Estimated reading time: 10 minutes
Table of contents
- What products are you selling?
- How to calculate dropshipping profit
- Shipping affects your price
- Fixed markup on cost
- Tiered markup on cost dropshipping pricing strategy
- Manufacturer suggested retail price (MSRP)
- Psychological dropshipping pricing strategy
- Fixed dollar addition
- Do you want a branded service?
- Dropshipping pricing strategy takeaways
- Frequently asked questions
Dropshipping is a craze that many are getting on board with due to the low barrier to entry and limited overheads.
Dropshippers usually run on a model where they sell products to customers without actually having to stock the product themselves.
The way this manifests is a dropshipper will choose a product they want to sell, find a supplier who stocks it and then start marketing their new product to their customers for a marked up price.
Dropshipping is a great inventory management solution for those who want to try out new products but don’t want to deal with the stress of buying endless stock, storing it in a warehouse and hoping it sells.
But there is no one single pricing strategy you should use. What you do need to consider is: how much it costs you to run your business, how much it costs you to buy your product, as well as accounting for things like returns.
Some people tout choosing the right product as the most important part of your dropshipping process, but really, if you don’t get your pricing right then the product you choose will largely become irrelevant as you won’t have a sustainable business to pursue.
In this post, we’re going to walk you through some of the core dropshipping pricing strategies you can use to maximize your sales and increase your overall profits.
What products are you selling?
Before you even think about which dropshipping pricing strategy you want, you need to have a clear understanding of what industry you’re in and what you plan to sell.
Different industries (and within that different products) are sold in different ways. For example, electronics are sold at a higher volume but the margins are much lower, whereas for household decor products you can sell at a much lower volume, but the margins are higher.
How to calculate dropshipping profit
If you want a simple way to calculate your dropshipping profits, you simply need to find the difference between the two price points for the same product. As in, the price shown on your website and the price you bought the item for plus any overheads like shipping, returns, website maintenance, etc.
That might lead you to believe that the higher you price your products, the better your profit is. While this is the case for some items, it doesn’t translate across the entirety of the dropshipping industry.
For that reason, there are a number of different dropshipping pricing models and structures you should consider.
Shipping affects your price
When it comes to dropshipping, you have to factor in shipping costs to your profit. In many cases, because the items you’re selling are traveling internationally and shipping times can be upwards of two weeks.
For many customers, this is far too long to wait and they expect their products sooner, or even the next day as Amazon can provide, but that doesn’t mean the dropshipping model is dead.
Many will accept long shipping times if they believe they’re getting a good deal on the price.
For that reason, many retailers add the shipping cost to their products and offer “free” shipping. As you can imagine, the shipping isn’t actually free, you’ve just incorporated it into the price of the product.
You can also seek out products from suppliers with no shipping cost. This can be lucrative for many dropshippers as it eliminates the need to include the shipping price in the product price and will increase your margins.
Fixed markup on cost
FMOC or fixed markup on cost is a type of dropshipping pricing strategy that involves adding a pre-set profit margin to the cost of your products. You can either do this by the dollar or by percentage.
Let’s pretend for a moment that the average price of your products is $10. You might decide you want to use a 10% markup. Meaning you add $1 to the price provided to you by the seller.
But if you used the ‘by dollar’ approach you could add $4 to each product and your profit margin would increase.
Tiered markup on cost dropshipping pricing strategy
Tiered markup on cost is a price strategy most commonly used when the supplier has a variety of different products ranging from low to high in value. It allows you to not price your expensive items too high, but at the same time, you can make money from your low dollar items.
Set parameters for yourself where items under $10 get a 50% markup and items over $500 get a 15% markup. These numbers are of course personable and will depend on what your store sells.
The object here though is to have a higher markup on the lower items to make it worthwhile for you to sell them.
Manufacturer suggested retail price (MSRP)
MSRP (manufacturer’s suggested retail price) is most commonly used by smaller dropshipping retailers who don’t want to deal with race-to-the-bottom price wars but still want to generate profit.
By pricing the products in accordance with suggested vendor retail prices you ensure you’re not outpricing the price the consumer will be expecting.
Markdown from MSRP (manufacturer’s suggested retail price) is a commonly applied dropshipping strategy. For many
Psychological dropshipping pricing strategy
Some dropshippers may want to include a certain level of psychological triggering in their prices, where the price the customer sees is assumed to be cheaper than it seems. For example, you might use ‘odd-pricing’ where the cost values end in “9”. “$9.99 seems a lot cheaper than “$10” even though the difference is only one cent.
Fixed dollar addition
Sometimes it might be beneficial to use a fixed dollar addition. This is because even though you’ve set your profit margin, you still need to include consideration for the fees you’ll have to pay to actually dropship.
A fixed dollar addition is a great approach if you’re looking for an easy way to evaluate what potential profit you might make. So you have your product and you want to include a 10% margin on each item. But if you used a $4.50 fixed dollar addition, you’d be certain that you’d cover all your fees as well as any extra profit margins.
Many dropshippers use discounts as their defining business factor. They keep all their prices high but make it seem to the customer as though they’re getting a good deal because they offer special coupons and discounts.
But in order to successfully offer discounts, you need to know what your customers value.
- Are they looking for exclusiveness and rarity?
- Or are they looking for something readily available?
Either way, knowing what appeals to your potential customers will help you decide which offers to make and generate more sales.
If you are going to offer discounts, then make sure you start with high prices. You won’t have any profit margin if you discount your products when they’re already the lowest they can be.
Returns are a factor of both online and offline shopping. This is especially prevalent in the dropshipping industry where sellers have less control over the quality of the products.
If people do want to return their items you need to factor in the cost for that to happen. Some merchants offer free returns, but obviously, this cost needs to be accounted for. You can do this quite easily by looking at the percentage of returns you have and add that on as a percentage of sales.
Before you make a sale, you should clearly outline your returns policy so there is no confusion in the unfortunate event a customer wants to return their item(s).
You might decide to only accept returns from certain items and some refuse to accept returns at all.
Do you want a branded service?
Many suppliers will be able to brand your items for an extra cost. This could include adding a sticker to your items before they’re packaged, or including flyers within the parcel.
All of these added extra details will help you solidify yourself as a brand rather than just a dropshipper and help increase customer satisfaction and loyalty, but remember these added extras come at a cost and so it’s helpful to think about whether it’s financially viable for you to adopt this approach.
With the number of people using dropshipping as their chosen method for selling, you have to deal with a large number of competitors across various channels.
It’s a good idea to track what your competitors are charging for similar items to ensure you’re not out pricing yourselves out of the market.
If you do find that you cannot offer your products as cheap as your competitors and still make a profit, then think about ways you can differentiate your business so customers still choose to come to you despite the higher costs.
And you can automate this with a price tracking software like Prisync.
Dropshipping pricing strategy takeaways
The beauty of dropshipping is that it’s a forever changing industry. Your supplier might stop selling the items you want, or they might increase their prices causing you to do the same.
Whatever your situation, you’ll never get the right dropshipping pricing strategy nailed down unless you test and figure out what the highest price you can charge that doesn’t repel your customers away.
You might decide to lower your prices on a weekend or change prices due to holiday seasons.
Because of the reduced financial risk (you don’t have to buy the product until someone makes a purchase from you), you can experiment with various different pricing options to find the one that suits you best.
And with everything, if you can, talk to your supplier. Find out if they have any ideas about what pricing strategy would work best for the items you’ve chosen. They might have recommendations based on other customers and might be able to help advise you on the best strategies moving forward.
Frequently Asked Questions
Dropshipping is legal. Yet, many marketplaces ban arbitrage, which is a type of dropshipping where the seller lists a product on a marketplace like Amazon, but ships it directly from another retailer/marketplace like Walmart.
Dropshipping is an order fulfillment method where the seller doesn’t keep stock of the product he/she sells. Rather, the third-party seller, where she purchases the product from, directly ships it to the final buyer.
Amazon allows dropshipping. However, the seller must remove external packaging, packaging slips, invoices, contact information, or any other sign/symbol that’ll identify the third-party seller prior to the fulfillment.