Dropshipping is an excellent way to expand your online shop. Dropshipping is a way for wholesale suppliers to handle your order fulfillment. It means that you, as a merchant, don’t need to worry about inventory, storage, shipping, or packaging.
Although dropshipping is relatively easy, there’s one thing that will always be a problem for newcomers: pricing.
It is crucial to understand the differences in pricing and how they impact your profit margins in order to maintain a profitable online store.
Why pricing products is important
Pricing is crucial for many reasons. First and foremost–profitability.
Prices are determined by the costs associated with any product. These costs include shipping costs, taxes, and wholesale prices. These expenses will affect your profit as well as your income. Your profit margin is the percentage of income that remains.
You may not make a profit if you set the retail price too low. You could lose sales if you set it too high.
Profit margin is a key factor in pricing decisions. However, it’s just one consideration.
Your ability to compete against other merchants directly impacts your prices. You’re more likely to lose customers if your products are less expensive than those of competitors. Setting your price lower than industry standards may reduce your brand’s perceived worth. This could lead to shoppers being hesitant about buying from your store.
Key Pricing Terms
A few key terms will help you understand pricing.
- Wholesale Price: Price of a product sold to retailers
The wholesale price is the price you pay to buy products. The retail price is your selling price.
- Revenue is Income from Sales
Your total sales will be your revenue. This is your “top line”, from which you subtract your costs to determine profit.
- Profit margin – Percentage left after subtracting all costs
You would pay $60 for a pair sneakers (wholesale price plus additional expenses like shipping or tax). You’ll make $40 if you set the retail price at $100.
As such, your profit margin will be 40 percent
(100-$60) or $100 = 0.4, 40%
- Mark up A product’s retail price minus its wholesale price
Let’s return to the sneaker example. If a pair of sneakers is $40 wholesale and each pair sells for $100, then your markup would be 150%.
(100-$40) or $40 = 1.5, 150%
Remember that your markup must be sufficient to cover all costs and maintain your profit margin.
- MSRP : Manufacturer’s suggested retail prices
MSRP refers to the recommended price for selling a product. It will usually include production and operating costs as well as basic profit margins.
Although it is often found on dropshipping platforms the MSRP doesn’t always reflect the retail price of the market. It is not always a true representation of what customers will pay.
You should always price products at the MSRP. However, you can also price products based on your market research or experimentation.
Setting Product Prices
In 5 easy steps, you can set the price for your products.
- Define your minimum retail price
- Understanding your market
- Find out about your competitors
- Learn more about your target audience
- Create your markup
01. Define Your Minimum Retail Price
Calculate a base retail price per product to get you started. This price should include all costs such as marketing, packaging, shipping, and other expenses. You should set a minimum retail price for each product to ensure you don’t lose any money.
A good place to start is to establish minimum prices. This will allow you to determine how low you can go. You can set dynamic pricing without compromising profitability once you have defined your price range.
02. Understanding Your Market
There are many factors to consider, and not all of them revolve around price.
Different products are more popular during different seasons. Sweaters are most popular in the fall and winter while bathing suits are more popular in the spring and summer. You can adjust your pricing to maximize profits throughout each year by understanding how seasonality affects sales.
There may be many products that you sell. Pricing can also be affected by this. There are many water bottles available with different price points. To gauge the price customers will pay, find products that are similar to yours. Next, differentiate your product to justify a higher price.
Plain water bottles, for example, sell for $10. Offering a product made in America or BPA-free may allow you to charge $15. People will pay more for extra value which can increase your profit margin.
03. Do your research on your competitors
Find out about your competitors to see how much they charge for identical or similar products.
You can use competitor research to get an idea of the market rate for your products. This is a great starting point to differentiate yourself. You might offer a variant of the product if your competitors are all selling the same product. You could also offer a lower price for the same product.
You can gain valuable insights into potential customers by researching other eCommerce businesses. Start by researching the competition via social media, blogs and forums, or reading reviews and testimonials posted on their sites.
04. Learn about your target audience
Understanding your target audience will ultimately lead to sales. You can make informed pricing and marketing decisions by understanding who they are – their age, location, income, and other details.
Consider how your customers will purchase your products, and what their expectations are. This includes:
- Buyer purchasing behavior
- Rate of purchase (e.g., once-off, monthly, weekly).
- Seasonality
- They will pay the highest price
These points will assist you in determining a price range that is reasonable, which can generate sales and keep a good profit margin.
05. Get Your Markups
You must find a balance between making profits and generating steady sales. You might find it helpful to determine the markup of your competitors and then work from that. It can be calculated the same way as your own. You will need to use their online retail price and an estimate for the wholesale price.
After you have done your research, determined the retail price range and are ready to think about strategic pricing.
Pricing Types
Before diving into pricing strategies, let’s cover two core pricing methods.
- Cost-plus pricing Adding a set price to your product’s unit costs
- Value-based Pricing: Setting product prices according to their perceived value to customers
There are many benefits to cost-plus pricing. It is easier to establish a profitable retail price by adding a markup on your wholesale price. It is easy to know your expenses so you can cover them and keep a steady profit margin.
Value-based pricing is more dynamic. It does not aim to make a lower profit but maximizes profit margins. This pricing method allows you to set your retail price based on what customers will pay. In determining a value-based pricing price, overhead costs are not considered.
Value-based pricing is an example in the clothing retail industry. Fashion items of the brand name are more expensive to reflect their social value than their actual material worth.
It’s difficult to determine a value-based pricing for many products. This requires you to have a better understanding of your market and target audience. The advantage is the potential to drive profit. The best industries to use value-based pricing are those that appeal to shoppers’ emotions such as fashion, art, or sports.
Pricing Strategies
There are many pricing strategies that can be used to accomplish different goals. Some strategies may increase profitability while others are focused on gross revenue. Some strategies, however, are designed to increase your customer base.
There are a few options when pricing products. You can experiment to find the best strategy for you business. Your market research and competitor research should inform the strategies you choose. Your sales and revenue will be higher if you have accurate information.
These are 8 common pricing strategies to help you get started:
01. Penetration: You can lower your price to be competitive in order to increase sales and establish a market position.
Useful for: Newer Retailers, New Products
02. Milking: Set your price high, then gradually lower it to maximize profit. As your product becomes more affordable, you can gradually lower the price.
Useful for: Cutting-edge gadgets, tech gear and products
03. Premium: A high price is used to emphasize the product’s exclusivity or quality.
Useful for: High-end Products, Designed to Target Wealthier Audiences
04. Competitive: Matching the price of your competitors. This strategy should be remembered, even if you are experimenting with other pricing options.
Useful for:most Industries, Products that have reached a steady price on the market
05. You can price products according to target markets if you have a product line. You can sell lipstick at different prices, such as one at $5, another at $15, and another at $30. Although they can be considered the same product but attract different customers,
Useful for: products which appeal to a broad audience and products with a lot of variability
06. Bundling: A way to sell a group product at a lower price. This is a way to get customers to spend more. Although it may seem like a loss to sell bundles of items, this is a great way increase your revenue and not necessarily grow your customer base.
Good for: products that have complementary/similar items (i.e., bundling audio cables with stereo equipment, gaming platform and extra controllers)
07. Psychological: Using psychology to motivate customers to buy. Psychological pricing can be described as setting the price at $99 rather than $100. This strategy can be used in conjunction with any other pricing option. You can experiment with it to find out how your target audience responds.
All products: good for
08. Optional: Selling optional accessories to a product at an affordable price. You could sell a laptop at a low price but offer options for extra memory or pre-installed OS. This strategy can be used to increase revenue for each sale.
Useful for: Many Industries – from computers to cars
Additional Pricing Tips and Considerations
Pricing strategies are only one aspect of the equation. Pricing can be used to increase conversions and bring in more revenue.
Shipping is a good place to begin. Shipping is an integral part in eCommerce. It is likely that customers will consider it when making purchasing decisions. Shipping costs that are too high may cause customers to shop elsewhere, even if the product is identical. Dropshipping is a lucrative business model that offers free shipping.
Free shipping is also psychologically beneficial. Free shipping is a great way to make shoppers feel special. Offering discounts and special prices to your customers is another way to increase your eCommerce business. When it comes to promotions, use your imagination.
These are the most common discount methods eCommerce companies use:
Step Discounts:Giving an amount of discount, such as 20%. This is a great way to save money as customers spend more.
Useful for: Increasing Revenue on Every Order
Flash sales Offering large discounts for a limited time, such as Black Friday sales. The limited-time offer is attractive to shoppers, who will often buy more. These sales are similar in nature to penetration pricing. To increase sales and possibly increase customer base, you may have to give up some profit margin.
Great for: holiday sales
Price Matching:Matching prices from other merchants. Customers will be more likely to trust your brand if you tell them your prices are unbeatable. This method, if well-marketed, can also bring customers from your competitors to your online shop.
Useful for: establishing a foothold on a market
Setting Pricing Rules
Dropshipping is an ideal method for merchants who want to be able to focus on their business. Dropshipping allows merchants to focus on marketing and increasing sales rather than managing inventory and shipping details.
Dropshipping is a great way to maximize your profits. Set pricing rules that are appropriate for your industry, and adjust as the market changes. Pricing rules will be automatically created when you integrate your online shop with a dropshipping portal like Modalyst. You can modify these rules to fit your business’ needs.
Pricing rules are automations that automatically apply predetermined markups on your products. For greater control over pricing, you can choose to have a multiplied markup or an added markup.
The multiplied markup is a percentage of wholesale price (i.e. 200%). An added markup (i.e. +$10) adds a fixed amount to wholesale price. Your rules will determine the price of any new dropshipping product that you add to an online store.
Although automation makes it easier to manage prices in bulk, you still need to do your research on new products. Every product is unique, and each market has different competitors and markup rates. It is possible to experiment and find the markup value that hits the sweet spot, then use it as a guideline for similar products in future.
Conclusion
Dropshipping is a business that relies heavily on pricing. Understanding how pricing affects sales, revenue and profitability is key to making the best pricing decisions.
These steps will help you use pricing to your advantage, and maximize the potential of your eCommerce business.
- Conduct in-depth market and competitive research
- Determine your minimum retail price
- Your short-term goal for your business (i.e. increasing revenue, profit margin, or market share) should be considered.
- Select pricing strategies that are in line with your goals
- Calculate a markup rate
- Try out different strategies and markups
- To automate dropshipping product pricing, set pricing rules
