The higher the profit you make from products, the more compelling it is to sell them. At least, that’s how it seems at first blush.
This guide explains why inexpensive products with a low profit margin should also show up in your online storefront. You’ll find the answer to a tricky question: how can you increase sales by selling
Why a High Profit Margin Is Not Always Profitable
Different goods produce different profits. Pricey ones are not always the most profitable, and cheap ones are not always the most unprofitable. To understand that, we’ll need to digest a bit of theory.
Another word for profit from a specific product is profit margin. It is what you get after deducting all the expenses: manufacturing costs, shipping, storage, etc.
Say, you bought a chair that cost $50, then you brought it to your warehouse for $10, and shipped it to the customer for $15. This exact chair costs $200 in your shop. In this case, the profit margin will be $200
The profit margin depends on the markup: the higher it is, the bigger the profit margin you will get.
All products can be divided into three groups depending on the received profit:
Low-marginproducts: These are inexpensive and daily-demandgoods like hygiene products, underwear, household chemicals, baby food, accessories. The markup on them is less than 20% (of the costs). Medium-marginproducts: Other necessity goods like wine, seafood, cheese, electronics, building materials. The profit margin for such goods starts from 50%. High-marginproducts: Expensive and exclusive products like branded things, gold, jewelry, flowers. Not meant for everyday usage, they pay off by a profit margin that is higher than 100%.
Your product range should contain products that are different in both price and profitability. Build your pricing policy by taking into account the target audience, the prices of competitors, and other factors.
How to Balance Your Product Catalog by Profit Margins
Your customers should have a choice in your store: if they only find cheap or expensive products, it’ll be hard to make a purchase decision.
Usually, products in online stores are split into categories. If you sell hair care products, then these categories can be shampoos, conditioners, balms, and sprays.
Each category in your store should feature several products, from cheaper to more expensive.
Here’s how you can price your products to get more conversions:
- Estimate the price range for each category. For example, you sell chairs. The cheapest one costs $50 and the most expensive one is $500. So this will be your price range. To estimate the lowest and the highest price in each category, check out competitors’ prices and keep your targeted audience in mind.
- Segment your products. Goods in each category could be divided into three segments: low, medium, premium.
Low-marginproducts are inexpensive and bring little profits.
So your chairs cost from $50 to $500. Therefore, the low segment in your store can contain products from $50 to $100, the medium segment will unite products from $100 to $300, and the premium segment will include products with a higher price.
Even if you have a store with a highly specialized range of products, you still need to have goods in all price segments, not just cheap or expensive ones. That allows customers to have a more extensive choice and satisfy different demands.
Your prices should grow along with the quality. It means that if your customers choose a more expensive product, they should be sure that the quality corresponds with the price.
Which products in your store should make up the core of your product catalog — cheap or expensive? To learn that, you need to decide on your store segment: low, medium, or premium.
For example, you can hardly find
At the same time, the stock couch can cost both $100 and $500, while the luxury one can cost $1,000 and $5,000. Such a price range widens both the choice and your target audience so that the higher price range could reach not only people with a high income, but also customers with an average salary.
There are three types of stores according to the price ratio:
1. Discount Stores
The minimum and maximum prices in these stores are lower than the corresponding prices of competitors. A typical audience consists of people with a low income. Price ratio:
- 50% — low segment
- 30% — medium segment
- 20% — premium segment
2. Stores With Average Prices
Product costs do not differ from similar positions among competitors. The typical audience is people with an average and
- 40% — low segment
- 40% — medium segment
- 20% — premium segment
3. Premium Stores
The minimum and maximum prices in these stores are higher than the corresponding prices of competitors. Claim: Quality cannot be cheap. The typical audience is people with a very high income. Product ratio:
20-30%— low segment 30-40%— medium segment 20-40%— premium segment
- 10% — luxury products
For example, you have a discount shop with prices from $30 to $100. That means about 50% of the goods should be in the field from $3 to $10, 30% of the products in the range from $10 to $80, and the most expensive goods, from $80 to $100, should make up about 20% of your catalog.
In order to correctly break down all the products by price, you need to:
- Understand your store price segment
- Create product categories
- Make sure that each category is presented by
low-, medium-,and premium-segmentproducts.
Helping people to find a suitable product with a reasonable price is not the only goal of price segmentation. It has a big impact on your profits. Let’s puzzle out the examples:
- Too many cheap items in your store. You have a furniture store in the low price segment. You sell all couches for $150. First, that can be bad for your brand image: customers might think that you offer only
low-qualityproducts. Second, your profit margins won’t be enough; even if you make 10 sales per week, your profit will be insignificant. Finally, your target audience will be only people with a low income, which means you neglect people with a slightly bigger salary who are ready to pay $300-400for a couch.
- Too many expensive items in your store. If you sell only expensive items, it will deter people with an average income, although they could be your customers.
What about the demand?
While creating the assortment, you should also consider the demand. Therefore, the store should have these product segments:
- Priority products. They should make up about 20% of your product catalog. They have a substantial markup and are sold often enough. Examples are alcohol, delicacies, sausages, coffee for a grocery store, or designer coats for a clothing store.
- Essential goods. These goods should make up
40-60%of your assortment, since they are bought the most and in large quantities. These are low-or medium-marginproducts. For a grocery store, it will be bread or pasta. For a clothing store, these are basic T-shirts.Usually, they provide low profits. However, some entrepreneurs can build their business by selling just basic products.
- Seasonal goods. Selling these products is profitable only in certain seasons. For example, you can find more sunscreens in summer than a beauty store usually has. Keep this segment below 20% of the complete assortment.
- Others. These are
low-margingoods that are needed for the convenience of buyers, the uniqueness of the assortment, and other purposes. It’s reasonable to allocate not more than 20% of your whole assortment to them.
Typically, a store has products with a high sales rate but a small profit margin, and goods with a low sales rate but with a high profit margin. This distribution allows you to maintain a balance between what customers want to see in your store and what is beneficial to you.
How to Use
Low-Margin Products to Grow Profits
Even if your primary strategy isn’t based on selling a vast quantity of cheap products, you should add some
- Customers tend to buy products with medium prices, avoiding the cheapest ones. So having cheap products next to more expensive ones will make the latter more appealing.
Low-marginproducts can help you to stand out among competitors and attract interest. For example, you can buy tea in a tableware store, but another doesn’t offer it. Low-margingoods can make purchases more convenient. By selling related products with a low margin, you can upsell the basic goods in your store for your customers.
So this is how exactly you can use
1. Increase your average order value with
Just offer your customers additional items to buy. For example, you can show up a separate content block like: People also buy with this product or You may also like in the shopping bag area. A call center operator can also offer additional products during the call to confirm the order. For example, it is worth it to tell your customer about the covers and protective glass for their smartphone in stock, if they forgot to order these items before.
2. Find out catalyzer items
There are categories of
For example, seeds are not costly at all, but if customers regularly come to your store for them, they might order soil, fertilizers, and other goods needed for planting and growing plants.
To find out the exact catalyzers in your online shop, you need Google Analytics. Check the customer journey through the website before they made a purchase, and pay attention to the product pages they visited.
3. Arrange small lots for wholesale
The best way to make a profit is to sell
4. Offer your product in bundles
So to segment all items of your online store by price and get the maximum possible profit from it, you need to:
- Determine the price segment for your online store and split all the goods from each category into inexpensive, average, and expensive.
- Figure out the most profitable and priority goods, products that will ensure turnover, and goods that will attract customers and create your brand image.
- Develop a strategy for working with
low-margingoods so that their availability can raise profits rather than lower them.