Pricing strategies for dropshipping follow the basic rule of business: If prices are too high, consumers won’t buy them, and if the prices are too low, e-commerce companies lose potential profit. Using the right pricing strategy is critical because one mistake could cost suppliers lots of profit when people choose another online company or buy only items with a low markup.
What Is Dropshipping?
Dropshipping is the process of choosing products, finding a manufacturer that stocks the product, marking up the price and marketing the product online. Manufacturers and suppliers ship the products directly, and small companies don’t need to bother with storing and shipping products. These dropshipping companies don’t run the risk of carrying or paying for dead inventory, and they can offer a wider selection of products. Manufacturers get free marketing and additional sales platforms for their products.
Setting the Right Price
Prices change rapidly based on market forces, geography and customer demographics. Online global sales reached more than $2.3 trillion in the United States in 2017, which was 10.2 percent of all retail sales.  Shopping cart abandonment rates average 75.52 percent globally.
Given those facts, there are strong reasons to fine-tune drop shipping price strategies. It’s important to consider the types of products because luxury items tend to have a higher markup and fewer repeat buyers, but that rule isn’t set in stone. The best overall strategy is to perform regular analyses of sales data and to update prices continuously to align with market trends.
The basic costs of dropshipping include more than just the supplier price. The following list of considerations can serve as a basis for calculations, but dropshippers should add any specific costs that aren’t on the list:
- Supplier cost
- Cost of shipping if not added to the price
- Marketing costs
- Fees for selling on marketplace platforms
- Shopping cart fees
- Fees for using a payment gateway
- Taxes and currency exchange fees
- The costs of returns
It’s easy to see that the costs could significantly surpass the costs that consumers pay when buying from the manufacturer directly. Manufacturers and suppliers offer a discount on product prices for dropshippers, but these are usually higher than traditional wholesale prices.  The five major strategies for setting drop shipping prices include:
1. Fixed Markup on Cost
Fixed markups are the most common marketing strategy. Dropshippers can add a fixed dollar or fixed percentage amount to each sale. No price remains stable if corresponding product doesn’t sell. The latter approach of adding a fixed percentage ensures that companies receive maximum profit in a rising market. Fixed dollar markups ensure manufacturers cover administrative costs and receive more profit in a falling market.
Lower priced items sell better with a minimum markup because the consumers who buy them are often comparing prices for the best deal. Electronics, which are often priced on the high side when new technologies become available, tend to have lower margins. Unique items, such as decorative items, sell at lower volume but a higher markup.
2. Tiered Markup on Cost
Tiered markup on cost is the best strategy when a dropshipper carries a variety of products with a range of prices from high to low. Decision-makers worry about pricing expensive items out of range by adopting a fixed percentage markup or too low if charging a fixed dollar markup. Tiered pricing sets rules for pricing products based on their overall costs. Small items available cheaply can withstand markups as high as 50 percent while expensive items might be competitive and profitable with only a 5 percent markup.
Companies that develop comprehensive pricing rules and special tiers can enter the information into automatic pricing software or monitoring apps to keep current with pricing trends.
3. Manufacturer Suggested Retail Price
Manufacturer suggested retail price, MSRP, seldom impacts the prices of products in companies that compete on price. Suppliers that compete on service, luxury goods and brand reputation make better candidates for MSRP. Small shops often use the MSRP to avoid price wars and to maintain a suitable profit margin.
4. Mark-Down from MSRP
Marking down the MSRP is a common strategy for pricing items. Many small companies believe that offering a discount over regular prices is the primary reason that some people order online. The psychological appeal of a discount counters the appeal of touching and examining a product in a brick-and-mortar store. If a company can offer a 20 percent discount on the MSRP price, that creates a significant discount that appeals to many people.
The downside is that many sellers discount the MSRP price unless the manufacturers implement minimum advertised price restrictions. Although the MSRP might be $99.99, if the product is commonly available at $69.99, there will be no compelling advantage by discounting the product 20 percent.
5. Psychological Pricing
Psychological pricing is common because all sales depend on the customer’s need or desire and psychological factors. The most common psychological factor in pricing is using .99 or .98 instead of rounding the price to a simple, whole-dollar price. The numbers 5 and 7 are also commonly used. Dropshippers can also use lower numbers to undercut competitor prices. If they use .95 at the end of prices, companies could use .47, .29 or even .09.
Research shows that the number “9” reigns supreme as the most psychologically pleasing price for products according to an MIT and University of Chicago study. The study even found that items priced at $39 outsold products priced at $34.  Costly status items sometimes do better with round numbers. People often prefer to use phrases such as “I paid two bills” or “3 Gs” for a given item.
Psychological influences don’t just apply to customers. That’s why many dropshippers apply a fix dollar amount to orders. An item costing $2.00 would only generated $0.40 by adding 20 percent, which wouldn’t cover processing charges. Using a combination strategy of adding a fixed $3.00 markup to every order and a sliding-scale percentage, dropshippers can cover the administrative costs and receive a reasonable profit. The low-end items might be exempt from additional charges, and the high-end items would receive a progressively smaller percentage of markup.
Common Sense Pricing
There must be room to make pricing exceptions because not all products perform the same. That’s why it’s important to review prices before publishing them online to catch any glaring errors caused by automatic price calculations. Setting rules for pricing only works if the company follows these recommendations:
- Review all prices regularly.
- Compare prices with those of leading competitors.
- Set discounts for new products as a market penetration strategy
- Monitor sales stats, churn rates and customer browsing behavior.
- Test and revise the price of any item that doesn’t sell up to expectations.
The Dropshipping Business Model
Dropshipping requires careful monitoring to be successful when consumers typically order from Amazon and get their products shipped to them as soon as 1 or 2 business days. Dropshippers can counter that advantage by providing personalized customer service and carefully considered prices. Dropshipping allows aspiring entrepreneurs to enter the e-commerce market without a lot of experience or capital, but business owners can’t cut corners by skipping standard business services and ordering conveniences.
MarketMole provides an up-to-the-minute holistic view of what’s happening in your market, including product pricing, product reviews and trending topics. Our market intelligence tools can be applied to any pages on the web, sending you notifications about stock levels, pricing and competitor pricing, negative reviews, MAP violations detection and more.
Contact us to learn how we can help you save time and make more money.
Learn more about MarketMole and our services.
References: Blog.dsmtool.com: 21 Incredible E-commerce Stats From 2018
https//blog.dsmtool.com/incredible-ecommerce-stats-2018/  Saleshoo.com: The True Cost of Drop Shipping: 16 Top Questions Answered!
https://www.salehoo.com/blog/drop-shipping-cost  Shopify.com: Pricing Strategy: 10 Ways to Find the Perfect Price for Your Products