Relevant Pricing and Ecommerce: How to Make the Best Business Decisions:
At first, glance, running an e-commerce business seems simple enough: create a website, offer something of value to consumers, sell, repeat. While this is definitely your main focus, you’ll soon discover that there’s a lot more behind the scenes.
As the world of online commerce grows dramatically, you will find many opportunities to expand your digital brand. Whether you’re planning to open an online store or expand your existing business, it’s important to understand the financial variables that drive growth. One of these essential variables is price.
What is the Relevant Pricing exactly?
Simply put, material cost, also known as differential cost, is a term used to refer to the possible future costs of a given decision.
It is often classified as “future costs” (which differ from decision to decision) or “opportunity costs” (the cost of a lost opportunity based on the decision made). Understanding these terms will help you stay competitive.
On the other hand, there are also the so-called irrelevant costs, which do not change with a given decision. In this case, there are:
• Crockery expenses: these are expenses that have already been paid and cannot be recovered. As this tax has already been paid, it is considered irrelevant. An example of this is the cost of your current website.
• Related costs: if you are making an unrecoverable investment. In this case, future costs are irrelevant because they must be paid regardless of the decision made.
An overview of related costs
Cost analysis of your decisions is the lifeblood of an effective and productive management process.
Suppose you have an online clothing store. You start to gain ground and a retail chain wants a budget of 2,000 shirts. Read the numbers before making a final decision to better understand how this order will affect your business.
Some of the variables to consider are:
• The cost of materials: To make the quality shirts you usually offer, you need to order 2,000 shirts, which cost $4 each. However, if you order 5,000, your unit price drops to $3. That means you will either pay $8,000 for 2,000 shirts or invest $15,000 for 5,000 shirts (hoping to raise the remaining 3,000). Therefore, 2,000 shirts will cost $8,000 or $6,000 to order. Additional materials, such as paint and canvas, cost $2,500.
• Essential Labor: How much does it cost in terms of direct labor to produce 2,000 T-shirts? Let’s say it’s $5,000 for this example.
• Equipment depreciation expense: For example, the estimated depreciation amount of the screen-printer.
• Hydro used at order completion: how much does it cost to leave the lights on x days during the production process? Let’s say it’s $600 for this example.
• Indirect costs: From accounting costs to rent, repairs to taxes, this includes all costs except direct materials, direct labor costs, and direct costs.
These cost variables include equipment depreciation (this is a non-cash expense and will not affect your company’s cash flow) and overhead expenses (which are not incurred). direct order).
Instead, the necessary costs are the materials, labor, and electricity needed. After adding all the Relevant Pricing costs and adding a defined profit margin (eg 15%), you must indicate this price.
In this case, you wrote: $8,000 + $2,500 + $5,000 + $600 = $16,100 + (16,000 x 15) = $18,515. Next, you need to decide if this is the best option for the future.
To do this, you need to compare each possible alternative based on cost. How does each decision affect your financial growth?
Note: While this is an ideal short-term approach, long-term financial decisions should be made on the basis of total costs, not just material costs.
Do I need to buy an existing e-commerce business?
If you haven’t started your eCommerce journey yet, you may be wondering if it would be cheaper to start a business or buy an existing eCommerce business. When comparing these two options, you need to weigh the pros and cons.
For example, an existing website would already be profitable, would have established visitors and vendors, and would attract many customers. However, it requires a significant upfront payout, which can be a gamble in terms of potential ROI.
Let’s say you’ve already started an e-commerce business, but don’t think it’s the right approach; in fact, it became a money pit. Instead, keep an eye out for a successful e-commerce site for sale. In that case, it’s the costs you can eliminate by closing your current site, as well as the potential loss of revenue.
While you can lose x amounts per month compared to your original site, you should focus on what you gain by investing in an eCommerce company that already has the full package.
To be successful, always calculate the odds and compare all your options before making a decision. Let the numbers guide you. By applying the Relevant Pricing to each situation, you can make more accurate financial decisions and thus increase profitability.