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Dropshipping Pricing Strategy: The Ultimate Guide

By Priceva
on January 19, 2022
When online stores want to test new products but don’t have the intention or opportunity to stock and store a large amount of items, they resort to dropshipping. This retail fulfillment process is a great way of doing E-commerce business, but its success depends on the pricing strategy chosen. This guide explains the aspects to consider when crafting a dropshipping pricing strategy.

The Basics of Dropshipping

Dropshipping is a widely used retail practice in which a seller (a dropshipper) buys third-party items and sells them to buyers. The process involves four steps:

  1. A customer purchases a product online in an E-commerce store.
  2. The store ships the order to a supplier.
  3. The supplier delivers the product to the customer.
  4. The shop sends an invoice and a shipping confirmation to the customer.

Since dropshippers don’t have to handle a large amount of stock, they can focus on elaborating the right pricing strategy for their goods. The choice of pricing approach depends on a number of things.

Factors that Determine a Dropshipping Pricing Strategy

Before we look at particular dropshipping pricing strategies, you should learn about the factors that should be taken into account when you calculate the reseller’s cost of goods.

Product

Before you decide on a pricing strategy, consider the industry, because each E-commerce niche has certain demands and peculiarities. For example, people expect fast delivery of foods, while furniture shipping can take months. Electronics can be returned or replaced at the seller’s expense, while lingerie is typically never accepted back by stores.

If you haven’t chosen products to trade, check out what the retail giants sell. Look for featured products on Amazon, eBay, Walmart and other popular marketplaces. To avoid competitiveness, you can focus on not-so-popular items in good niches.

Remember: You need to identify your target audience before selecting your product, even if it seems to be very profitable.

Shipping

It’s no wonder that shipping is crucial for dropshippers, because the quality of service defines the success of an entire business. Dropshipping usually implies that a product travels around the world to get into the hands of the buyer. Note that the delivery process can take a week or two.

Since modern customers are very demanding, slow shipping can frustrate them. If you have troubles with your shipping services, low prices can be the main reason for customers to select your service. But remember that no one wants to pay for shipping, which is why many businesses include shipping expenses in the final price.

To optimize your pricing strategy, you can also work with supplies that don’t charge shipping costs. It will help you increase your profit margins.

Returns and Refunds

Refunds are an indispensable part of the retail industry. With dropshipping, sellers cannot directly control the quality and condition of goods. Hence, you should limit returns (ideally, decrease them to zero).

Make sure to elaborate a transparent and optimal return & refund policy: customers should be able to replace a product or cancel their orders. Keep in mind that returns are an extra expense, so you should check the percentage of returns for the products you are going to sell.

Competitors

The dropshipping model is getting more popular, which implies raising competition in markets. No matter what E-commerce niche you choose, most likely it is already full of sellers. This is why monitoring competitor prices is essential: you need to make sure your pricing is optimal to get a market share.

Price tracking software is a great way to automate price comparison while getting real-time information about rates. It allows sellers to stay at the forefront of the market and boost sales.

Profit

Before you proceed to choosing a pricing strategy, you need to define your desired profit, do calculations and define your business model. Dropshipping profit depends essentially on the surplus that the middleman makes. The easiest way to calculate it is cost-plus pricing, in which you add overhead, shipping, return & refund risks, website maintenance, marketing and other expenses.

Setting higher prices does not necessarily mean earning more. While premium or luxury item sellers can charge extra, most sectors in the dropshipping industry have narrower margins. Due to these limitations, businesses experiment with dropshipping pricing strategies to choose the most efficient approach.

Why a Dropshipping Pricing Strategy Matters

The dropshipping model is highly popular in the E-commerce field because it is a low-risk way of selling products. Those who want to run a business from home and learn the basics of retail often choose this option.

But despite being relatively easy, dropshipping won’t necessarily be profitable or successful. If you charge too much, customers will start buying at competitors’ stores. If you underprice products, you can lose potential profit.

Also, you need to develop a dropshipping pricing strategy, because you will have to pay for shipping, transaction processing, app fees, E-commerce platform costs, and so on.

Types of Dropshipping Pricing Strategies

The choice of a dropshipping pricing policy depends largely on the product’s price charged by the supplier. Different goods require different pricing approaches – let us explain why,

Low-Ticket Product

For low-ticket products, suppliers usually charge up to $10. If you are planning to trade these types of goods, consider the following:

  • Perceived value. As a rule, low-ticket products are thought to be of poor quality.
  • Sales volume. Low-ticket products should be sold in large amounts because of their low prices.
  • Marketing expenses. It’s recommended to reserve 30% of your item’s retail price for marketing costs. This is a particularly useful approach for beginners, since they can have a pretty limited ad budget.

Fixed-Dollar Markup

This strategy is ideally applicable to very cheap products. In this case, you just add a certain dollar amount to the item’s price. Ideally, you should be able to make a $10 profit margin per sale, which will allow you to cover marketing expenses, taxes and other fees.

Fixed-Percentage Markup

As its name suggests, this approach implies adding a certain percentage markup to the product’s purchase price. Many businesses set the product’s retail price at x3 of the supplier’s price because it ensures that they can pay for all business expenses.

Free-Plus-Shipping

With this strategy, you sell a product for zero dollars and charge only for shipping. This method is applied to low-ticket products when all other business expenses are low. Also, customers pay for shipping, which may cover a large part of operational costs.

Medium-Ticket Product

Medium-ticket products cost around $10 to $25. As their price increases, so does the cost of goods sold (COGS). Before crafting a pricing strategy, ask yourself these questions:

  • Who are your potential buyers? Are they ready to pay for these goods?
  • Does your audience know about the product, or is it new on the market? That will help you understand whether you can price goods based on their perceived value.
  • What is the product’s maximum cost? Note that you will not be able to exceed this limit, so your profit might be lower than you expect.

Cost-Based

A cost-based strategy is often used for medium-ticket products because it allows setting optimal pricing that covers business expenses. To implement this strategy correctly, first, you need to set a lower price so as to gather some information about your buyers. Once you obtain this data, you can adjust the pricing based on customer behavior. At this point, you can target a certain audience who are ready to order from you.

Bundling

Bundling allows you to offer more attractive retail prices while still making a profit. When customers buy products in bundles, they can get a discount for all of them together. People like good deals, and this strategy can work particularly well with some particular target audience groups.

High-Ticket Product

These products cost at least $30 from suppliers, and there is no upper limit in price. With high-ticket goods, you should consider the following aspects:

  • Perceived value. Expensive products sell well when their perceived value is high. Also, the item should solve the buyer's problem for its cost to be justified. No one wants to overpay for useless goods.
  • Taxes and customs. When shipped overseas, high-value products should comply with international rules and regulations. For example, expensive luxury goods must be declared when they are crossing the borders of some countries. So before you start trading, research rules and regulations, as well as taxes that apply to high-ticket products.
  • Marketing expenses. High-priced products require quality marketing since the cost per purchase (CPP) is higher. This is why costly products are usually handled by more experienced dropshippers.

Perceived Value

The best thing about high-ticket products is that their high perceived value allows sellers to charge much more than a 100-300% markup without risking losing customers. A perceived value-based pricing strategy is recommended for these types of goods. Here are some tips to maximize your profit and implement this pricing approach successfully:

  • Upselling allows you to increase your profit margin with a higher average check. You can encourage customers to add discounted accessories to their cart.
  • After-sales experience is important when you serve higher market segments. Show your customers how to reap more benefits from the product, provide 24/7 customer support, and handle their issues in a timely manner.
  • Keep your customers engaged in a positive way – that will boost your Customer Lifetime Value (CLV).

Calculating Dropshipping Profit

With all the above-mentioned business expenses, you might be confused about calculating your final dropshipping profit. In fact, dropshippers use a simple formula:

Total revenue - Total expenses = Profit


While calculating revenue is quite easy, summing up all the expenses is a more difficult task – dropshippers have to pay for many things.

Expenses can be fixed or variable. Fixed ones include marketplace fees and E-commerce services – they don’t depend on the number of items sold. Variable expenses relate to each product sold: COGS, shipping, transaction fees, marketing costs, and taxes.

Finally, don’t forget to consider processing time for dropshipped items because it varies depending on the type of goods and delivery destination.

Other Factors that Impact Dropship Product Prices

While it is important to consider business expenses when calculating the cost of your goods, you should remember about other factors that impact your ability to price higher than competitors.

Trust Signals

It is not surprising that customers are more likely to buy from Amazon and large marketplaces rather than barely known stores – they know what level of service to expect. With the issue of trust in mind, you should do your best to establish yourself as a reliable dropshipper.

Build your authority with the help of trust signals: security badges, reviews, and so on. Your consumers will feel more comfortable ordering from you. The same applies to suppliers. Besides, higher trust means you can charge more – people won’t mind paying a few dollars extra to a store that lives up to their expectations.

Dropshipping Suppliers

Now, analyze what suppliers you are working with to stock your products. Many stores order from places like Aliexpress without realizing that they’re overpaying, because this marketplace is also an intermediary between end users and manufacturers.

There are many agencies that work with online stores directly and charge minimal prices. This is possible because they partner with manufacturers directly, so you won’t have to pay a large markup price.

Think you have no choice of suppliers? Negotiate with your current partners and try to find the lowest price for your products. Also, you can consider contacting manufacturers directly, though this is a rare practice among dropshippers because they don’t make large bulk purchases.

Now that you know exactly what impacts product price and how to calculate the cost of your goods, you should consider the last thing: competition. It is crucial to deliver good deals, otherwise customers will buy from other stores. How to make sure that your prices are optimal? You don’t have to analyze manually – implement automated price tracking software like Priceva.

Why Should You Trust Priceva?

Priceva provides a comprehensive scope of price management tools, including price optimization software. It monitors competitor rates in real time and provides pricing recommendations to help you increase sales and profits.

Why use price optimization by Priceva?

  • It fuels business growth because you can charge optimal prices for every item in your assortment.
  • You can be proactive and change prices as often as needed to deliver better deals than your competitors.
  • Better competitive benchmarking helps you understand when to follow or ignore competitors’ pricing decisions.
  • It will save you a lot of time because the entire analysis process is automated. Thus, you can focus on other aspects of your business development.

Final Thoughts

Dropshipping is a great retail practice for those who don’t want to run brick-and-mortar stores and deal with storage hassle. However, this is a very dynamic industry where you depend on suppliers to a great extent.

To maintain your profit margin and keep your business afloat, you need to determine a pricing strategy that will allow you to cover all your expenses and yet be agreeable for consumers. Thanks to the reduced financial risk, you can experiment with various pricing approaches and find the one that works best for you.

FAQ

What is the best profit margin for dropshipping?

If your profit margin is higher than 10%, you are doing your business right. The medium profit margin for dropshippers is usually between 15% and 20%. A profit margin of over 20% is a very high success rate in dropshipping.

How much should I markup my product?

The markup for low-ticket products can be up to 300%; for medium-ticket products, 40% to 70%, and between 15%-20% for high-ticket products.

Should you test products before dropshipping?

It is important to ensure that you deliver high-quality products. Otherwise, you will have to deal with a large percentage of returns, which will hurt your profit margin.

Why do most dropshippers fail?

Among all the other reasons why a dropshipping business fails (the wrong niche, a bad supplier, low conversion rates, insufficient customer service), incorrect pricing is a serious mistake that can affect profit margins and destroy a business.

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