Relevant Pricing and Ecommerce: How to Make the Best Business Decisions:
At first glance, it seems very simple to run an eCommerce business: create a website, offer something valuable to consumers, sell, iterate. While this is definitely your main goal, you’ll soon find that there’s a lot more going on behind the scenes.
As the world of online commerce continues to grow strongly, you will have many opportunities to expand your digital brand. If 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 the right price.
What exactly is a Relevant Pricing?
Simply put, material costs – which can also be called differential costs – are a term used in connection with the possible future costs of a particular decision.
It is often categorized as “future costs” (which differ from decision to decision) or “opportunity costs” (the cost of a missed opportunity based on the decision you make), to make the understanding of these terms competitive.
On the other hand, there are also so-called irrelevant costs, which do not change based on a specific decision. In this case, there are:
• Dishwashing costs: these are costs that have already been paid and cannot be recovered. Since this fee has already been paid, it is considered irrelevant. An example of this is the cost of your current website.
• Related costs: This is when you make an investment that cannot be recovered. In this case, the future costs are irrelevant, as they must be paid regardless of the decision taken.
An overview of the Relevant Pricing
Analyzing the costs involved in the decisions you make is essentially the lifeblood of a productive and effective management process.
Let’s say you have an online clothing store. You start to gain traction and a retail chain wants to get the price of 2,000 shirts. Before making your final decision, analyze the numbers to better understand how this order will affect your business. Some of the variables to consider are:
• Material Cost: To make the quality shirts you regularly offer, you need to order 2,000 shirts for $4 each. However, if you order 5,000, your unit price drops to $3. This means you’ll either pay $8,000 for 2,000 shirts or invest $15,000 for 5,000 shirts (hoping to push the remaining 3,000). Therefore, ordering 2,000 T-shirts costs $8,000 or $6,000. Additional materials, such as ink and screen printing materials, cost $2500.
• The labor required: how much does your direct labor cost to make 2,000 shirts? Suppose it was $5,000 for this example.
• Equipment depreciation costs: for example, the estimated depreciation amount of your screen printing press.
• Hydro used during order: how much does it cost to turn on the lights during the production process x? Suppose it was $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.
Of these cost variables, the cost is NOT relevant to your decision not to depreciate the equipment (it is a non-monetary cost and will not affect your company’s cash flow) and your overhead costs (it is not directly attributable to the order. required not that).
The relevant costs, on the other hand, are the necessary materials, labor, and electricity. After adding up the total of all relevant costs, with a fixed profit margin (say 15%), enter the price.
In this case, you will quote: $ 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 to proceed.
To do this, it is necessary to compare each possible alternative based on its costs. How does each decision affect your financial growth?
Note that although this is an ideal short-term approach, long-term financial decisions should be made based on total costs, not just material costs.
Do I need to purchase an existing e-commerce business for Relevant Pricing?
If you haven’t started your eCommerce journey yet, you may be wondering if it’s cheaper to set up 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 will already provide evidence of established and profitable traffic and sellers, and some customer interest. However, it does require a significant deposit, which can be a gamble in terms of potential ROI.
Let’s say you’ve already started an eCommerce business but you think it’s not the right approach – it’s really a money-making pit. Rather, focus on a successful eCommerce site for sale. If so, you can eliminate the related costs by closing your current website, as well as the potential loss of revenue.
While you can lose x amounts per month on your original website, you should focus on what you gain by investing in an eCommerce company that already has the full package.
It all comes down to Relevant Pricing
To be successful, you need to calculate the odds and compare all of your options before making a decision. Let the numbers guide you. By applying the right costs to each situation, you can make more accurate financial decisions and, consequently, increase profitability.