In the beginning of our online retail shop, we always have many thinkings about how much profit will we make per item that we sell in our online shop. But by the time, after 2 years, we ran the business, we think that the mindset is not correct. The correct one is not about how much profit that you get from selling per item, but it's all about how much sales will you make in the end of the month. Because when running the business, you need to compete with competitors. To compete, your price should be more interesting. To be more interesting, we need to give more discount programs, promo programs, etc.
Is my mindset correct?
Any reference (could be books) that could let me understand more about the business process would be appreciated.
One thing you should think of is that it is not always about only profit margin or item prices. It is about how much money you are able to make (present value of future cash flows, if I may). And sometimes the start of your business would be the time where you gain your customers, in order to profit more and more later.
Shopping is not only about lower prices or convenience. It is about the whole buying scenario, the experience. If you are able to create an experience in your enterprise, you can make the clients loyal to your company - and therefore profit from it in the longrun.
A great book to be read is Marketing 3.0, by Kotler.
Very generally, there are two main generic marketing categories of marketing-pricing strategies for gaining a competitive advantage: low cost or differentiation.
Low cost strategies need high volume & low costs model to succeed. The advantage of this kind of strategy is that it's fairly predictable. All else equal, if you lower your costs, you will sell more. It's easy to know where you stand in the market by comparing your prices to your competitors'. "Marketing" (promotion, branding) is easier. If your prices are the lowest customers will find you. Amazon & Ebay become viable options for reaching customers.
The catch is that to lower prices you need to lower your costs and in retail much of your costs can be hard to affect. Scale, efficiency & inventory management are big factors here. Capital investment usually plays a role.
Wal Mart, Dell & Aldi/Liddell are great examples of different ways well understood businesses followed low cost strategies successfully. It may be useful to read case studies about these.
Differentiation strategies are about making your product (the retail experience, not necessarily the physical product you sell) different in some way that is valued by your customers and makes them willing to pay a little more. These strategies usually focus on margins more than volume. This is usually more suitable for smaller businesses. For example, a small e-retailer with 200 orders per day can differentiate by calling all customers 3 days after shipping to create a personal experience. Amazon.com cannot.
Deciding which strategy is your strategy is important. Most large successful companies are in one camp or the other.
Within each of these strategies, you also need to decide on a price. The ideal price is where margin X volume is highest. The problem is that you don't know exactly where that is. To find out you can use short term promotions and specials to crudely measure demand elasticity. Promotions are also useful for price discrimination purposes, getting in price sensitive customers without losing potential revenue from price insensitive customers. Basic microeconomics is very helpful here.
Reading & Learning
1 - Michael Porter is the academic that came up with the vocabulary for this: http://en.wikipedia.org/wiki/Porter_generic_strategies#Focus_or_Strategic_Scope 2 - Seth Godin Is a famous modern marketing guru with popular books & a blog that are almost exclusively about differentiation. sethgodin .com
3 - Case Studies are (IMO) the best way of learning about low cost strategies. Reading about companies obsessed with giving customer value for money will drive home how this strategy influences every aspect of the business. They all find different ways of doing this.
4 - Basic Microeconomics is useful for retailers and will help you develop good thinking habits for approaching these questions like thinking in curves & considering everything "on the margin." Try https://www.khanacademy.org/science/microeconomics
You are halfway there in your thinking. It is not that the first idea was right or wrong but that they are both somewhat correct.
The margin per sale is important but only when taken into account with the volume of sales per month. A $5 profit for 200 sales is worth more than $150 profit for one sale but only for so long as there are no additional costs to uncover.
There are some good answers here that look at strategy and you should definitely read them. What we are all trying to do is position ourselves to get the most possible money from the market. So we have to ask how much the market is willing to pay and at each price point how many units the market is likely to consume.
Then we ask what the cost of delivering at that price point is.
When all that is said and done don't forget that consumer behaviour is not always to seek cheapest. Sometimes it is to seek most expensive, biggest, most well known or most reliable. Do a google on USP - Unique Selling Position.
Whichever approach you take don't lose sight of the fact that you are seeking the most sustainable income. Sometimes volume is the way but sometimes it simply doesn't scale. If I make 10 unit sales a day at $100 can I make the same profit for 20 unit sales at $50? Not if it costs me $35 to make each unit.
To make low price and high volume work you need to scale to very high volume and deep pockets because at that scale a change in cost of $0.01 can end up too expensive. On the other hand low volume and high margin can absorb cost changes of far more substantial amounts.
Also at the high price end of things consumer psychology is very different. Clients often value the product more highly and ask for less support. As the price goes lower the product is seen as having less value yet strangely consumers tend to demand far more. Also at the higher margin end of things you find customers who are often willing to buy equally premium priced related products and services.
Best of luck with your strategic planning.