How to Price Your Products for Dropshipping
Dropshipping is a great way to grow your online store. It’s a system where wholesale suppliers handle your order fulfillment. As a merchant, it means you don’t have to deal with inventory, storage, packaging or shipping.
While getting started with dropshipping may be relatively simple, one question always comes up, especially for newcomers: how to price your products?
Understanding different pricing methods and their impact on your profit margins are crucial to maintaining a successful, profitable online store.
Why Pricing Products Is Important
Pricing is important for several reasons. First and foremost—profitability.
The price of any product is based on the costs associated with it. This includes the wholesale price, shipping costs and taxes. Your profit will be determined by these expenses, as well as your income. The “profit margin” is the ratio of income that remains as your profit.
If you set your retail price too low, you may end up with a small profit margin. Set it too high, and you may miss out on sales.
While profit margin may be the key driver behind pricing decisions, it’s not the only consideration.
Your prices directly affect your ability to compete with other merchants. If your products are more expensive than competitors, you’re likely to lose potential customers. To contrast, setting your price lower than the industry standard may decrease your brand’s perceived value. In turn, shoppers may be hesitant about purchasing from your store.
Key Pricing Terms
To understand how pricing works, you should be familiar with a couple key terms:
Wholesale price: Price of a product when sold to retailers
As a merchant, the wholesale price is your buying price. Your selling price to customers is the retail price.
Revenue: Income generated from sales
Your revenue will always be the total amount of your sales. This is the “top line” from which you deduct your costs to determine your profit.
Profit margin: Percentage remaining from your revenue after deducting all costs
For example, you pay $60 for a pair of sneakers (wholesale price + additional expenses such as shipping or tax). If you set your retail price at $100, you’ll be left with a $40 profit.
Your profit margin will be 40%, calculated as such:
($100-$60) / $100 = 0.4 or 40%
Mark up: A product’s retail price minus the wholesale price
Let’s go back to our sneaker example. If the wholesale price for a pair is $40, and you sell each pair for $100, your markup will be 150%.
($100-$40) / $40 = 1.5 or 150%
Keep in mind, your markup should be set to cover all costs as well as maintain your intended profit margin.
MSRP: Manufacturer’s suggested retail price
MSRP is the price that manufacturers recommend for selling their products. In most cases, it’ll take into account production and operation costs, as well as a basic profit margin.
Though commonly found in dropshipping platforms, the MSRP does not always represent the market’s retail price. Moreover, it’s not always an accurate representation of the price customers are willing to pay.
While you should always consider the MSRP, price products according to your own market research and experimentation.
How to Set Your Product Prices
Here’s how to set prices for your products in 5 steps:
01. Define your minimum retail price
02. Understand your market
03. Research your competitors
04. Get to know your target audience
05. Set your markups
01. Define Your Minimum Retail Price
To get started, calculate a base retail price for every product. This price should cover all expenses, including marketing, operational costs, packaging and shipping and more. The minimum retail price for any given product should ensure that you don’t lose money on your products.
Getting a firm grasp on your minimum prices will give you a good start, letting you know how low you can possibly go. Once you’ve defined your price range, you can create dynamic pricing without risking profitability.
02. Understand Your Market
There are many different factors to take in—and not all revolve around pricing.
Simply put, different products sell better during different periods. For instance, sweaters are more commonly purchased during the fall and winter, bathing suits just before summer. Understanding how seasonality impacts sales, lets you adjust pricing to maximize profits throughout the year.
The products you sell may come in a wide variety. This also impacts pricing. For example, there’s an endless selection of water bottles with differing price points. Find products similar to yours, to gauge what customers are willing to pay. Then, try to differentiate your product so you can get away with a higher price tag.
For example, plain water bottles sell for $10. You may be able to charge $15 by offering a product that is BPA-free, or made in the USA. People are willing to pay more for added value, which can boost your profit margin.
03. Research Your Competitors
Get to know your competitors and how much they charge for similar or identical products.
Competitor research will give you an idea of what the market rate is for your products. It’s also a good starting point for differentiating yourself. If your competitors all carry the same product, you may want to offer a different variation of it. Another option may be to set a lower price on the same product.
Researching other eCommerce businesses can give you valuable insight into potential customers. You can start by looking up the competition on social media, blogs, forums or go through reviews and testimonials on their site.
04. Get to Know Your Target Audience
Ultimately, understanding your target audience is the key to making sales. Finding out who they are—age, geographic location, income, interests and more—can help you make the right decisions when it comes to marketing and pricing.
Think about how customers purchase your products and what are their expectations. This includes:
Buyer purchasing behavior
Purchase rate (i.e., one-time, monthly, weekly)
Highest price they’re willing to pay
These points will help you find a viable price range, one which generates sales and maintains a solid profit margin.
05. Set Your Markups
Your markup rate must strike a balance between making a profit and generating steady sales. It may be helpful to calculate your competition’s markup and work from there. You can calculate it just like you would your own, according to their online retail price and an estimate of the wholesale price.
Once you’ve done your research and determined the retail price range, you’re ready to start thinking about strategic pricing.
Types of Pricing
Before diving into pricing strategies, let’s cover two core pricing methods.
Cost-plus pricing: Adding a set markup to your product’s unit cost
Value-based pricing: Setting product pricing according to its perceived value to customers
Cost-plus pricing has several advantages. It’s easier to set a profitable retail price by adding a markup to your wholesale price. Your expenses are mostly known, so it ensures that you cover costs and maintain a steady profit margin.
Value-based pricing is a more dynamic method. Rather than turning a smaller set profit, it aims to maximize profit margins. With this pricing method, you set your retail price according to what customers are willing to pay. Overhead costs don’t play a role in determining a value-based price.
The clothing retail industry is a good example of value-based pricing. Brand name fashion items are priced higher to represent their societal value, rather than their actual material value.
For many products, it’s hard to gauge a value-based price. This method requires a much greater understanding of the market and your target audience. But the advantage lies in the potential to be a profit driver. Value-based pricing is best used in industries that tap into shoppers’ emotions, such as fashion, art or sports.
There are numerous pricing strategies, each used to achieve different goals. While some may increase profitability, others focus on gross revenue. Alternatively, some strategies aim to grow your customer base.
When pricing your products, draw from a few methods. Experiment and see which strategy works best for your business. The strategies you choose should be based on your market and competitor research. The more accurate your info, the better your sales and revenue.
Here are 8 commonly used pricing strategies to get you started:
01. Penetration: Lowering your price below the competition to increase sales and gain a foothold in the market.
Good for: newer retailers, new products
02. Milking: Setting your price high and reducing it over time to make sure you get the most overall profit. Gradually reducing the price introduces your product to new audiences, as it becomes more affordable.
Good for: cutting-edge products, tech gear or gadgets
03. Premium: Setting a high price to highlight your product’s quality or exclusivity.
Good for: high-end products, targeting wealthier audiences
04. Competitive: Matching your competitors’ price. You should always keep this strategy in mind, even when experimenting with other pricing methods.
Good for: most industries, products that have reached a stable price in the market
05. Product line: If you have a line of similar products, you can price them according to different target audiences. For example, you can sell lipstick at different price points: one for $5, a second for $15 and a third for $30. Though these can be thought of as the same product, they attract very different shoppers.
Good for: products that appeal to a wide audience, products that have a lot of variability
06. Bundling: Selling a group of products together for a lower price. This method is designed to encourage customers to spend more. Selling bundled items at a reduced price may seem like a loss, but it’s a great way to increase your revenue without necessarily growing 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: Utilizing psychology to encourage customers to make a purchase. The most common example of psychological pricing is setting the price tag at $99 instead of $100. This strategy can be combined with any other pricing method. Experiment with it to see how your target audience reacts.
Good for: all products
08. Optional: Offering optional additions to a product at a discounted price. For example, selling a laptop for a base price and offering options for enhanced memory or a pre-installed operating system. This strategy is used to increase the revenue of each individual sale.
Good for: many industries—from computers to cars
More Pricing Tips and Considerations
Pricing strategies are just the tip of the iceberg. There are many additional things you can do with pricing to increase your conversions, bringing in more sales and higher revenue.
A good place to start is shipping. With eCommerce, the price of shipping is an integral part of the end-price. Customers are likely to take it into consideration when making decisions. If your shipping costs are too high, shoppers may opt to purchase from competitors—even if you offer the same product at a lower price.
This makes free shipping a great value in the world of dropshipping. Additionally, free shipping works on a psychological level. Shoppers love to feel like they got a deal.
Another way to boost your eCommerce business is by offering special prices and discounts, especially to loyal customers. Use your creativity when it comes to creating promotions.
These are some common discount methods eCommerce businesses use:
Step discounts: Giving a percentage discount, like 20% off. This method is great because customers save more as they spend more.
Good for: increasing revenue on every order
Flash sales: Offering large discounts for a short period of time, like Black Friday sales. Shoppers tend to want to take advantage of the limited time offer, leading them to purchase more. These sales are similar to the penetration pricing strategy. Often, you give up some of your profit margin to boost sales and potentially increase your customer base.
Good for: holiday sales
Price matching: Matching the price of competing merchants. Ensuring customers your price can’t be beat increases their trust in your brand and encourages them to buy from you. If marketed well, this method can bring your competitors’ customer base over to your online store as well.
Good for: gaining a foothold in an established market
Setting Pricing Rules
For many merchants, dropshipping is a “hands-off” method. It lets them focus more on marketing and increasing sales, rather than managing inventories and shipping details.
To maximize profits with dropshipping, set pricing rules that work for your industry and modify as the market changes. When you integrate your online store with a dropshipping platform like Modalyst, pricing rules are automatically set. However, you can easily modify them to suit your business needs.
Pricing rules are a set of automations that apply predetermined markups to your products. You can choose between a multiplied or added markup (for more control over product pricing).
A multiplied markup will be determined as a percentage of the wholesale price (i.e., 200%), while an added markup adds a set amount to the wholesale price (i.e., +$10). Any new dropshipping product you add to your online store will be priced automatically according to your rules.
Though these automations make managing prices in bulk easier, you should always do your research for new products. Each product has its own unique market, with different competitors and different markup rates. You can experiment to find which markup value hits the sweet spot and apply it as a rule for future products that are similar.
Pricing plays a major role in the success of your dropshipping business. To make the most out of your pricing decisions, you need to understand how it affects sales, revenue, profitability, as well as customer behavior and your brand perception.
To use pricing to your advantage and maximize your eCommerce business’ potential, follow these steps:
Perform in depth market and competitive research
Determine your minimum retail price
Consider your short-term business goal (i.e., increasing revenue, profit margin or market share)
Choose pricing strategies that align with your goals
Determine a markup rate
Experiment with different strategies and markup rates
Set pricing rules to automate pricing for dropshipping products
Ready to scale your business? Get started with dropshipping today!
By Rom Meir