A pricing strategy can help you set prices without undercharging or overpricing your products.
Pricing products can cause doubt and confusion when you’re just starting on dropshipping. You don’t want to charge less than your product’s worth and you don’t want to overprice either. So how do you determine the right price?
When pricing products, there are five various factors to consider such as the product itself, your competitors, your desired profit, the shipping time, and the rate of returns and refunds.
Factor #1: Product
Even if you found a product that is very profitable in different markets if it is not the interest of your target audience, it will not take off as you hope it to be. As 77% of customers expect to be offered products that meet their personal tastes, no amount of discounts and deals can sway them to buy something they don’t want or need. According to a survey, being offered content that is not relevant to their interests and needs can frustrate 74% of online customers. Therefore, choose only dropshipping products that fit your target market.
Factor #2: Competitors
As more and more people are embracing the dropshipping business model, the competition gets tougher and tougher every day. Don’t price your products without knowing how much your competitors are selling, Because if you do, you might price your goods out of your market and no one will buy from you.
Factor #3: Profit
With dropshipping, setting higher prices on your goods does not warrant better profits. Luxury or premium industries might get away with higher margins but most dropshippers have to settle with thinner margins. This means you cannot price your dropshipping products outright based on your desired profit as there are other factors at play that you have to consider. However, you can experiment with various pricing strategies to know which will help you earn more.
Factor #4: Shipping
Dropshipping is known for its long shipping process. As this can frustrate the customers, you can offer as trade-off advantageous product prices to convince them to buy. Some dropshippers add the shipping cost to the product price and offer free shipping. If you can negotiate free shipping with your supplier, the better chance you have in increasing your profit margins.
Factor #5: Returns and Refunds
When buying online, shoppers are more confident in doing business with stores that have a transparent policy on returns and refunds. This should be established on your dropshipping website to prevent confusion and misunderstanding when returning products. Returns and refunds are common in dropshipping because you have limited control over the quality and condition of the product. As these can bring in extra cost to you, then you should consider adding it to your product price.
By considering these five factors when setting product prices, you’ll avoid losing money by selling them at lesser rates than they’re worth and selling them higher than your competitors. Now, let’s move on to the pricing strategies you can employ when pricing products.
What are the 3 pricing strategies for dropshipping products?
There are multiple pricing strategies for dropshipping products out there. Yet, they can be classified into only three strategies. These are cost-based pricing, market-oriented pricing, and consumer-based pricing.
Pricing Strategy 1: Cost-Based
The cost-based pricing is a strategy used to determine the product price by adding together the total business expenses and a specific profit margin.
Business Expenses + Profit Margin = Product Price
This is the easiest way of setting prices. To get the total business expenses, you should calculate all the expenses attached to the goods you’re selling. For a dropshipping business, these are some of the expenses often considered.
- Cost of sourcing products
- Website fees
- Software or apps subscription fees
- Staff salaries and contractor payments
- Shipping cost
- Returns and Refunds
- Bank processing fees
For the profit margin, aim for a profit that will let you earn as much as possible but still make the product affordable for shoppers. Consider industry standards for your niche to get an idea of what profit margin to set on your products.
The Pros and Cons
The cost-based pricing strategy is simple and does not require extensive market or customer research. You can ensure coverage of all business costs and earn minimum profit for each sold product. However, not knowing the current market conditions on selling the product might cause you to lose profits. You won’t be able to know if the market is already saturated and the race for the cheapest price has already started.
Pricing Strategy 2: Market-Oriented
The market-oriented pricing is also known as competition-based pricing. This strategy needs to learn the current market conditions and check the prices your competitors set on the same dropshipping products. To accomplish this, you should first identify who your direct and indirect competitors are. Direct competitors are dropshipping stores that sell the exact products as you. Those who offer similar products as a substitute for what you’re selling are indirect competitors.
To determine these types of competitors, perform a search engine search of your products. Based on the search engine results, record in the spreadsheet at least 10 results. Compare your prices with your competitors to see if yours is just within their range. Check their websites regularly to know if they changed their prices so you can make a price adjustment if needed.
If you can get your hand into a software that can automatically monitor competitors’ prices and available stocks daily, the better. You can use this data to leverage your business and stay one step ahead of your competitors.
The Pros and Cons
This type of pricing strategy is best paired with the cost-based pricing to get the best results. However, dropshippers with low budgets might find it difficult to execute and there’s also the probability that your competitors have not correctly priced their products.
Pricing Strategy 3: Consumer-Based
This pricing methodology involves setting prices based on how consumers perceived the value of your products. Also referred to as value-based pricing, this strategy needs that you know who your customers are and what do they value most about your product. These customers are not price-sensitive as they care more about the value they’ll get from buying from you rather than low prices. As 86% of shoppers are willing to pay more for better customer experience, focusing your efforts on meeting their expectations can let you get away with charging higher prices for your dropshipping products.
The Pros and Cons
The consumer-based pricing strategy intensifies customer loyalty and gives you a good chance of generating higher profits. Yet, there are drawbacks to it as well because determining the optimal price can take more time and resources. You might also overlook your competitors offering the same products and services as yours at very low prices.
All three pricing strategies offer you a chance to price your dropshipping products most favorably. You can earn more profits with them and they can help grow your dropshipping business. Combine these methods and experiment with your prices to see which would work best with your store.