You monitor your competitors' prices and find someone selling for less than you. You think about lowering your price, but you know your remaining margin from the sale is limited. Then you consider raising it, and the question returns: Why would a customer buy from me if they can get the product for less?

Between the fear of losing the customer and the fear of selling without a profit, pricing becomes a perplexing decision. You need a price that the customer accepts and leaves you with enough to run your store and sustain your business. To reach it, you need to understand your costs, what the customer is actually comparing, and the reasons that might prompt them to choose you.

In a Salla session with Mohammed Al-Omari, a business development and financial performance analysis specialist, we discussed the relationship between cost, the market, and customer-perceived value. Here, we explore how to use these elements to evaluate your price, and what to review when a competitor's price seems lower than what you can afford.

Watch Mohammed Al-Omari explain the relationship between cost, value, and market prices, starting from minute 11:10.

Cost | How far can you lower your price?

Before asking about the price a customer will accept, calculate how much the sale costs you. You buy a product for SAR 50 and sell it for SAR 100, expecting to keep SAR 50. However, this calculation stops at the purchasing cost, whereas the sale itself may involve packaging, payment fees, shipping costs absorbed by you, along with advertising costs attributed to the order.

Suppose the product cost is SAR 50, packaging, payment fees, and store-absorbed shipping add SAR 15, and the order acquisition cost is SAR 10. The total of these costs comes to SAR 75, leaving SAR 25 from the SAR 100 selling price.

This remainder is called the contribution margin; it helps cover the store's remaining expenses, such as subscriptions, salaries, and rent, before generating a profit. Therefore, do not treat it as a net profit that you can withdraw entirely.

If you drop the price to SAR 80, assuming previous costs remain unchanged, you will only be left with SAR 5. Here, the question becomes: Is the contribution from your sales at this price enough to cover the rest of your expenses? And how many units do you need to sell to make that happen?

Use your store's actual costs and pay attention to how they vary across products, payment methods, and shipping options. If an order contains multiple products, calculate its shared costs once and distribute them appropriately during product analysis, so you do not burden each product with the full shipping or customer acquisition costs.

Competition | Is the lower price the reason a customer chooses you?

When you see a cheaper product, review what the price includes before comparing it to yours. Are the specifications and quantity identical? Are the shipping costs comparable? Are the delivery time, exchange policy, and service level similar?

These details help you understand the comparison the customer makes. Two products might look identical in pictures, but the purchasing experience or value gained from each may differ completely.

Conversely, the product and the offer might truly be identical, making the price difference influential in the decision. In that case, you need to understand your ability to compete: perhaps the other store purchases in larger quantities, secures better terms from the supplier, or fulfills orders at a lower cost.

Their price tells you what the customer pays them, but it does not reveal what they keep after the sale. Therefore, use competitors' prices to understand the market, then return to your numbers to understand the impact of matching them on your store.

Choice | Why would a customer buy from you if your price is higher?

This question deserves a clear answer from the customer's perspective. If they see the same product, the same service, and the same purchasing terms, it is only natural that price becomes a major deciding factor. Before asking them to pay more, identify what they will receive in exchange for the difference, and ensure it is clear and meaningful to them.

The difference could lie in the product's material, craftsmanship, customization options, or a service the customer needs. However, the phrase "our quality is better" alone does not explain how their experience will differ. Highlight the details through pictures, clarify specifications and uses, and ensure delivery timelines and policies are easy to understand.

If a customer is buying a gift for an upcoming occasion, for example, gift-ready packaging and clear delivery dates might matter to them. If they are buying a product that requires precise sizing, detailed sizing guides and photos could help them evaluate their choice. The value of these elements depends on the customer's needs and your ability to deliver what you promise.

Review your product page and ask: Can the customer understand the reason for the price difference without contacting me? Is the reason I highlighted important to them, or is it just an added cost I incur without them seeing the benefit?

If you cannot find a difference that the customer values, and your costs do not allow you to match the market, review the supplier, purchase volume, order fulfillment process, or the viability of the product itself. You cannot solve every pricing issue by convincing the customer to pay more.

Adapted from his discussion in the Salla session.

Sustainability | Is what remains enough to run your store?

A price might cover the costs associated with the order, but it might leave a limited margin insufficient to cover the rest of your expenses at your current sales volume. This is why you need to link what remains from each sale to the quantity you can realistically sell.

Suppose your fixed expenses are SAR 3,000 per month, and each unit sold leaves SAR 20 after variable costs. In this simplified example, you need to sell 150 units just to cover fixed expenses before making any profit:

SAR 3,000 ÷ SAR 20 = 150 units

If you usually sell 50 units, there is a gap that warrants review. You may need a different price, lower costs, an adjustment in expenses, or a realistic plan to increase sales. Relying on the assumption that orders will naturally increase later, without estimating what is required to get there, can delay identifying the problem.

This is an illustrative calculation for a single product assuming fixed costs remain constant. If your store sells multiple products with varying margins, you will need to factor in the sales mix when estimating the break-even point.

To delve deeper into understanding costs and the break-even point, learn financial fundamentals for e-commerce stores with Mohammed Al-Omari on Salla Academy.

Discounts | Do you need to lower the price for everyone?

When you hesitate about your pricing, you might resort to a store-wide discount to encourage customers to buy. But before slashing prices across all products and customers, identify the specific problem you want to solve: Do you want to clear specific inventory? Encourage bulk purchases? Or test customer demand for a new product?

A clear objective helps you define the scope and duration of the promotion, and then calculate its cost. The room for discounting may vary between products, so do not assume that the same percentage is suitable for everything you sell.

Also explore alternatives that fit your goal, such as bundle offers or free shipping under specific conditions, and calculate what remains from the order in each scenario. Changing the offer format does not exempt you from calculating its cost.

To understand the impact of discounts on the remaining profit margin from a sale, read also: How to Calculate the Impact of Discounts on Your Profit Margin

Testing | How do you test your price before rolling it out?

You do not need to change prices across your entire store all at once. Start with a product that has repeat orders and enough historical data to help you understand its performance, then define the reason for the adjustment and the outcome you want to track.

Record your baseline: The actual selling price after discounts, quantity sold, variable costs, and total contribution margin over an appropriate timeframe.

Define what you will change: If you change the price, ads, images, and offer simultaneously, it will be difficult to pinpoint what caused the result. Keep the test as clean and focused as possible.

Track demand and the remaining margin together: A drop in units sold alone does not indicate the failure of a new price, just as an increase alone does not prove the success of a discount.

Suppose you used to sell 100 units, with each unit leaving SAR 10 after variable costs; your total contribution margin would be SAR 1,000. After adjusting the price, you sold 80 units, but each unit now leaves SAR 15; your total margin increases to SAR 1,200. In this example, sales volume dropped while the remaining amount available to cover expenses and profit improved.

This does not mean raising prices is suitable in every scenario. Keep an eye on customer inquiries, complaints, and repeat purchases when the testing duration allows, and account for seasonality, ad spend, and inventory availability differences between the two periods.

Set a decision deadline: Allow the test to run for a period that yields meaningful data based on your sales volume, then decide whether to maintain the price, tweak it, or run another test.

The Decision | What should you review if the customer rejects the price?

If the price does not yield the expected results, revisit the decision factors. Did the price increase without the customer understanding what they are getting? Are you comparing it to different products? Is there an issue with the product page or checkout experience? Or is the product cost so high that competing with it is unviable?

The next step might be improving the product description, finding a more suitable supplier, adjusting the product line, or revisiting operational expenses. Sometimes, you need to accept that a specific product does not align with your store's business model, rather than continuing to sell it at a price that strains your business.

Before choosing between "lowering the price" or "raising it," write down three things: what the sale costs you, what the customer receives, and what remains for your store. Then validate your decision with the numbers. This way, you can evaluate your price based on clarity rather than fear alone.

Watch the Session | Deepen your understanding of the impact of discounts on store profitability

In a Salla session, Mohammed Al-Omari discussed the relationship between pricing, costs, discounts, ads, and cash flow, answering merchants' questions about their financial decisions. The discussion on the impact of discounts on margins begins at minute 19:31 of the recording.

Planning to launch your e-commerce business? Create your store on Salla, and start setting up your products and prices based on clear costs.