'll be paying your supplier for each product you've selected for your sampling, it’s time to determine how much you'll be receiving from your customer for each of those products. This is the retail price that customers will pay you, plus maybe any additional amount they may pay for shipping.
First, find out (if you don't know already) whether the manufacturer has a MAP policy. MAP stands for Minimum Advertised Price, and it tells you the minimum price you're allowed to advertise the products for. MAP is absolutely awesome because it protects retailers (like you!) from "price wars" that would otherwise erode the profit margins over time. If you aren’t allowed to list products for below a certain price (i.e. the MAP price), that means none of the other retailers are, either. Therefore, you are always guaranteed to have the products listed for the lowest possible price.
If the manufacturer has a MAP policy, take a few minutes to visit a few of your competitors' sites to check: a) whether they are selling at (or above) the MAP prices, and b) whether they're charging anything for shipping. If you find a retailer that's selling below MAP, call up your rep and point it out to him/her to see how serious they are about enforcing MAP. (If they're letting it slide and basically admit that they're not going to do anything about it, you can basically ignore the fact that the supplier has MAP.)
If the competitors are abiding by MAP, pay attention to whether they're offering free shipping. Chances are that they are offering free shipping (I'd say that's the case 80-90% of the time when a supplier has and enforces MAP). If that's what you're seeing, you're done with this step because you know that you'll be doing exactly what your competitors are doing... you'll be selling at MAP and offering free shipping. So you know exactly how much money you'll be collecting from your customers: the MAP price (which will be shown in the price list).
If the manufacturer doesn't have (or doesn't enforce) a MAP policy, you'll need to do a little more work to figure out the all-inclusive retail price for the products. (You'll also need to do this in the rare scenario where everyone is abiding by MAP but some/most/all of the retailers are charging extra for shipping rather than offering free shipping.)
The goal is to find out the all-inclusive amount (including shipping) that your competitors are charging for each of the products in your sampling. Why? Because you'll be charging right about that same amount. Click here to download our Profit Analysis Spreadsheet. One tab at the bottom of the sheet has instructions and the other contains the actual spreadsheet. It will help you calculate the all-inclusive retail price your competitors are charging (which is very close to what you will likely be collecting from your customers as well, as we've discussed).
Step 3: Analyze the Profit Margins
As I've said 3-4 times already, your profit margin is simply the difference between a) the all-inclusive wholesale cost you pay your supplier, and b) the all-inclusive retail price (including shipping) you receive from your customer. (Note: If you downloaded the Profit Margin Analysis spreadsheet, the 'Profit' column shows you what the profit margin is on each product.)
Remember from Module 2 that we always shoot to make at least $50 on the average order (the higher, the better). Usually, you won't make nearly as much profit on the low-end products as you will on the mid-range and high-end products (which is fine!).
Don't get scared off if the profit on some of the low-end products is less than $50. We're concerned with the profit on the "average" order. Also, keep in mind that in some niches, the average order will contain multiple products (not just 1 product!).
As I mentioned early on, for this type of store the number of dollars of profit is far more important than the profit percentage. It really doesn't matter if your profit percentage is 7% or 14% or 23%... what matters is how many dollars of profit go into your pocket at the end of the day!
So the million-dollar question is: Are you going to be able to make $50+ on the average order? If the answer is yes, congratulations! You're done here and you can either source another brand for your store or start building out your catalog! 🙂
If the answer is no, that's okay. Don't give up! This is just one supplier. Go back and try again with another supplier (there are several in the average niche!)! And if none of the suppliers you've been able to get reseller accounts with have sufficient margins, either dig up more potential suppliers or switch to another niche altogether!
Whew, that was a lot of information! Congratulations; once you've got one or more suppliers set up, you've conquered the biggest eCommerce battle of them all. The rest is not only much easier, but a whole lot more fun, too!
Return to Module 3 to determine what else needs to be figured out with your drop-ship wholesale supplier before you start to build your store!