Deciding the dropshipping product prices can be one of the most overwhelming tasks for any dropshipping seller. “Is it too expensive? or am I losing potential profits by underpricing?” I know, we all have been there. So, let us find out the secret formula of how to price dropshipping products right.
Disclaimer:This information is general in nature and for educational purposes only. And, it does not constitute formal financial, investment, or business advice.
Product pricing is not all about covering the costs and having a profit margin
In today’s competitive business environments, pricing strategies are not only focused on covering up the costs and providing an adequate profit margin. Today the product pricing is considered more as a marketing tool. Lots of retailers use and manipulate product prices to drive traffic to their stores.
So, having a proper dropshipping pricing strategy is an indirect way of marketing to create more sales and more profits.
And, do you know that the NUMBER ONE purchase influence of online shoppers is the price of the product? Well, not only the first purchase influence but second and third purchase influences are all related to the product pricing.
So, selecting the right product price in retail is an essential element for your business success.
If you are a beginner to dropshipping, it is better if you can read this Dropshipping startup guide. It will help you to get better guidance to start and run a successful dropshipping store.
How to price dropshipping products
If you do not select the optimum price point for your dropshipping products, you may either lose customers by setting the price too high or lose potential profits by setting the prices too low.
There are lots of established product pricing strategies for dropshipping shop owners. In this guide, we will discuss different approaches to price dropshipping products, so that you can select the best pricing strategy which fits into your business model.
Dropshipping pricing strategies – Content lineup
- The traditional cost-based product pricing strategy
- Competition based pricing strategy
- Customer-based pricing strategy
- Other pricing strategies for your dropshipping products
- Psychological pricing
- FREE plus shipping
- Bundle pricing
- Cutthroat pricing
The traditional cost-based pricing strategy for dropshipping products
Most of the conventional sellers use cost-based pricing as their pricing strategy. This is a very safe way of defining product prices.
If you are a beginner to dropshipping, cost-based pricing may be the best place to start. Cost-based dropshipping pricing strategy has a very simple logic, it is easy to implement and you can pre-calculate your profits, providing some comfort zone for you to try different pricing points.
The method of cost-based pricing is very straightforward. First, you have to forecast and calculate all your costs associated with the Dropshipping product.
Below I will list down the basic costs associated with any Dropshipping product. You have to carefully go through this list and create your own by adding any additional charges you may have, depending on your business model.
- Supplier Price
- Shipping Cost
- Marketing Costs (Typically around 30%)
- Selling platform fees (If you sell on eBay it would be around 12%)
- Shopping cart transaction fees (If you use Shopify it would be 2%)
- Payment gateway fees (i.e. for PayPal Merchant account 3.7% + 0.3 USD)
- Currency exchanges margins
- Allocation for refunds (Typically 5%)
- Running charges for any other tools or apps in use
- Your profit margin (40% – 50%)
- Marketing Cost –
When it comes to marketing costs, 30% is a typical value for Facebook ads. You can decide your CPA and calculate the Marketing costs. As you can see, in the long run, it is not profitable to get traffic to your store solely on advertisements! It can eat up a massive portion of your potential profits. That is why you have to work on SEO and check the opportunities to create sales from other sales channels for your Dropshipping store.
- Returns and Refunds –
If you provide accurate product descriptions, you can reduce the return rate well below 5%. But, if your product descriptions are in poor quality and misleading, you may have to allocate more than 5%.
- Profit margin –
You have to decide about the profit margin by yourself. If you have noticed, I did not add any fixed charges, or costs of other overheads like your time, salaries, annual fees, Internet charges, etc. The reason is, I think it is inconvenient to calculate these costs along with your product costs. So you can decide on a profit margin to cover these expenses as well. Usually, I keep 2.5x to 3x markup for dropshipping products.
Additional reading – How much money do you need to start dropshipping?
Now, as you can see, traditional cost-based pricing is based on simple logic. As a beginner, you can start with a cost-based strategy for your dropshipping store.
But, if you have noticed, this strategy lacks a significant input. It is a blind method. It does not take the competition or the market conditions into account.
Without this data from the market, you may be either set your prices too high or too low compared to the other dropshipping stores.
Competition based pricing for dropshipping
Here we basically spy on other’s dropshipping businesses and adjust our products prices accordingly.
There are so many tools associated with modern E-commerce platforms to automatically track the competitor prices and sometimes even to track other’s stock levels. For example, price tracking tools like Prisync or Keepa can help you to track the product prices from another e-commerce store.
Let us discuss the strategy behind the competitor based pricing
Now you may think like “If I know my competitor prices, I will offer the lowest price, so I can get more customers to my Dropshipping store.” Well, this is not going to work. When you set the selling price too low, few things can happen.
- It will avoid all the potential profits you could have gained by setting up your price a bit more.
- Your customers might think that your products or services are of poor quality, and that is the reason behind the low price.
- Another competitor might set the price even low, and you will lose all your customers to that person. If the “low price” were your only game plan, and when another person stole your game, you would have nothing else to offer, right?
So, what if you set your prices too high? If you go and check these Dropshipping stores with higher product prices, you will find some reasons for their prices.
Sometimes they might be offering short delivery times, and maybe they have excellent customer support, or else, they might be offering some real discounts for returning customers. Likewise, you cannot just increase your price and wait. You have to provide something special for that price.
Additional reading: Why you must need a unique selling proposition for your business
So, where exactly are you going to set your price?
Here you have to understand a bit of simple maths. Do not worry, if you do not want to remember maths, you can jump ahead a little and skip the next para.
If you collect the competitor price data and draw a price distribution, depending on your Dropshipping niche, you may end up with either positively skewed or negatively skewed curve.
If your products are high-end products, the curve will be negatively skewed, or if your products are low-end products, the curve will be positively skewed.
Now, if you can remember the Arithmetic Mean, Median, and Mode of data distribution, the Mode is the price at which the highest number of sellers are selling that particular product. Median will be the mid-price (like 50-50). And, the mean will be the average competitor price.
Depending on your niche, the competitor price data can be skewed in different directions
So, if you have an excellent quality store/ services, with some decent customer support, you can easily target for the Mean value (average value). And, if you believe your services are better than an average Dropshipping store, you can keep increasing and test the price.
By the way, pricing is not just a one-time process. Test and adjust your prices a few times to find the optimum point. It is all a part of operating an online Dropshipping business.
Additional Reading: AB testing best practices
Customer-based pricing for dropshipping
As an online dropshipping store owner, you have to understand that your business should be developed around your customers. Your game plan should be modified according to their behaviors and needs. So, when it comes to product pricing, we cannot eliminate the “customer factor.”
Now let us see the intentions of the people who are visiting your site. Some study shows that,
- 2/3 of the people who are visiting an online e-commerce shop are just coming into check the products and compare the prices.
- Nearly half of the people are looking for discounts and coupons.
- And, around 1/4 are looking for promotions.
With that numbers in your mind, you may be able to get some blurred image of your customers that you are getting. Now, we have to make that image clearer before setting product prices.
Now let us see what you are selling.
- If you are selling high-end products or luxurious products, people do not compare the prices a lot. Instead, they will compare your services. So, the majority of the people who are visiting your site are quality concerned. So, you can invest in improving your customer support and after-sales services, and increase the prices accordingly.
- If you are selling for the hobbyists or to the people who are passionate about these products, then they know the prices. They will know the difference between the $38 product and $40 product. So, you have to be price concerned. And also, lots of your potential customers might be looking for promotions, offers, and coupons. If you have such a target market, you can easily convert them to be returning customers with a few coupons offers.
- If you are selling low-end products, where people are not much concerned about the quality and customer services, they will definitely look for lower prices. They might not do a lot of market research. And, if they feel like the price is low for some product, they will go for it.
Other dropshipping pricing strategies
This is an old method of creating price tags. Believe it or not, $9.99 does way better than $10. That is never going to expire. But, there are some limitations.
- This pricing method works only on low to mid-range products. Adding a price tag of $9999.99 instead of $10000 can actually harm your reputation.
- Also, there is a saying that the prices ending in odd numbers works well. But, I couldn’t find any method to evaluate this concept. Maybe you can check that on the way.
- While talking about psychological pricing, having complex prices can damage your Dropshipping sales conversion rate. If you have a price tag of $387.82 and a price tag of $388.03, there is a higher chance that you will get a sale for the second tag. Even though the price is higher, it looks much simple and smaller than the first tag.
FREE plus shipping
The keyword of this pricing method is “FREE.” When people see the word “FREE,” that triggers the impulse buyers. Here what you basically do is, promote the product as a giveaway, but inflate the shipping cost to cover your expenses, and to have a tiny margin.
The main idea behind Free plus shipping is to bring in new customers.
Once you have a customer on your site, you must have a mechanism for cross-selling, up-selling or to convert that customer into a returning customer. Without having such a mechanism, using the free plush shipping as the only pricing strategy will not work for long.
Also, when you use FREE plus shipping as a promotion for your Dropshipping store, remember to come up with a better reason for that promotion. So, your promotion won’t look like a scam for your customers.
You may have already seen sales promotions like, “buy two, get one free” or “buy two, and get 10% off”.
These are the bundle pricing methods. You can create a bundle of multiple products and come up with an offer. For example, when you sell a Bluetooth mouse, you can offer a mouse-pad for 30% off.
In this way, you can make a secondary sale, and even with a less profit margin, you can gain some profit by selling more.
One bad thing about bundle offers is that, after your customers see this offer, they will be reluctant to buy individual products for a higher (or regular) price.
This is where you price your products below the lowest prices on the market. And, if you have sufficient marketing power, you can quickly promote this as a limited time offer, and then start slowly increase the prices.
In this way, you can break into the market with a new brand and attract new customers. But, as we have discussed earlier, you must have a proper mechanism to keep your customers to yourself after this promotion. Otherwise, you will start losing money in no time.
Those were the strategies behind how to price dropshipping products
Now that we have discussed the basic pricing strategies used by the online Dropshipping merchants, you have to decide which methods you are going to use with your Dropshipping niche.
Usually, you cannot use just a single pricing strategy. If you need to create a successful Dropshipping business, you may need to combine multiple approaches and use them to price your Dropshipping products right.
Is there anything else you would like to know more about and wish was included in this article? Let us know in the comments below! For more articles about dropshipping and digital marketing, check out our blog.