Product pricing is not an easy task. If you sell at a high price, no one will buy your product. You sell it too low, you lose money, and you throw in the towel before you even get a fair chance at succeeding.
Over the years, I learned that pricing your products for sale is an art and a logical process. In this article, you will learn everything you need to know to price your product and get to that sweet spot where the price is just right.
You will learn:
- The 7 best pricing strategies
- How to create a customer persona or avatar
- Tip for pricing your e-commerce or dropshipping products
- Pricing strategies apply to specific conditions; you must choose the best one that applies to your situation
- Understanding what your customers want and desire is the key to proper pricing
- You must do the math to price your products correctly; not doing so can result in losses
In the end, you will have learned the different effective pricing strategies that you can apply to your dropshipping business. If you are ready, let us start!
Part 1: How to Price Your e-Commerce Products
1. Understand Your Buyers and Competitors
This concept is easier said than done; you need to do a lot of investigative work to understand your buyers. In this process, you must create a MASCOT for your target buyers.
Why? If you have just built your e-commerce or dropshipping store, you have no idea how the market will respond, at what price point your buyers are happy, and how much they are willing to shell out for what you are selling.
So, how exactly do you do this?
Painting a Picture of the Customer
Who is your customer? Or better yet, who is your target customer? This exercise is what we call customer profiling, and you must do this to have a rough idea of how much money your customer can spend.
First, what products are you selling, and how are they used? To help you do this, you must focus on the actual problem that your product is trying to solve.
Are you selling a drone? If you are, what kind?
There are many types of drones out there. Some are mere toys, while some are for professional photographers. As you can see, there is a huge difference between what a $1,000 drone can do against a $25 one.
Drones that sell for $25 are those that you sell to kids. In this regard, you must target parents who want to buy this as a present.
The problem that this drone is trying to solve is entertainment and relationships. And as you know, it is rare to find a customer who will spend $1,000 for a gift.
But your pricing approach changes if you are targeting professionals like photographers and videographers.
If you know that your target customer is a freelance photographer, you can research how much these people earn per year.
According to Indeed, a freelance photographer’s average salary or earnings in the US is $744 per week. Multiply that by 52 weeks, and you get $38,688.
With this knowledge, how much do you think a photographer will spend on a drone? If you sell it for $1,000, it equates to roughly $84 of expense per month, which a photographer can certainly afford.
What does this mean? It means that $1,000 is a comfortable price point so that you can sell your products at that base price without fear.
Who are your competitors, and how much are they selling the same products for?
After completing your customer profile, the next step is to head to other websites and check out how much they sell their products. The trick here is to do keyword research on Google.
You must use the appropriate keywords to show you the same or similar products. Open all the relevant pages on the first page of Google and place the prices on a spreadsheet.
You can match these prices or undercut them, but it is a rare option for you to sell your products at a higher price. You can sell yours at a higher price, provided that you have something else of value to give.
For example, you can sell your products at a higher rate if you have more credibility or offer a warranty. This process should be easy for an e-commerce business where you manufacture and ship your products.
But if you are dropshipping, you must undercut your competitor or offer it at the same price. The other thing you can do is to take the average and price your product that way.
Use the Right Pricing Model
You must apply a pricing model once you know your target customers and your competitor’s prices. There are seven types that we will talk about here.
As early as now, I have to tell you that there is no magic formula that you must apply. The choice depends on different circumstances, and you are the best person to decide which approach to use.
1. The Cost-Plus Product Pricing Model
In this pricing model, you must add a percentage to the capital cost as your mark-up. The capital cost is also called a break-even cost.
Let us take a look at a simple example below.
Let us say that this drone has a price range of $49.99 to $99 in the market.
Your break-even cost here is almost $60. This table does not include your overhead costs, website maintenance, the fee you pay for charging payment, advertising costs, and a whole lot more.
But we will discuss that later. For now, let us use the cost-plus pricing model. Supposing that we add 40% as our mark-up, then we get:
$59.99 X 40% = $23.99.
If we add $23.99 to $59.99, our selling price is $83.99. This price is higher than the lowest price of $49.99 but still within the range of the highest price of $99.99.
At this price, however, you can now offer free shipping. The other approach is to remove the shipping price from your capital and charge that separately. In this case, our calculation is:
$49.99 X 40% = $19.99. Add that to $49.99, and you get $68.99.
So, where did the 40% come from?
There is no scientific answer to that. Every industry has an average mark-up price. For example, restaurants typically price their products at least 60% more than the capital because they have a lot of overhead costs.
The thing with this pricing model is that it is based on the assumption that you will sell a lot of units. The limitation here is that if you do not sell a lot, you will not cover other costs like website maintenance and advertising costs.
Now, let us say that you settled down to selling your product for $68.99. This time, you have to take into account your monthly expenses. See the example table below.
Your total cost is $229 to be able to run your dropshipping or e-commerce business. What this means is that for a price of $68.99 that has a gross profit of $19.99, you need to be able to sell 12 units per month to break even.
We arrived at that number using the formula below:
$229 / $19.99 = 11.45 units.
Now, ask yourself, are 12 products reasonable? Is it achievable?
At that rate, remember that we are only breaking even and not making any profit. If 12 units are not achievable, you can do two things. The first is to reduce your expenses, and the second is to increase your mark-up percentage.
2. The Value-Based Product Pricing Model
The second type of pricing is what we call value-based, which means that you price your products not based on a percentage but on a perceived value.
What does this mean? If you think about it, why are iPhones much more expensive than Android? The reason is value.
While both operating systems and phones can pretty much do what the other brand can, Apple always markets the iPhone as an elite kind of phone, so Apple can command a price the way it wants. Customers have different perceptions about a product. Several factors affect the value of what you sell is
These factors are:
- Availability – is your product always available, or is it a limited edition?
- Exclusivity – is the product exclusive to your store, or can customers buy it anywhere?
- Quality – is your product made with fine-grade materials, and are they built to last?
- Performance – does the product perform optimally; can it go head-to-head with other expensive brands?
- Novelty – is your product a trend? Is it innovative, and is it new?
As you can see, the value you put on your product depends on these factors, which you can highlight in your product pages to justify the cost.
In the first pricing model, you may be able to price your product at a 60% profit margin, giving you room to break even and even become profitable.
But if your product has value, you can bump the price to 80% or even 100% of the product cost!
The best example of a product where you can use this pricing model is print-on-demand items or those that you customize. There are many dropship suppliers today that allow you to customize the products such as Printify and Printful.
Most of these are t-shirts and coffee mugs where you upload your design, which the supplier will print on the product.
These dropship suppliers are print-on-demand or POD services. Since the products are unique, they have more value than generic ones, and you can bump up the price.
For example, you can buy a t-shirt from POD suppliers for $6 each, which includes the printing service. You can sell the shirt for at least $20, especially if your ideas revolve around hot topics like politics.
3. Competition-based pricing
Competition-based pricing means that you price your goods based on prevailing market rates. The thing is that you do not take into account the value of your products. You only consider how other vendors price their products similar to yours.
Here are the benefits of competition-based pricing:
- It is easy to implement
- The pricing strategy makes your products competitive
- The risk is minimal
In a snapshot, you want to do research and find a spectrum of prices for the same product such as yours.
For example, let us say that you are selling canvas prints. You go to Etsy, and you list down the prices of your competitors for canvas prints of the same size.
Let us say that the range you found is between $40 and $60. At this point, you have three options:
- Price your products at $40 – compete at the lowest price
- Price your products at $60 – compete at the highest price
- Price your products at between $40 and $60 – compete at a price range you are comfortable with
Whatever price you choose, you must find a way to differentiate your goods from the others. If you have no sales yet, you would be better off selling your items at the lowest price. At the highest price, make sure that your product is better than the others.
4. Price Skimming
Price skimming is a strategy where you charge the highest possible price that the market can afford, then lower it down at a later time.
The goal is to get as many sales during launch as possible—a time when the demand is high. As the demand goes down, you want to lower the price to attract consumers who want to buy but cannot afford the launch price.
You want to use this approach to:
- Quickly recover your capital and customer acquisition costs
- The high price does not invite competitors to raise their prices
- Your product is of high quality
Most of the time, you would see price skimming as a strategy in electronic devices. Every new electronic product sells for a high price, and this price goes down later.
The problem with price skimming as a pricing strategy is that it does not work for a long while. You can only do this for a few months. In addition, those who bought early on may not trust you again. If the price drop is huge, the first customers would feel ripped off—why did they pay a premium price for a product that they could have purchased at a cheaper price later?
5. Loss-leader pricing
This pricing strategy means you sell your goods at a loss or a very small profit. The goal is to attract shoppers to buy your products at a loss, and hope that they buy other items that have a high-product margin.
In some cases, you can use this pricing strategy at the launch of your product. You want people to test your goods and spread the word. In the physical world, some entrepreneurs even give free products.
Loss-leader pricing also applies to a strategy where you offer a huge discount. It normally happens during the holiday season. In the United States, it is not uncommon to see major retail stores offer their products at a significantly huge discount during Thanksgiving.
Here are the best scenarios when to use loss-leader pricing:
- You have excess inventory
- You have a new product that you want to go viral
- You combine the discounted goods with a high-profit product
The loss-leader product pricing strategy comes with danger. As the term implies, you can lose money. It would be wise to implement this only if you can afford to lose a certain amount of money. In addition, it is also best for bundles—to sell products at a lower profit margin if a customer buys a group of products together.
5. Dynamic pricing
Dynamic pricing is a strategy where your prices change based on several factors such as demand, season, competitor pricing, segmentation, and demographics.
How does this work?
In this strategy, you change the price of your goods if you think it makes you more competitive. For example, if there is a huge demand for drones during the holiday season, you can either make your prices higher or lower than what they used to be.
Usually, dynamic pricing happens during the holiday season, or if the goods are commodities. Commodity goods are typically farming and mining products such as gold, silver, etc.
As a dropshipper, the season and demographics are the primary reasons for using this strategy. Below are some examples:
- Increase or decrease prices during the end of the year
- Launch a sale price in the summer
- Charge higher prices for US consumers
- Charge lower prices for markets in economically progressing countries
There is no cut-and-dried process to implement this strategy. What I can tell you is that you need to be in tune with what is happening in the market to implement this strategy successfully.
6. Premium pricing
As the term implies, premium pricing refers to a method where you sell your goods at a high price. The price is always higher than the average market value. Think Apple—their prices are always through the roof, and yet they have a loyal following or customer base.
You use premium pricing for the following reasons:
- Your product is of superb quality and it is second to none
- You want to increase your product’s perceived value
- You are one of the few who sell this product (the supply is lower than the demand)
In dropshipping, premium pricing is a great strategy only if you do private label. Since you are the only one who has this product, you can charge more money than your competitors.
The thing with premium pricing is that you need to back it up with some serious marketing. For example, if you dropship food supplements, you need ads and videos that show people how your product helped them get healthier.
7. Anchor pricing
Anchor pricing is a strategy where you play on a buyer’s tendency to get more value for less money. It is a kind of pricing that many fast-food chains use to entice people to buy bundled products or buy something at a higher price point.
Here is an example you usually in theaters:
- Small popcorn – $5 (100 grams)
- Medium popcorn – $8 (200 grams)
- Big popcorn – $10 (500 grams)
As you can see, people would immediately notice that the big popcorn is only two dollars more than the medium one. However, it is more than twice the amount.
If you think about it, you need to spend $25 for five small popcorn (100 grams each) to get 500 grams of popcorn. However, you only need to spend $10 if you buy the big one.
Anchoring also means you price a product so high (this is the anchor), and then offer a product of similar quality at a lower price, which now makes a consumer think this second product is a good deal.
For example, you can price a suit for $3,000, and the customer would think this price is too high. Beside that suit in your online store is one that sells for $400. At this point, the consumer wants to buy this product because, to him, the $400 suit is a steal—it is a bargain that he cannot let go of.
Understand Your Break-even Point
Earlier, we touched on the subject of a break-even point. It is the amount of money you have to raise from your gross profits to pay all your expenses.
In some cases, it is the number of units you have to sell in a month to pay our business bills. A break-even point is not the point where you make a profit.
It is the point where you are not in the negative or the red zone. In short, it is a point where, after paying all your bills, your business made $0.
You owe nothing, but you made nothing.
Every quarter, you have to re-calculate your break-even point. This is because you may introduce something new to your business every quarter, like a new marketing campaign or new costs, such as hiring a blogger to write content for you.
As your expenses rise, you must adjust your product prices accordingly. It is important because if you do not know your break-even point, then there is no way you can make an intelligent decision on how to price your products. Remember, a business decision must always be based on data.
How to calculate the break-even point
It is time to whip your math skills as we need to do some calculations.
Here is the formula: Profit = P(X) – VC(X) – TFC
And here is the legend:
- P = selling price
- X = number of units sold
- VC = variable costs
- TFC = total fixed cost
Before we do the math, let us describe each component.
- P = This refers to the price that a customer has to pay, including the shipping.
- X = This is the number of units you sold in a month, which is already paid. Do not include units where you issued a refund.
- TFC = fixed costs are those that do not change. Examples are rent, your website cost, utilities, wages you pay, and others.
- VC = variable costs are those expenses that can change, like marketing, shipping, taxes, fees, and more.
Now, let us do the math in a theoretical scenario.
Profit = P(X) – VC(X) – TFC
Our P is the selling price, which is $83.98. We arrived at this number because the price is $59.99 (including shipping)
40% of that is $23.99, so we add $59.99 and $23.99, and we get $83.98
Our VC or variable cost is shown below:
- Advertising - $100
- Miscellaneous - $100
- Total = $200
Our Total Fixed Cost or TFC is shown below:
- $59.99 X 100 units = $5,999
- Website cost = $29
- Total = $6,028
Here is the summary:
Profit = P(X) – VC(X) – TFC
- P = $83.98
- X = 100
- VC = $200
- TFC = $6,028
- Profit = $83.98 (100) – $200(100) – $6,028
- Profit = $8,398– $2,000 – $6,028
- Profit = $8,398– $2,000 – $6,028 = $370
In this case, we made $370 for that month if we sold 100 units at a 40% profit margin. We would make more if we did not spend on advertising or if we could control our miscellaneous expenses.
Now, what if we sold 200 units? Does that mean we made $370 x 2 = $740?
Let us see. If we sold 200 units, our TFC would change.
Remember: Profit = P(X) – VC(X) – TFC
- P = $83.98
- X = 100
- VC = $200
- TFC = $12,027
And so, we have this:
- Profit = $83.98 (200) – $200(200) – $12,027
- Profit = $16,796 – $4,000 – $12,027
- Profit = $16,796– $4,000 – $12,027 = $769
We are slightly higher in profit than simply multiplying the net profit earlier by 2.
Now, this is just a simple example. We have not yet included other things like your salary, data or internet cost, electricity, and so much more.
Part II: More Tips on Pricing e-Commerce Products
1. Always know what is happening in your niche
Just because you priced your product right and you are making sales does not mean the price should stay there. You should do the same exercise we did earlier for competitor analysis every quarter.
Over time, your price must evolve. Always leave room for enough profit to launch a sale or issue discounts. You also need to know that your overhead costs, such as salary, taxes, rent, and utilities, may fluctuate and increase occasionally, so consider this in your pricing methods.
2. Calculate your profit margin before launching
In the exercise we did, are you happy with a net profit of $370?
If not, you must increase your selling price or sell more items. Another option is to look for a different supplier who offers it at a lower cost or try to save on the cost of shipping.
Do not skip this process. Calculating your variable and fixed costs is tedious, but these are necessary. You cannot run a decent business if you do not know where your money goes.
What is the formula for a profit margin? The profit margin is equal to the following:
(Selling Price – Cost of Product) / Selling Price
The profit margin is a percentage. It is from this profit margin that your business will pay for itself. If you have done this calculation and the result is negative, you are not even at your break-even point. You are losing money, and you need to do something.
As mentioned earlier, you can bump up the selling price or reduce your variable costs. Now, what if you cannot bump up your price, and you also cannot reduce your variable costs? In that case, you have to consider selling another type of product.
3. Do not be afraid to experiment
Always be on top of the trends in your industry, and do not be afraid to test new things. As an entrepreneur, you have to get the pulse of the market.
Test how the market would react to increasing your price or lowering it. Send emails and surveys to your customers and get their feedback. Get a series of marketers to do an analytical study about your niche. Buy reports if you have to. Use data to your advantage.
Hiking up your product price is alright, but do not do it overnight. It will help if you increase your product price in small increments. That is why you must do this right the first time. If you suddenly jacked up your price, you would be in a bad spot.
PART III: FAQ: e-Commerce Product Pricing
What is commerce pricing?
E-commerce pricing is the way or method by which you decide how much you would sell your products for.
What are the pricing strategies in e-commerce?
There are seven that we discussed in this article. By far, the most common one that dropshippers use is the cost-plus pricing strategy.
What is the best pricing strategy?
There is no best pricing strategy. It all depends on your market and product.
What are pricing strategies important?
Pricing strategies are important because you want to price your products accordingly. You want to ensure that you do not lose money and that your prices are competitive enough.
Product pricing is a skill that every entrepreneur must understand. It is a tough job, but it is crucial for your success. Many people do this the wrong way. As such, they manage a business where they still live paycheck to paycheck, never growing or expanding.
The next step is to find your competitors and see how they price their products. The best way to do this is with Dropship.IO. Our system has a competitor spy tool that allows you to see what your competitors are doing.
Sign up now for a free 7-day trial and see the difference!