Dropshipping is an eCommerce model that has become popular primarily for its low-level barrier of entry. It is a model of business that can complement your nine to five, great for college students looking to get ahead, and for those who want to live the unfettered life of a digital nomad.
What makes dropshipping great and accessible for everyone is that it completely eliminates the problem of buying stocks of products that may or may not sell. With dropshipping, all you need is your computer and at least one third-party supplier. When someone visits your store and makes a purchase, the order is forwarded to your suppliers, who keep the products, packs it, and then ships it straight to your customer’s doorsteps. You only have to buy the product when someone orders it, and you control your profit by marking up the supplier’s price.
Let’s say an item you sold costs $2.99 from your supplier’s end, but to make a profit off of the item, you marked up the price at $12.99 from your shop. This is how people are making money from dropshipping. Marketing relatively low priced items and selling them at a higher price to their customers.
So, let’s say your dropshipping website is already on its way, you already know what products you want to sell, and now you find yourself asking: What pricing strategy is best for dropshipping?
First off, the fact that you have the foresight to recognize the relevance of a good pricing strategy is a step in the right direction of finding the right pricing strategy for a dropshipping business that is both profitable and sustainable.
Unfortunately, there is no pricing strategy in dropshipping that can suit every business. Every business is unique in its own way and you must first take into consideration a number of factors in order to determine pricing strategy. Some factors that you must take into account include:
- Your target demographic
- The value of your products
- Your brand’s image
- How much it costs to run your business
- The supplier price
- Other miscellaneous expenses, like returns, refunds, maintenance, tax, etc.
Getting your pricing right is critical in dropshipping if you want a business that is meant to last for the long run. You do not want to price your products either too high or too low. Before we introduce you to some strategies, we must become familiar with some concepts first. Let’s kick off this article by discussing profit—specifically profit margin.
What is Profit Margin?
Being able to understand the concept of profit margin is a critical aspect to understanding the overall health of your dropshipping business. You do not want to be running a dropshipping store with a low margin.
So what is profit margin?
Profit margin is the amount of revenue you have remaining after you have deducted the cost of running your business. Profit margin indicates how profitable your dropshipping business is. It is expressed in percentage, wherein the higher the percentage number is, the more profitable your online store.
Below we will discuss how to calculate Net Profit Margin—a calculation that expresses the profitability of the business as a whole.
How to Calculate Profit Margin
The formula to calculate your profit margin is simple enough: First, we deduct your dropshipping store’s total expenses from your total sales. Then, to find the margin, divide your profit by the revenue. To make the margin a percentage, multiply the result by 100.
Let’s look at an example of how to calculate and find your profit margin:
- Your dropshipping store revenue is $100,000.
- Your total expenses are $80,000.
- Your net profit after deducting revenue from the total expense is $20,000.
Your profit margin is: $20,000 / $100,000 x 100 = 20%
Why is Profit Margin Important?
Calculating your profit margin will reveal the health and profitability of your dropshipping business. It shows you how much money you are making, and can reveal and determine the problems you are having within your business.
If you discover that your profit margin is too low, then it could signal a wide array of issues including that of a poor pricing strategy and inadequate management of business expenses.
What Is Your Ideal Profit Margin?
Your profit margin may depend on the kind of products that you are selling. For instance, if you are selling phone cases, then your margins may be lower but your business may depend on the volume of your sales. On the other hand, if you are selling home décor, you may sell your products at a low volume but at a higher margin.
A general rule of thumb is that a 10% profit margin is considered to be average, while 20% is considered high or good, while a 5% profit margin is too low.
We restate that profit margins can vary across different niches and other factors. What you can try to do is research the standard profit margin for your niche to make a comparison on whether your profits are adequate.
Because there isn’t one set profit margin ideal for all types of dropshipping businesses, there are a number of different pricing models that we will discuss here that you should know about in considering what the best strategy is for you:
Dropshipping Pricing Strategies
1. Competitive Pricing
The competitive pricing strategy takes into account the fact that shoppers are out there looking for the best deals. Much of the time, our decision to make a purchase is based on price. Because of this, competitive pricing is one of the major pricing strategies used in dropshipping.
Competitive pricing isn’t just all about matching your price with your competitors, it can also mean having lower prices or a price made more attractive because of added incentives, like a longer return period or a longer product warranty.
There are three types of competitive pricing that you should be aware of:
As you can see, the competitive pricing strategy means more than just going on the competition's website and copying their prices. It means giving your customers a better deal overall. Just come up with a better deal, and the competition will be losing customers to you.
However, you must take note that competitive pricing may lead to lower margins when you aren’t taking the operating cost of your business into account. In all pricing strategies, it is important to keep a close eye on your profit margin, especially when it comes to competitive pricing.
2. Cost-Based Pricing
Cost-based pricing, or cost-plus pricing, is a simple pricing method that can be adopted by any dropshipping business. Cost-based pricing first requires you to calculate the cost of running your dropshipping business before adding a profit percentage.
Cost-based pricing is used by dropshipping businesses to maximize profits. This strategy ensures that all the expenses for running your business are covered and that there is a set profit margin percentage that is already established. It is also a way for a business to forecast how much money they will spend and earn.
Here is a list of commonly shared dropshipping business expenses to take into account:
- Shipping cost
- Product supplier price
- Platform fees
- Marketing cost
- Return and refund cost
- Additional software
- Maintenance fees
Having a cost-based pricing strategy makes it absolutely vital that a dropshipping business does not lose track of any of their expenses, or else you will fail to apply this strategy accurately.
Cost-based pricing is an easy strategy to adopt, because it requires only internal information about the expenses of your dropshipping business, and demands little time to figure out. The flaw in this pricing strategy is it does not take into account the customer’s willingness to purchase a product at the established price point.
3. Tiered Markup Strategy
Establishing a fixed profit margin may not be ideal for all dropshipping businesses, especially when a store sells products ranging from low and high-value items. If you are running a dropshipping business with products with varying price ranges, then the tiered markup strategy may be a lot more ideal for you.
With the tiered markup strategy, you won’t have to worry about marking expensive items too high, while not being able to make a decent enough profit from your lower-priced items. You can implement this strategy by placing as much as a 50% markup or more on items that sell under $10, and a lower 15%-20% markup for items priced over $100.
The profit margin that you set for your products can depend on what your store actually sells. If you are selling a wide array of products with a variety in price levels, then establishing a tiered system of pricing is perfectly feasible. But if you are selling products under a similar category that is of similar value, placing wildly different price ranges to achieve tiered pricing may not work out as well.
4. Psychological Pricing
There are a lot of psychological elements being put to play in the world of sales. When it comes to product pricing, one such strategy is called psychological pricing or charm pricing.
The big idea behind charm pricing is that you reduce the value of the left-most digit, for instance from $5.00 to 4.99, and shoppers feel as though they are saving more money. Our minds latch onto the lower monetary value of the “4” in $4.99, instead of properly taking into account that the closest round off is in fact $5.
We see charm pricing everywhere, from restaurant prices to popular electronic products. The pricing strategy behind charm pricing is backed by psychological findings on how our minds perceive numbers and monetary values. Consumers tend to favor price numbers with odd numbers in them, as shown in the example above. It seems that the number 9 has an especially significant impact on the way we perceive value and has a positive effect on shoppers.
Charm pricing is also a way to trigger impulse buying in your consumers, due to the fact that shoppers feel that they are getting a better deal. This psychological pricing strategy can be utilized across most dropshipping websites. The only instance where charm pricing may not work out for the better is for eCommerce websites that are selling luxury or premium products, where lowering your cents value can affect the perception of your brand.
5. Premium Pricing
Going for premium pricing or prestige pricing means setting your prices higher than that of your competition. How can this ever work in your favor, you may ask? Well, it all has to do with branding and who your target market is.
An online store can establish itself with the premium pricing strategy with the goal of creating the perception that they are a high value, high prestige, and exclusive brand. When it comes to premium pricing, it’s all about brand image.
Take a look at brands like Rolex, for example. People place enduring value over a Rolex piece than any Timex watch, even though both share the same function of telling time. One brand is simply advertised as a prestigious luxury item and status symbol, while the other brand is more “budget”.
To implement this pricing strategy and actually have it work for you and your dropshipping business, you must create the perception of high value attached to your brand name and have a marketing strategy that puts you and your products above the competition.
Brands that work with premium pricing also tend to limit the number of sales so as to create a feeling of exclusivity. This can be applicable to dropshipping businesses that are doing print on demand.
The premium pricing strategy is advantageous in the sense that a company can garner higher profit margins, but to do so you must increase your target consumers’ perception of value towards your brand first. When you implement this strategy, you must do so in the very beginning and incorporate it into all aspects of branding.
6. Bundle Pricing
The bundle pricing strategy can be combined with any pricing strategy that you ultimately choose. A business that sells items under the bundle strategy sells a bundle of goods together for a lower price than if the customer were to buy the items individually.
Common examples of this strategy can be seen in value meals in fast-food chains, products that require accessories, and special buy 2 for less promos. When you implement the bundle strategy, you are actually prompting your customers to spend more on your online store than they originally intended for that shopping session.
If you have a range of products that you feel go together, then you can set them as a bundle promo on your site at a combined “special” price. This causes customers to feel as though they are getting more value and savings, even though they are actually spending more and buying additional items.
The only disadvantage to bundle pricing is that you can’t always know what your customers are willing to buy in bundle. But it’s easy to make accurate guesses when you are selling items that absolutely complement one another.
Ultimately, bundle pricing is an excellent strategy in increasing your average order, and in applying competitive prices to a group of products and outdoing the competition.
7. Customer Driven Pricing
When you are trying to come up with the best pricing strategy for your store, one major factor that you must consider are your customers.
After all, you can’t run a business if you don’t have customers. One of the first steps always encouraged in establishing a business is to first come up with a profile of your target market, and when it comes to dropshipping, a customer-centric approach is just as important.
To establish a pricing strategy ideal for your customer base, you must first establish a clear image of who your customers are, their needs, finances, life stage, etc. You must then take into consideration the value of your products and how much competition there is in your niche.
Having a sense of both your target audience and the value of your products will bring you to a closer idea of how much your customers are willing to buy and spend, and you can begin to establish fair prices for the products in your shop.
Back to You
Now that we have discussed profit margin in dropshipping and a number of ideal pricing strategies for your online business, it is time for you to make one of the biggest decisions you will have to make in the course of your online venture.
Your business is unique in its own way, and there is no one strategy that can fit all businesses. Choosing the best pricing strategy is a decision that must be based on an understanding of your target market, your competitors, and the cost of running your business. You alone know your business better than anyone, and if you get your pricing strategy right, your online shop will be sustainable and profitable for the years to come.
Are you in the process of deciding what pricing strategy is best for your dropshipping website? Choosing your pricing strategy is one of the most important decisions that can affect the overall performance of your dropshipping business. If you have any questions regarding this article or any concerns about your dropshipping pricing strategy, then please feel free to start a conversation with us today.
At Ecommerce Pro, we love to discuss the future plans of your online business ventures and to share practical solutions that help you meet your eCommerce and dropshipping business goals. Just chat us up anytime!