I have ecommerce clients who intentionally keep their prices below some of their competitors. They are trying to build customer loyalty and gain market share.
I understand what they are trying to do. They are willing to make less on an order today if it helps them build a stronger business over time.
That may be a good decision. But I want to know how much they are giving up and what they are getting for it.
Lower Prices Can Be Part of the Plan
I don’t believe every business needs to charge as much as possible on every sale.
An ecommerce owner may have good reasons for keeping prices lower. They may be introducing a product, getting established in a competitive market, or encouraging customers to buy from them again.
The question is whether the business can afford the strategy.
How much is left after paying for the product, freight, fulfillment, marketplace fees, payment processing, advertising, and returns? And is that amount enough to help cover the rest of the business?
You should be able to answer those questions before deciding that more sales will make up the difference.
How Many More Orders Do You Need?
Suppose you sell a product for $100. After the costs that go with that order, you have $20 left to cover overhead and profit.
You lower the price to $95. Assuming those costs stay the same, you now have $15 left.
You reduced the selling price by 5%, but the amount left from each order fell by 25%.
At $20 per order, 1,000 orders produce $20,000 toward overhead and profit. At $15 per order, you need approximately 1,334 orders to produce the same amount.
Can you get those additional orders? Can you handle them without adding employees, warehouse space, or other costs?
Maybe you can. But that is the calculation I would want to see.
Are You Building Loyalty?
If the reason for lower prices is customer loyalty, we should look at whether customers are coming back.
Are they placing a second order? How long does that take? Are they buying more over time? Do you have to spend money on advertising to bring them back each time?
A customer who returns regularly without another expensive advertising campaign may be worth accepting a lower margin on the first purchase.
But if most customers buy once, the business needs to recognize that too.
I would also want to understand what keeps them coming back. Is it the product, the service, the convenience, or the price? If you eventually need to raise prices, that distinction may matter quite a bit.
Growth Still Needs Cash
More orders usually mean buying more inventory. You may have to pay suppliers well before you collect from customers.
That can put pressure on cash even when every order contributes something toward profit.
Before encouraging more volume, I want to understand how the business will pay for it. A pricing strategy needs to work with the inventory purchasing plan and the other bills coming due.
Give the Strategy a Way to Be Evaluated
You don’t have to abandon lower prices because another accountant says your margins should be higher.
But you should decide what you expect the strategy to accomplish and when you will review it.
That might mean looking at repeat purchases, total dollars earned after order costs, customer acquisition costs, and the cash needed to support growth.
Your accounting needs to be accurate enough to make that review useful. If inventory costs are wrong or marketplace activity is incomplete, you may be making pricing decisions with numbers that don’t reflect what happened.
When a client tells me they are keeping prices lower to build loyalty and market share, I want to understand the plan.
Then I want us to have financial information that helps determine whether it is working.