If you have an online dropshipping store or if you are thinking about starting your online dropshipping store, then you have definitely asked yourself, how am I going to price my product and ensure that I can turn a profit?
That’s where pricing strategy comes in – where you think about all your overhead expenses and how to calculate a selling price that makes the most sense for your product.
You could lose business by setting your price too high or you could lose profit by setting your price to low.
These are all things to consider when setting your price, and if you are trying to find a good pricing strategy, then read on!
Here are just a few things to think about when looking at pricing strategy:
- Audience: Who is your target audience and what have you determined to be their annual household income? How much would this group be willing to pay for your product?
- Perceived Value: What is the cost of your product based on what other people already know of the product ? For example, people already have a sense of what a product should cost depending on what it is.
- Price Elasticity: How does your audience react to price changes? Does making the price slightly higher make a significant difference in purchases? This can help you price your item higher.
- Business Costs: Gather how much money it costs for you to run your business. This is the money you need to earn back when selling your product.
- Tax: Don’t forget about sales tax, VAT or profit tax!
- Marketing Costs: Determine your Cost Per Acquisition, meaning look how much it costs in marketing for you to sell one product. This would be especially important if you are running ads. 30% of your retail price should be allocated for marketing costs.
- Use Cents, Or not to use Cents: By pricing your product at $8.99 could look cheaper than pricing your product at $9. This is something to think about when pricing your product.
- Cost of Goods Sold: This would include materials and labor that went into making the product
Understanding the Demand and Revenue Curve
The demand and revenue curve shows that when your prices are higher, you will have less demand for your product, meaning you will sell less products. Your optimal price point is the sweet spot for your product. Pick a price point where the price point of maximum revenue = maximum profit.
Breakdown of Terms:
Revenue: How much you are selling your product for multiplied by how much you have sold.
Cost of Goods Sold (COGS): How much it costs to make/buy your product from your supplier multiplied by how much you have sold.
Profit = Revenue – COGS
Now you can use these functions to see how much you should sell your product for! For example, if you raise your prices by 10%, then assume that you would sell 10% fewer products, so you would assume that when calculating revenue that your “how much you have sold” would decrease by 10%. Then go through to recalculate your profit.
This strategy helps to determine if even though your revenue is lower, is your profit higher? Because if your profit is higher then it would be worth raising your prices.
What about different priced products?
Since you are dropshipping and not holding inventory or need to pay for labor costs, you just need to look at the cost of items to determine a pricing strategy.
1. Low-ticket Products (Up to $10)
a. Perceived value is low, so people will not be willing to pay a large sum of money for these items
b. Impulse buys from customers, meaning your goal is to sell as many products as you can
c. Try to maintain a $10 profit margin per sale if you choose to do a fixed dollar markup
d. If you choose a fixed percentage markup, you want your product to be 300% more of your purchase price
e. Free plus shipping strategy: where you sell the product for free and charge shipping, however you do not want to go above $9.99 for shipping.
2. Medium-Ticket Products ($10-$30)
a. Make sure your product is not priced higher than your competitors
b. Cost based pricing: Determine a price for your product based on your monthly expenses.
c. Bundle Pricing: Customers can buy a product and a different product and get a discount. This way you are selling more than one product with the marketing cost of only one product
3. High Ticket Products ($30+)
a. Make sure the perceived value of your product is high.
b. This would be a hard product to sell if you are new to dropshipping
c. Marketing costs could be high as less people would be more likely to buy your product
d. Perceived value pricing: Based on your brand identity, you can sell the product for a way higher price
Top 3 Tips for your pricing strategy
- Customers will view free shipping as a better deal especially when competing against stores like Amazon
- Don’t forget to calculate your profit! Profit = Total Revenue – Total Expenses
- Keep your profit margin to at least 30%
Ready to start your dropshipping store? Sign up now for RondeVu and begin selling!
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