Product Line Pricing Techniques

If you’re new to selling online, product line pricing can be difficult. Today we’re going to talk about why your inventory turnover ratio matters and how it can help you understand how to price your products.

Is seeking the highest profit margin the best way to evaluate products? Not necessarily.

Determining the inventory turnover ratio is the standard for understanding your company’s efficiency in regard to sales and inventory.

Your turnover ratio is perhaps the most important metric you can use to measure the performance of your dropshipping business.

Turnover Ratios Explained

If you are in the position to carry inventory, then you will need to understand what inventory turnover ratios are.

This ratio is a key performance indicator and if you want to improve operations, you need to crunch the numbers.

Even if you are a dropshipping company, there are reasons why you might want to carry inventory. If you have inventory, you can bundle products that you buy at wholesale price to sell unique products online.

Even if you decide not to carry inventory, finding your inventory turnover rate is still a good idea. Doing so will help you to better understand how your business is performing.

How to Find Your Inventory Turnover Ratio

To find your inventory turnover ratio, all you have to do is find the cost of the goods sold and divide it by your average sales. Alternatively, you could divide your sales by your average inventory.

Cost of Goods Sold ÷ Average Sales

or you could take:

Sales ÷ Inventory

If you take your annual sales and divide the number by your inventory, you will easily be able to find your inventory turnover ratio. This is a quick and easy way to analyze how efficient your company is at moving inventory.

Here’s an Example

Let’s say that your dropshipping business has $35,000 of sales this last year. That said, your annual cost of goods was $75,000. To find your turnover ratio, your formula would look like this:

75,000 ÷ 35,000 = 2.14

For this example, the e-commerce store owner has an annual inventory turnover rate of 2.14. Typically, it is better to have a higher turnover ratio.

To determine whether this is a good or bad ratio, we recommend comparing this figure to your industry’s standard.

Whether you are a dropshipper or you carry your own products, it is always a good idea to find your inventory turnover ratio.

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