It’s hard to run a dropshipping store, especially connecting with customers, choosing the right products, and designing the layout. Plus, it’s not always clear how best to price your products. In setting your price, you want to charge enough to ensure that you get a decent profit margin, depending on the type of product you sell. Some have higher margins and some have lower margins. However, you don’t want to charge so much that you drive potential customers away; you need to offer good prices, especially in such a competitive market. So here are some dropshipping pricing strategies that you can use for your online store.
What Are Some Costs to Consider When Setting Your Price?
We all know that running a dropshipping store has its fair share of expenses. So, before you can figure out how to price your products, you need to identify your business expenses. These may include:
- The wholesale price of the product (from your dropshipping supplier)
- Costs of advertising and marketing
- Packing/shipping costs
- Membership costs for your dropshipping supplier
- Selling fees (about 12% on eBay)
- Shopping cart transaction (about 2% on Shopify)
- Fees for processing payments (about 4% for PayPal)
- Fees/costs for running your website (domain costs, template, branding)
- Salary/wages for you and your employees
- Potential refunds (about 5%)
- “Rainy day” fund (to be used in case of an emergency)
As you can see, running a business can get really complicated! Amazingly enough, it takes much less money to start a dropshipping store than it does a brick-and-mortar retail establishment, but there are still plenty of expenses.
Furthermore, the specifics of these expenses will vary from case to case, so be sure that you go over these carefully in order to come up with an accurate figure.
Marketing and Advertising
In order to be profitable, you obviously need to let your potential customers know that your online store is up and running. How do you achieve this? Well, with advertising. Furthermore, your particular niche may need more advertising costs than others, so you’ll have to take that into consideration when setting the final price. For example, using Facebook or Google ads can be extremely effective, but they always cost money.
Additionally, direct advertising can really help you get customers, but if ads don’t perform well, then you’ll have to add those losses in your final price analysis. At the end of the day, most experts advise that your marketing costs should be about 30% of your total operating costs. For a small dropshipping store, that could be anywhere between $1,000 and $3,000 in advertising costs for the first 2 to 3 months of operation.
Sometimes, when you have to sell a product, it’s best to offer some discounts. However, this should be done with great care because offering discounts too frequently or discounting an item too much can end up hurting the brand in the long run. Furthermore, this is not done by every online retailer because with a dropshipping store, you don’t have to worry about surplus products. At the end of the day, you only pay the wholesale price for every product that your customer purchases, so a lot of online stores don’t even offer discounts. It all depends on how you want to run your e-commerce business, but certain kinds of goods (like bargain items) sell really well with discounts.
What’s the Ideal Profit Margin?
This is the ultimate question when running a retail operation! Of course, there’s a certain amount of leeway in terms of what your potential margin can be, and you can alter your price point to increase your margins. If you want to make more per transaction, then you could always try to increase the retail price. However, if the product is too expensive, then customers will simply go to another online store. It’s a delicate balancing act: you can charge more to make more money, but if you charge too much you’ll lose money.
Obviously, there’s also no point in breaking even – a business should be run for profit, otherwise, it’s not really a business. This is where you choose a markup, meaning how much you add on top of the product’s price, and this markup can be anywhere from 10 to 50%. Furthermore, most suppliers set their wholesale prices at 40 to 50% less than the retail price.
That being said, the possible profit margins usually break down as follows:
- Acceptable – 10 to 15%
- Good – 15 to 20%
- Very good – 20 to 30%
- Outstanding – 30 to 50%
In very rare cases this margin can be above 50%, but your standard dropshipping store will usually be in the 15 to 20% range. This is because the dropshipping business model does not usually have outstanding profit margins; it is most known for its convenience and low risk.
In fact, one of the cardinal rules of retail is that lower risk equals lower margins, and dropshipping is an exceptionally low-risk business model. However, you can use certain tools to choose the right niche and identify a segment of the market with higher profit margins.
Use Your Product Pricing as a Marketing Tool
You shouldn’t consider your price point as only being necessary to cover costs and generate decent profits. In fact, it’s useful to think of product pricing as a marketing tool and a way to make your brand stand out to consumers. According to the 2019 Pulse of the Online Shopper report from UPS, 79% of online shoppers consider price to be the most important factor in their purchases.
Let that sink in for a moment – that means that online shoppers prioritize product price over all other aspects of their retail experience, including:
- Shipping costs/speed
- Variety of options in stock
- Customer feedback/reviews
- Discount offers
So, when you’re trying to drum up publicity for your online store, make your prices the center of your marketing campaign. Furthermore, be sure you use appealing words, like reasonable, competitive, or low-priced. It’s generally best to avoid words like cheap as these have a negative connotation and consumers may think that the products will be of inferior quality.
Keeping all this mind, now let’s take a look at how to price your products!
How To Price Your Products Using These 4 Pricing Models
Choosing the right price for your products is known as the pricing strategy. Additionally, the method by which you calculate this is known as the pricing model. There are various pricing models that can be used, but before we go over those let’s quickly define 4 crucial terms:
- Revenue – Income that you make before you factor in deductions or operational costs.
- Profit – Amount of money you actually make. In other words: revenue – costs = profit.
- Cost – How much it costs for you to sell a product in your online store, including the wholesale price and overhead.
- Price – How much the consumer actually pays for the product.
Furthermore, it’s important to note that no single pricing model is always the best; most retailers will use a combination of the different models to come up with the best prices. That being said, let’s look at the different models that you can use!
1) Traditional Cost-Based Pricing
Also known as fixed markup, many online retailers will use this pricing model since it is one of the easiest and safest methods. It’s very intuitive, easy to execute, and allows for you to pre-calculate your profit margin. For all these reasons, this the most common pricing model for dropshipping newcomers.
So how do you price your products using this model? Well, you make a list of your expenses, add them up, and then apply a predetermined markup to come up with your price point. You can also choose a profit margin ahead of time and calculate the corresponding markup and then apply it across the board to all your products.
That being said, here are two tools that you can use to calculate these amounts:
- Markup calculator – You input the cost and choose the markup percentage and the tool will calculate your revenue and profit.
- Margin calculator – You input the cost and choose the profit margin and the tool will calculate your revenue and profit.
There is a specific form of this method known as keystone pricing. This is when the retailer applies a 100% markup across the board. In other words, you simply double the cost to come up with the final price. Let’s say you have a product that costs you $20. Go to the markup calculator, input the cost and set the markup to 50%. Once the calculation is complete, you’ll see that your
However, there are serious limitations to this method: it does not take market conditions or competitors’ prices into account. It’s also known as a blind method because you just apply the markup rate across the board, without factoring in these additional conditions. In other words, this method is easy and convenient, but it’s not always the most effective, making it a great starting point for many online retailers. Another way of saying this is that cost-based pricing is business-focused and not customer-focused. For some online retailers, this won’t be the best method for them to use.
2) Tiered Markup
With this method, you apply a different markup depending on the wholesale cost of the product. As you can see, this is a variation of the traditional cost-based method (or fixed markup method). Since the key difference is that you do not apply the same markup across the board, you have much more flexibility in how you set your prices.
The basic formula for this method is:
Price = [(Cost) / (100 – markup)] x 100
In this formula, the markup value can vary depending on the level you want to set it at.
So let’s try this formula out! Let’s say you have two items. Item A costs you $20 and Item B costs you $50. Usually, it’s better to have higher markups for lower-cost items and lower markups for higher-cost items. So let’s say you want to apply a 50% markup to Item A and a 20% markup to Item B, you would end up with two equations:
- Item A: [(20) / (100 – 50)] X 100 = 40
- Item B: [(50) / (100-20)] X 100 = 62.5
That means you should charge $40 for Item A and $62.50 for Item B.
So, with this system, you can customize the markup value depending on the underlying cost of the product. Additionally, markup and profit margin are related values, and you can easily determine how one influences the other by consulting a markup versus margin chart.
3) Manufacturer Suggested Retail Price
If you’re trying to determine how to price your products, sometimes you can reach your ideal profit margin if you use the manufacturer suggested retail price (also referred to as the MSRP or sticker price). Essentially, you simply go by what the manufacturer has suggested based on their analyses of the entire market. This is basically the easiest and fastest way to price your products since you are basing your decision on a predetermined amount. For online retailers looking to get started quickly, this may be the way to go!
However, the MSRP is not a one-size-fits-all solution. Remember, operating costs and expenses will vary from store to store. Additionally, using this pricing model means that you can’t adjust to market demands in order to increase your sales or profit margin. Consequently, you may have to use a more detailed pricing model that will allow you to hit that ideal profit margin.
4) Competitor-Based Pricing
So let’s say that you applied other pricing models and you are not selling enough products for your e-commerce store to be profitable. This is perfectly possible in certain dropshipping niches that may require more advanced pricing methods.
A 2019 survey from Episerver concluded that 68% of online shoppers will compare prices from various stores to the prices on Amazon. As a result, sometimes it’s best to look at your competitors. There are some price-tracking tools that make this easy:
- Prisync – This easy-to-use software will help you track your competitors’ prices across all e-commerce platforms. It even comes with a free trial!
- Keepa – This is similar to Prisync, although this focuses on prices/transactions on Amazon. This is still useful since Amazon is the world’s largest third-party logistics provider (3PL) and a great deal of the site’s traffic comes from independent retailers.
- DSMTool – Using this price-comparison tool will give you pricing information from over 50 different websites, including eBay, Shopify, AliExpress, Amazon, ChinaBrands, Walmart, and Target.
However, this method has serious limitations. Remember, these comparison tools are available to everyone, and other retailers can slash their prices as well. If everyone drastically decreases their retail prices (also known as cutthroat pricing), a phenomenon known as the race to the bottom occurs. Basically, this is when every retailer tries to outdo the rest of the market, resulting in profit margins crashing for everyone.
Additionally, there is a psychological component since consumers will equate low prices to low quality. That doesn’t mean you should never use this method, but it should be used sparingly.
Use These 4 Tips to Price Your Products
In addition to the 4 pricing models, you can also use these 4 tips to fine-tune your prices:
1) Psychological Pricing
Some prices just look better, even if they are effectively the same. For example, $9.99 will be infinitely more profitable than $10. Additionally, overly complex numbers just don’t catch the eye: customers won’t likely hit that “purchase” button if the price tag is something like $17.83. Therefore, it’s best to round up to the nearest 99 cents. If you feel especially confident, then round it up to the nearest multiple of 10. For example, a $24.82 product becomes $29.99.
However, this only works for products in the low to mid-range of prices (usually under a thousand dollars) and, in many cases, you’ll have to round it up to a multiple of 5 ($24.82 becomes $24.99 instead of $29.99). This is an old trick, but it works wonders! In fact, this is also referred to as charm pricing.
2) Use the Word FREE
Customers love seeing this: any time that word peeks out at them from a bit of sales copy, they’re far more likely to hit that “purchase” button. So how do you make this work in the context of a dropshipping store? You offer FREE SHIPPING for any transactions above a certain amount. In fact, according to this 2018 report from the communications firm Walker Sands, nearly 80% of online shoppers in the US said that free shipping will convince them to buy the product online.
Of course, for you, the shipping won’t be free (you’ll have to pay your dropshipping supplier), but you can add that cost into the final product. This is especially effective if the customer is located near you and the shipping costs will be minimal.
3) Bundle Pricing
This is another oldie but goodie: try using sales promotions like buy two, get one free or buy three, get 50% off the third product. You see this kind of pricing all over grocery stores. That’s because it works! People always love getting a good deal; it makes them feel like the purchase was a sound financial decision and not a mistake. However, this type of pricing definitely doesn’t work with luxury items; in fact, it may end up hurting sales in those situations.
4) Start Low to Get More Reviews
The importance of customer feedback and store reviews cannot be overstated in this day and age. It is an extremely important part of online retail and it can frequently be the deciding factor for potential customers. Consequently, you can start your pricing strategy with lower markups and build up a solid reputation with online shoppers. Over time, they will positively rate your store and leave good reviews, thereby drawing in more future customers and boosting your sales! Remember, you can use the tiered markup method to set these prices and alter the markup percentage from product to product.
What If You Set Your Price Too Low?
- Your profit margin will be too low.
- Customers may think that your products and/or services are inferior quality and not worth their money.
- Another competitor could undercut you by using cutthroat pricing.
- A race to the bottom may occur and profit margins will plummet for all retailers.
While prices are the most important part of the online retail experience, it’s not the only thing customers are looking for. So, when determining how to price your products, be sure you make your online store appealing in other ways by offering fast shipping, an extensive inventory, and great customer service.
How To Price Your Products With Greendropship
Choosing the right dropshipping supplier is crucial in determining a good profit margin for your online store. For example, you definitely want to have a combination of a great selection of products with fair wholesale prices. You also need a supplier who can pack and ship products quickly, efficiently, and inexpensively. Finally, in a perfect world, your supplier will provide you with the tools and technology to properly track your sales and inventory.
Greendropship meets all these criteria! We offer over 20,000 natural and organic products made in the USA, all of which have competitive prices so that you can hit that ideal profit margin. Be sure to download a product catalog or contact a sales representative with any questions you may have.