Ultimate Dropshipping Guide
Chapter 5: Dropship Pricing Strategies
One of the more common questions asked by dropship resellers is “What price should I be setting my products at on my ecommerce website?”. There are a ton of different dropship pricing strategies to choose from, and depending on your products, supplier(s) and business model, your approach can vary. There are some that argue that the only “right” strategy is that your pricing should always be changing as you test what works and what doesn’t. Regardless if you buy into that notion or not, choosing a dropship pricing strategy is one of the first steps in launching a dropship ecommerce business and greatly impacts how your customers will perceive your brand. It would serve most resellers well to take time to evaluate the different pricing strategies and how they affect both their profit margin and their buyer’s perception of their business.
The first thing you should consider is what types of products you are selling. Not every product type can be priced the same. For example, electronics sell in higher volume but typically with a lower margin, while fragrances and home decor sell in lower volume but in a higher margin. Look for the product types you can sell and consider your price strategy after selecting your product niche.
Next, talk to your supplier about your pricing thoughts when getting started. It is worth sending your sales representative or their support desk a brief email to see if they have any recommendations for price settings specific to their product types. Some suppliers might not provide much advice with regards to a retail pricing approach, but a good relationship with your sales rep can lead to some helpful advice before getting started.
Many pricing strategies exist and each one is based on a particular set of circumstances.
Here are a few of the more popular pricing strategies to consider:
Fixed Markup on Cost
This can be calculated by adding a pre-set profit margin to the cost of the merchandise. You can use a fixed dollar markup or a fixed percentage markup. When you are looking at using a percentage vs. fixed dollar markup, the first thing to look at is the average cost of your products. If most of your products are low cost cell phone accessories or a dollar store supplier, then a percentage markup might not be the best approach. For example, if most of your products are around $10, then using a 15% markup would mean you are only adding $1.50 to each product. However, if you choose a $3 or $5 fixed dollar markup, then your profit margin per item will be much higher.
Tiered Markup on Cost
This is a solid price setting approach when your supplier has a varied type of products offered with many items of both low and high dollar values. If you are worried about pricing your expensive items too high while not making enough on your low cost items, then using a tiered structure might be your best option. You can set tiers or levels for your items so that items below $10 get a higher markup like 50% while your items between $200-500 might have a smaller markup of say 15%. You can set as many tiers as you like. Some users like to use very specific tiers for their settings having 10 or 20 different price levels, but in general, your goal is simple: use a higher markup on the lower dollar items while lowering the markup on your higher dollar items.
One reason this can be a good strategy is that many stores use a simple or single markup. It can be difficult for them to set a tiered setting if they are pricing products on their own. This means that if you have a 30% markup on all items and another store has a 25% markup, then it might be difficult to compete. However, if they are looking for a laptop and some accessories, even if your markup is slightly higher on a power charger or wireless mouse, the laptop on your site will be cheaper and can help you win the entire shopping cart sale for your site. Again, the option you select will depend on your prices. If you sell general merchandise from a supplier with a large product catalog for example, you will have great variety in the price levels of your products. But, if your supplier sells a more niche product type like silk flowers, the variety in your products might not be as great allowing you a simpler price setting.
Mark-Down from MSRP
Setting your price as a mark down or “discount” from the Manufacturer’s Suggested Retail Price (MSRP) is a very common approach. Many store owners think in terms of a discount being offered as the key reason why someone should shop on their ecommerce site. If the MSRP is $100 and you have a 20% discount, then that is a very clear savings offered by your store. Just like marking up your products, you need to evaluate your product types and competition before selecting your discount. Are most of your products low dollar or high dollar? Does your supplier have a variety of MSRP levels for your products? Also, does the MSRP for your items seem to represent what the market recognizes?
Just because the supplier says the MSRP for an item is $77, if many stores seem to sell that item for $50, then an MSRP based pricing might not make sense. In general, electronics tend to have very recognized MSRP levels. People have a general idea about what a flat screen TV, MP3 Player or laptop might sell for online, so the MSRP for these items might be close to what the market tends to use for its promotions. However, a smaller or niche supplier might not have an MSRP level with much significance. For example, if you are using an action figure or RC hobby, most customers might not know what the manufacturer recommends for that statue or remote control accessory, so it might be more common for these items to have a price that is more independent of the manufacturer’s suggested price.
Manufacturer Suggested Retail Price (MSRP)
Setting your price right at the MSRP is also a common strategy used by the smaller retail shops to avoid price wars and still maintain a decent profit. By pricing products with the suggested retail prices supplied by the vendor, the retailer is out of the decision-making process. However, even with suppliers that might provide excellent MSRP levels for their products, if you do not select some discount below MSRP, it will be very difficult for you to have an advantage over the competition.
This is used when prices are set to a certain level where the consumer perceives the price to be cheaper based on the price shown. The most common method is “odd-pricing” using cents ending values in 5, 7 or 9. It is believed that consumers tend to round down a price of $9.95 to $9, rather than $10. Along with the very common sense ending value approach like ending in 99 or 95 cents, some users try to use the cents ending value to price below the competition. As more users list with 95 cents as an ending value, you can lower yours to 85 or 45 cents or even 9 cents for all products to always try and achieve the lowest price. While the psychological pricing and the cents ending value is very common on ecommerce websites, using a much lower cents ending value might be a better approach when listing on a marketplace with multiple sellers like Amazon, eBay, Walmart and more.
Now that you understand some of the basic price-setting strategies, there are a few price setting tips to consider:
Fixed Dollar Addition
The use of a fixed dollar addition can be an important part of your price strategy for your wholesale dropship products.
Let’s say you are setting a profit margin for your products, but have you calculated in the amount to cover your marketplace or dropship fee? Are you making enough on some of your low dollar items to be profitable?
The use of a fixed dollar addition can allow you to easily evaluate your potential profit. For example, let’s say you have a 20% margin on your products. If an item costs $5.49 cents, a 20% margin would add $1.10. However, if you used an additional $3.50 fixed dollar addition, then you know you might cover a dropship or listing fee or have some additional margin built into your products. The markup is a larger percentage of your low dollar items while essentially being a “hidden” markup when applied to your much higher dollar items.
When you process an order, it does not take any longer to process an order for a $500 item vs. a $5 item, but when you have a fixed dollar addition added to your markups, then no matter your fixed dollar or percentage markup, you know you have a guaranteed fixed dollar amount added to every product sale to help compensate for any needed fees or processing times.
Price vs. Shipping Markup
Some store owners are worried about having a price that is too high for their items, so they markup their products low, but add a small hidden fee to their shipping module or product weights to increase the cost charged for shipping.
The goal is to have a product price show lower than other stores while making up the needed margin with an increase to the amount charged for shipping. Other owners look to increase the cost of their item prices more significantly while promoting free shipping on their site. These users recognize that many customers might be more focused on your unique deal or temporary free shipping promotion and will be less concerned about the product prices being shown.
Store owners can build their entire approach around one of these strategies while others might change between these approaches or change from a more traditional price strategy to one of these methods and back again multiple times over the course of the year.
Regardless of the approach used, when implementing one of these more custom approaches, it is important to promote your significant price discounts or “free” shipping promotion to make sure it gets the attention needed from the traffic on your website.
NOTE: Incorporating the amount charged for shipping into your overall pricing strategy is a more advanced approach and will require a more experienced store owner to make sure that the total amount charged is enough to cover both your needed product margin and shipping costs.
MAP is the “minimum advertised price” for a product listing that is typically set by the manufacturer. This means when listing the item for sale you are not allowed to price below MAP, or risk potentially losing your ability to resell products from that manufacturer or distributor.
When working with a large distributor that carries products across hundreds if not thousands of manufacturers, you will want to speak with them about their MAP policies and how they might vary across products. Some products may have a “hard MAP” in which it is strictly enforced and you can see this by quickly researching the product online to see all pricing meets this criteria. Other products may have a “soft MAP” where the MAP isn’t really enforced and is a general guideline by the manufacturer.
Determining which products have MAP and whether it is enforced or not factors in greatly to a) whether you want to resell the item or not and b) how to price it. Ideally, your distributor provides the MAP price in the data feed and you are able to build rules around this pricing to easily list products that are competitive but do not put you at risk of losing your reseller privileges.
Featured Product or Product Specific Pricing
This is perhaps the most effective price strategy, but is the most time-consuming and therefore the most overlooked option.
Many resellers want to take the “set it and forget it” approach and apply a simple price setting, but what they forget is taking the time to price some individual products can maximize your website traffic and conversions.
Many wholesale dropship resellers select 10-20 items or so to feature on their website, such as on the main page. All major ecommerce platforms have a “featured product” display option. Smart store owners use this section to promote their more popular items to their customers, but you are missing an opportunity to leverage your traffic if you do not utilize a product-specific price setting for these or other items.
You do not need to price every product on your store with a 5% or 10% margin, but for those items displaying clearly on your main page, listing them at a much more competitive price is the best way to make a great first impression.
A customer might add one of these easy-to-find products to their cart after recognizing the instant savings compared to other websites online, and then continue to add 2 or 3 more accessories or related items where you can make your additional margin.
For the price-conscious customer, they might do a lot of research for the “must-have” item that brought them to your cart, but they can be much less price-sensitive once they see the huge savings on their favorite item while adding some additional items to their cart to spread out their shipping costs.
Do Not Fear Change
Your wholesale dropship supplier might frequently change their product prices based on the season or inventory levels.
Do not be afraid to change your price approach as well. Should you lower your price going into the weekend? Do you prefer to focus on mid-week sales and price drops? Are you just coming into or out of a holiday sales cycle?
If you had to manually change the price showing for 10,000 items on your website, it might make sense to leave your prices more constant, but when you are using dropship automation software, you can change the price on 10 products or 10,000 in seconds.