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How to Price for Shops (Keys to Unlocking the Most Profitable Shops, Part 2)
Thanks to the changing tech landscape, shops are now more affordable and more flexible than ever, plus, the demand for shops has never been higher! Before I joined commonsku as the Chief Content Officer, I spent years as a distributor focused on the company stores/shop space, after taking hundreds of calls from prospects and setting up many shops, I learned how to quickly qualify the best opportunities, focus on the most profitable ones, and grow those with the most potential. In this series, we’ll discover the keys to unlocking the most profitable shops.
Let’s cut to the chase: No one should be providing store costs for free to their client. Period.
Either you should upcharge with margins, or charge fees separately as they occur, or amortize costs into volume pricing (more on that one in a few) but you shouldn’t provide anything that a customer values, for free.
If you’re one of those who thinks: I’ll show them, I’ll do stores for free, just so I can secure all that promo-spend volume and beat all my competitors.
Know this: That game has been played-out and at the high cost of devaluing a premium service (more on that in a minute).
But first, for those who are curious about charging for stores, in order to determine what you should charge, you need to know that there are two types of shop/store costs:
Costs incurred from your service providers: The cost for software, the costs for any fulfillment, storage, etc., and the costs for freight.
Internal admin costs: Arguably, the most expensive costs, your time spent setting up and managing the program. These costs include your initial (and ongoing) consult with a client, to tasks like aggregating orders or managing your shop, to every time you touch a product (managing exchanges for example).
For those that might be new to shops or for those who aren’t quite sure they’re handling shop fees the right way, let’s look at two quick examples to clarify the difference between a normal (drop-ship) ordering process and a shop order for that same t-shirt.
Normal Order
You receive a $10,000 t-shirt order, this is not a shop order, just a normal drop-ship project. Your price at $10,000 includes your mark-up, all set-ups and run charges, plus freight, in other words, all landed costs. Your profit margin, naturally, accommodates your time. Also, since you contracted with an outside designer to create the design, you had four hours of design time that were contributed to that project and you were able to buffer the cost into the order. An example: If your designer’s billable rate was $75.00 per hour for design, that’s $300 in design fees.
And though you have an agreement with your customer that design is a part of your service, because you’re a savvy distributor who thinks like an agency, you show this value on your invoice to your client, even though it’s at no charge. (Never let a client take for granted the value of what you do).
The order drop ships to the customer from your screen printer and you’re done!
Shop Order
Let’s take that same $10,000 t-shirt project and create a different scenario with a shop. (These stores can get infinitely more complicated than this scenario but, for our example’s sake, this keeps it manageable). This time, the client wants exactly what was described above but this t-shirt project will celebrate the fact that their company made the local “Best Places to Work” list and to commemorate it, they want to gift each of their employees with a t-shirt, letting each employee go on the shop and order their size. The shop will only be open for a limited amount of time (30 days) to collect orders, then you will close the shop. Once all the sizes are accumulated, you’ll collect those orders into one purchase order and submit this to your supplier, then drop-ship the entire order to your customer’s HQ. Since it’s a $10,000 order, let’s say the shirt is $7.50, so, you’re aggregating 1,333 employees’ t-shirts into one order. All of the same costs apply when you designed the shirt, but now your admin time and additional costs for the shop include:
Setting up the store (configuring the store), advising the client on best options. (1-2 hours, depending on the provider, but sometimes this can be as easy as creating a presentation).
The cost from your store provider for store set-up and monthly support fees.
Setting up the item on the store. (15 min)
Launching the store (this might be low maintenance on your end, primarily, this is the client announcing the store to by their employees).
Answering an occasional question about the product from employees trying to figure out the size, the material, delivery (even though you were very clear on your product description). (30 min)
You notice about ½ way through the month that only 60% of employees have ordered their shirt, so you ask the client to send a reminder, or, if you have the luxury of direct marketing, you send the reminder. (30 min)
Two days before the store closes, you send one more email reminder, “last call for shirts” (15 min)
Once the shop’s 30-day window is closed, you close the shop. (15 min)
You aggregate all orders into one purchase order. (1 hour)
Process the sales order with your supplier like you would any normal order and follow up on the order. (½ hour)
The order drop-ships to your customer.
Last task: Manage any returns/exchanges (but, since you’re a savvy distributor, you convinced your client to order extras in each size and have those on-hand).
Total time: 5-½ hours.
Now the power question:
What is the value of this your customer?
Consider it from their perspective: They won’t have to assign a team member (or members) to collect orders from each department head, burying their colleagues in an infinite number of emails. They won’t have to work with multiple vendors (setting up their own shopify site with one vendor partner, working with their internal designer, and then working with a screen printer) and mostly, they won’t have to aggregate 1,333 orders. They can focus on mission-critical objectives while you do the heavy lifting, turn-key. What’s the value of making their life that easy? Moreover, they made the Best Places to Work list! What’s the value of making every single employee feel delighted about being a part of that company?
The overall value -creating a positive impact on the brand while streamlining the entire process- is significant.
You’ve added 5-½ hours of admin work to this simple shop. If you gave away the design costs for free and your store management time, and your store tech costs from your provider, you’re reducing your margin and profit on this order. Often, distributors give away support and service charges in this business because they don’t know their costs, largely because they didn’t ask enough questions during the consult time (for a list of questions, see our previous post).
When you don’t charge for services, you end up giving away more than mere costs, you take an exceptional, convenient, and easy experience for your customer (and a more involved process for you) and turned it into a commodity, obliterating the value.
This is why, when people ask me how much they should charge for a store, I always say, “it depends.” It depends on three things:
1) Your time committed to creating and managing it
2) Your additional costs for the store technology and any other fees you incur for handling
3) The value of this shop to your client (the most overlooked factor)
Demonstrating Value to a Customer
A distributor once gave me a great idea about showing the value to a customer between domestic and international orders. When they provide a quote to customers, they give both the domestic and international price on the same product. The customer then sees the value of getting something immediately (within 1-2 weeks) versus the value of waiting 90-days for something to arrive from overseas. It’s ingenious because the buyer recognizes the difference in value and moreover, the buyer doesn’t relegate the distributor to one (high) price only: domestic.
Likewise, you can take the same scenario above and provide two prices to your customer: The price of the shirt without the shop and the price of the shirt with a shop. This shows your customer there is an actual cost and value to producing and managing a shop but also keeps the market-value for a t-shirt comparable.
Let’s look at an example. And since we don’t have time to go into all the comparative store costs by all the platform providers that are out there -as they are numerous-, and since ours is the simplest ;-) we’ll use commonsku shops to demonstrate how to price a shop.
A 2.5% fee is all you will pay on the orders that are processed through a commonsku shop. Note that this is only after a product sells. Most shop providers will charge you for a store set-up and monthly maintenance regardless of whether your shop is successful. We only want to charge you when it’s a win-win for everyone. But enough of me talking about shops, let’s get back to our example:
For a $10,000 order, a 2.5% fee is only $250 to create your shop (less than the design fees for the shirt order). Add your time to manage (5-1/2 hours x a conservative $75.00 per hour = $412.50), add your design fees, and you have a total cost of $962.50. Average this into the cost of your 10,000 t-shirts and you have the following comparison for your customer:
Normal t-shirt unit price: $7.50
Turn-key shop t-shirt price unit price: $8.22 (OR, if you prefer to break out those fees, you can keep the unit price the same and charge a store set-up of $250 and your admin fees of $412.50, the $8.22 includes the design costs for the shirt as well).
This is a very simple example as stores can get infinitely more complicated but I think you get the idea: you want to be sure and communicate value to your customer. And the shop is worth far more to the customer than $662.50, keep that in mind!
The only time you should ever consider giving away store costs and admin costs for free is if you are doing so because your customer is going to spend more volume with you through the store, but you still need to know your costs moving forward and you should have a contractual obligation with the customer to guarantee that future spend. You can’t just do a shop on a promise from the client or an educated guess regarding your costs. You need to calculate actual potential sales, real time, and real hard costs.
When I was a distributor, one of the best contractual obligations we ever created for some of our store clients was a minimum purchase agreement. It worked like this: If a client spent above x amount within a determined time frame, they would not be charged for their store (or would be charged a reduced amount). At the end of the year, if they didn’t spend what they estimated they would spend, we would bill the fees. What was incredibly eye-opening about this simple process was that it not only re-cooped ours costs to create and manage a shop but it did something almost magical: it activated buyers to become internal champions at their company for the shop, they persuaded (and sometimes mandated) that their colleagues use the store, (as sometimes, a store can become a shell store, generating very little, or, once it is set up, a customer can let a store drift into oblivion).
And My Mea Culpa
Yes, you can (and likely will sometimes) forgo all of this advice and just not charge for your shop. Just know what you’re giving away and quantify what you’re gaining in future sales. Determine, with the client, with the best information you have, the actual activity and anticipated sales activity and compare that against your costs and profit. We once provided a minimum purchase agreement to a client plus a heightened pricing schedule for our store fees (technology and handling). The fees were substantial, so much so that the client got serious about shifting spend, he sat down and showed me what he was spending with me and each of my competitors, demonstrating exactly what percentage of the budget we could anticipate receiving. Use the leverage you have to open those types of conversations and if you’re trading away services for fees, don’t underestimate your value.
One more cautionary tale: We once had a seven-figure client whom we charged for store fees and services. When the program went up for bid, we lost it to a competitor because the competitor didn’t quote for those fees and services. The client showed them what they had historically spent but they didn’t specify their future budget allocation, nor tell them just how much they were about to slash their spending. Four weeks later, the finance manager from the winning distributorship called me to ask, “How did you do this profitably?” The answer was that the customer spent more with us historically, plus, we were charging for services. But since they won the bid without really understanding the details of the program -future budget allocation, how much admin costs were internally incurred to manage the program, how many new items were added regularly, the thousands of employees we managed as approved users on the store and the churn related to it, how many orders were processed monthly, the merchandise demands- they didn’t know how to price the services or they ignored them altogether in order to win the business.
Giving away your services for free devalues you, your brand, our medium, and your service. Moreover, it tanks the market, reducing a premium product and a premium service to a commodity.
As an industry, I would love to see us reverse this mentality of giving away service charges for free, in any category, whether in design or shop set-up or kitting or consulting. Just because a supplier doesn’t charge you a fee for a service doesn’t mean you won’t have costs (and admin costs are the highest form of costs you will ever incur).
Mostly, be sure and appreciate the difference between the cost of producing something versus the value it represents to your clients, if you do, you’ll see your margins, your value, your profit, and your attitude about shops, soar.
commonsku has three amazingly simple types of shops to fit your needs, a Marketing Shop, Pop Up Shop, and a Company Shop, for more information, check out our shop options here.