We’ve priced and modified the price on many products, as well as tested various price strategies. By doing this, we have created a list of everything you should consider before pricing and how to calculate a price for your products.
Read on to find the right price for your product.
Key Takeaways
- Identify your target market and business goals
- Calculate your costs and the profit you want to make
- Use a dropshipping calculator to understand your numbers
- Analyze and update your prices once you start making sales
What to Consider When Pricing a Product
There are a few things to consider before deciding on a price for your product.
Long-Term Business Priorities
Consider the reasons for starting your business and your long-term goals.
These are personal to you, but some examples include the following:
To Sell - You may create a dropshipping company to sell it in the next two years. If this is the case, consider what will appeal to a potential buyer. This could include selling a variety of products and maximum profit.
For Longevity - Alternatively, you might be starting a dropshipping company as it's something you’re passionate about and want to establish a brand. To do this, you may need to spend more on advertising to get your brand recognized. Therefore, you might price with a lower profit margin to subsidize your marketing costs.
Identify Target Market
Consider your target market. The people you design your product for are your target market.
Your target market could be demographic, geographic, psychographic, or behavioral.
The market you aim your product at determines the price you can successfully sell for.
- Is your product aimed at students? Then you might need to price low, as they are usually on a limited budget.
- Are you selling in a specific region? Consider the average income and if your product price matches this.
- Is it a specific sports product? Consider who would use it. It could be an adult on a high income who has money to spend on luxury products. Or a kid who needs it for gym class.
How to Calculate Product Pricing
Before pricing a product, it’s vital to check you will be turning a profit.
Generating profit is the aim of dropshipping.
To do this, you will need to know the cost of the product and the shipping costs. Your supplier will be able to provide this information. You will also need to know any fees and your fixed costs.
Once you have this information, you can work out the rough price you want to sell at. And how much profit you will make.
We aim for a 20-25% profit on our dropshipping products. So, if we buy a product for $10 (shipping and fees included), we need to sell at $12.5-13.33 to make 20-25%.
But, the percentage of your profit is individual to your business.
For example, grocery stores only have, on average, a 2.2% [1] profit margin due to the volume and reach they have.
Variable Costs (Goods, Shipping, Fees)
Understanding your costs allows you to price your products effectively.
The variable costs are the costs that only occur when you sell a product.
There are three main variable costs to consider.
- Goods - The cost of goods sold (COGS) is the price you pay the supplier for your product.
- Shipping - This is how much it costs to ship each product to your customer.
- Fees - Fees could include packaging, labeling, labor, marketing materials, and advertising.
As an example, we will work on the following costs per product.
Note: The prices are just random and not a guide.
Fixed Costs
Now you know your variable cost per piece, it’s time to look at your fixed costs.
These are expenses that don’t change. They remain the same if you sell 100 pieces or 10,000 a month.
They will vary depending on your business, but common fixed costs include the following:
- Subscriptions and Memberships (Shopify, Automation Software, Domain, Custom Email, etc.)
- Business License
- Insurance
- Rent
It can be difficult to factor these into your product price. It usually will require you to adjust your price when you have more of an idea of sales volume.
For example, let’s say your fixed costs are $300 per month.
- Scenario 1: You sell 100 products a month. $300 divided into 100 gives you $3. You need to add $3 to each product cost to generate a profit.
- Scenario 2: You sell 10,000 products a month. $300 divided into 10,000 gives you $0.03. You need to add $0.03 to each product cost to generate a profit.
As you launch more products and increase sales, the amount you need to factor into each product will decrease.
Finding the right amount to add to each product can take time. Continually analyze your sales and check your pricing.
Profit
You’ve worked out all of your costs. Now it’s time to add your profit to the price.
As we’ve said, we like 20-25% profit, but adjust this to suit your business.
Complete the following calculation to determine what 20-25% is on your costs.
- Convert your profit percent to a decimal, e.g., 0.2 or 0.25.
- Take 0.2 or 0.25 away from 1, so you’re left with 0.8 or 0.75.
- Divide Total Costs (e.g., our 9.7 variable costs and 0.3 fixed costs is $10) by 0.8 or 0.75.
This will give your listing price of $12.5 or $13.33.
Variable Costs
$9.7
Fixed Costs
$0.3
Total Costs
$10
Profit (20%)
$2.5
Price to List Product
$12.5
Use a Product Pricing Calculator
Calculating your numbers can be unnecessarily confusing, especially when you want to experiment with different prices and margins.
To do this easily, try a product pricing calculator.
There are plenty of options, but I’m going to, of course, recommend ours.
We have a FREE tool, Numbers Breakdown. It has tons of information and will calculate everything you need to know about your numbers.
You can use it with or without a membership, so make sure to check it out.
Use the calculator by following these steps:
- Fill out your selling price.
- Add in an estimated amount of pieces you’ll sell.
- Enter your costs and fees.
- We will instantly calculate your profit margin, as well as other key metrics.
How to Analyze, Experiment, and Test Pricing
You will launch your product at one price. But, it is unlikely to stay the same forever. And it shouldn’t.
Analyze the data you have and adjust the price of your products accordingly.
Sales
If your product is flying off the shelves and receiving great feedback, consider upping the cost to maximize your profits.
Alternatively, if your product isn’t selling, but you notice that your competitors are doing well, think about dropping your price to generate sales.
Seasonal Promotions
We have a product that sells all year round, but interest really peaks between January and April.
During this time, our price tends to be at its highest. This is because in this period, there is high demand, and people are willing to spend the most. Then, once the peak is over, we offer a discount to try and boost sales.
You can also take advantage of big sale days. This could be Black Friday, Cyber Monday, New Year's Day, etc. On these days, you can offer promotions, like free shipping or discounts.
Discounts
Offer repeat customers exclusive discounts, like free shipping or % off when they spend over a certain amount.
Alternatively, set up rewards programs to help customers return to you. Offer something similar to the Mcdonald's coffee promotion, where you buy five coffees and receive your 6th for free.
You can also entice new customers to purchase from you with a 10% discount on their first purchase.
Make sure to factor these discounts and promotions into your costs.
Product Pricing Strategies
A product pricing strategy is a method to determine the best price for a product.
There are several product pricing strategies. Below are some of the most commonly used ones in dropshipping.
Competitive Pricing
Competitive pricing is when you price your product cheaper than your competitor.
The aim is that you can draw their customers to your store for a better price for the same product.
This might mean that your profit is lower. However, you might make up for this by selling more pieces.
Value-Based Pricing
If your product is better, adds more value, or you have an established brand with a trusted audience, you might be in a position to price your product above the competition.
This means that you might miss out on those looking for a cheaper deal. But you probably have a higher profit margin.
Cost-Plus Pricing (Mark-Up Pricing)
Cost-plus pricing is simply adding a markup to your variable and fixed costs. This doesn’t take into account your competitor's prices or the product's value.
Manufacturer Suggested Retail Price or Recommended Retail Price
This is when the product manufacturer recommends the price you sell at. Most of the time, you can alter the price, but it helps to standardize pricing.
You may have seen this before on food products in convenience stores.
Penetration or Discount Pricing
Penetration pricing is when you temporarily discount your products to gain traction and interest.
Discount pricing is offering customers discounts on your inventory to increase sales.
Both can be great for some customers as they feel like they are getting a great deal. But it can also make your customers think your products are of poorer quality or less valuable.
Price Skimming
Launch your product at a high cost and reduce the price over time.
This strategy works by keeping the price high while the demand is high and the competition is low. Then as the market becomes more saturated, you can lower your price to attract and keep customers.
How to Price Depending on Your Platform
The basics of pricing your product will remain the same no matter where you list.
However, there may be additional fees to consider when pricing your products. These vary between platforms and countries you sell from and to.
Shopify
Shopify charges a credit card rate. The percentage varies depending on your subscription plan.
They also charge a transaction fee if you aren’t using Shopify’s own payment gateway.
If you choose to sell on Shopify, make sure to factor in the credit card rate and possible transaction fees to your product price.
Depending on the amount you sell, it might be worth considering upgrading your plan as the Starter plan has a 2% credit card rate, whereas the advanced plan has a 1.5% rate.
Amazon
Subscribe to an Individual or a Professional plan. The plan you choose will determine your basic fees. You may also be subject to referral fees.
If Amazon is your chosen dropshipping platform, make sure to add in these costs when determining how much to price your product.
Etsy
There is a listing fee for Etsy, as well as transaction fees.
Etsy is a great platform, but if you’re testing multiple products, it might not be the best option. This is because you need to pay every time you list a product. Listings also expire on Etsy, meaning you might need to repay the fee if your listing expires.
As well as the listing fee, there are also transaction fees.
Add these fees to your product calculator to work out your price and the profit.
eBay
eBay charges a listing fee and a final value fee. You will be charged the final value fee when your product sells.
Similar to Etsy, eBay’s listing fee makes it a less favorable dropshipping option for us.
Make sure to consider these costs in your final price.
Final Thoughts
Work out your variable and fixed costs and add your profit to get a rough price.
Use our Numbers Breakdown tool to help figure out a price that works for your business and customers.
Check out the competition and see what techniques they are using, and don’t be afraid to adjust and test different pricing strategies.
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