This article is only for educational purposes and does not constitute legal or financial advice. Make sure you consult a professional regarding your unique business needs.
There are a lot of factors to consider when starting your business. Should you sell your goods or services online or in-store? What are some of the costs associated with either option? As you price your goods or services for sale, it’s important to take into account all of the costs that could be incurred, ultimately impacting your profit margin.
For example, let’s say a candlemaker sells candles for $10 per 8-oz. jarred creation. The candle itself costs $8 to make and each jar costs $2. This means without considering any other expense, this seller will make no profit on each good sold.
Here are some things to consider before pricing online or in-store.
What is a profit margin?
When it comes to business, here are three types of profit margins to consider when pricing your goods or services:
- Gross Profit: Gross profit is any income that remains after the cost of goods sold. This includes only the costs directly associated with the item for sale, meaning raw materials and labor. This does not include debt, taxes, or overhead costs.
- Calculate it: Gross Profit Margin = Gross Profit ÷ Revenue from Sales
- Sample calculation for our fictional candlemaker: ($10 - $8) ÷ $10 = 20%
- Operating Profit: Operating profit takes into account cost of goods sold and other operating expenses, such as administrative or sales expenses, that are necessary to run your business day to day.
- Calculate it: Operating Profit Margin = Operating Earnings ÷ Revenue
- Sample calculation for our fictional candlemaker:
- Operating profit: ($10 - $8) x 1,000 - $1,000 = $1,000
- Operating profit margin: $1,000 / ($10 x 1,000) = 10%
- Net Profit: Net profit includes cost of goods, operational expenses, and expenses such as payments on debt, taxes, and income from investments. This reflects the amount of revenue left over after all expenses are accounted for.
- Calculate it: Net Profit Margin = Net Profit ÷ Revenue
- Sample calculation for our fictional candlemaker:
- Net profit: ($10 - $8) x 1,000 - $1,000 = $1,000
- Net profit margin: $1,000 / ($10 x 1,000) = 10%
There are some costs to consider when optimizing pricing for online sales. With no brick-and-mortar location, there are other costs a business can incur. Whether pricing for online or in-store, keep in mind these costs when you’re discounting any products or services.
Processing fees: fees charged to merchants for processing credit card or online payments
Shipping costs: From costs of packaging to shipping fees, online businesses selling physical goods (rather than services or prepared food and drink) should budget for costs associated with transporting those products to customers.
Delivery costs: Anything from the transportation itself, like cars or bicycles, to the way food is transported (to keep it warm or cold for example), contribute to on-demand delivery costs. By fulfilling orders yourself, you can reduce costs that you may otherwise incur by using a third-party delivery service.
Sales taxes by different locations: Online sales could mean different sales taxes by location and type of product, so keep in mind how a specific product is taxed in that state. If your business has a physical presence in that state, you must collect sales taxes from online customers in that state, otherwise you generally do not have to collect sales tax for online sales. For example groceries can be taxed differently if the category of food is soda or candy.
Monthly or recurring costs: Website hosting and domain, inventory storage, customer support, marketing costs, and business taxes all contribute to the bottom line for your business. Costs that need to be continuously paid to keep your business operating should ultimately be a factor in pricing goods as they may impact your’ profit margin.
There are pros and cons to both online and in-store sales. Here are some costs you may incur if you operate a brick-and-mortar business.
Processing fees: Fees charged to merchants for processing credit card or online payments.
Physical hardware: Point-of-sale system, store fixtures or shelving, and initial inventory are all examples of physical hardware. These costs will vary if you are a service professional like a hairstylist who may need equipment such as shears and hair washing stations, or a book seller who may need display racks and shelves.
Local taxes: Sales tax is made up of state sales tax plus local sales tax rates (with the exception of five states with no statewide sales taxes).
Monthly or yearly recurring costs: Recurring costs for brick-and-mortar retailers can include rent or mortgage for a physical space, employees, maintenance fees, customer support, marketing costs, and business taxes.
If you use Square Online, you can now apply the taxes they set up in Square Dashboard to their Square Online pickup and delivery orders. This means sellers can apply multiple tax rates (including item and location-specific taxes). A seller taxing differently for alcohol and food or serving more than one city can now adjust taxes accordingly in Square Online’s tax section.
Remember our candle maker? Perhaps they’ve decided to sell their candles for $15 since they found a way to source bulk jars and wax, bringing the cost to $1 a jar and $5 a candle. With the total cost of goods down to $6 a candle, they now have a $9 gross profit.
Although our seller is fictional, keeping pricing strategies in mind can help real business owners like you plan ahead and calculate how much the costs will factor into their profit margins. Ultimately there is no right or wrong answer when it comes to pricing, but as your business grows, calculating costs and profits can help you try new and more complicated pricing strategies like bundling or pricing goods competitively without losing money.
When it comes to pricing your goods or services online, it can be tricky to offer reasonable prices and great quality while keeping your business’ health in mind. From key calculations you should keep in mind to unexpected costs like warehousing or customer service, we hear from one Atlanta based business owner who is optimizing its unisex lifestyle clothing brand for eCommerce. Listen to Square’s Paying it Forward podcast and hear firsthand from a small business owner who has taken out a loan and some of the unexpected obstacles she encountered along the way.