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Pricing Strategies & Dropshipping

Every store out there wants to increase their profits. How? Most try squeezing out costs to an unbelievable extent while others are running after making super deals with suppliers. We encourage you to monitor your costs and offer better deals, but most retailers don’t focus on this.
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Ever consider using a pricing strategy for dropshipping? Have you ever used a pricing strategy systematically, or offer random discounts and promotions? We’re here to show you another way to increase your profit margins with 3 pricing approaches you can use for your business.

Before deciding on which pricing strategy to use, read through each of them to find the best fit for your business.
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Let's start by understanding what a pricing strategy is.

What is a pricing strategy?

It’s a methodological approach used to price products. As one of the P's of marketing, pricing is also considered a marketing strategy to project product or brand perception.

Why is it important?

As we’ve specified in the introduction, if you don’t have a strategy, chances are you're leaving money on the table. If you price too high, you might have no one adding any items to the shopping cart whereas if you price too low, you might lose profit.

Where should you start?

We live in a world that is driven by data, pricing is just another data point in this equation. Therefore, you need to know what factors affect the final pricing of a product and for what purpose. Not to mention the customers' point of view for what they are willing to pay.

Before moving on to determine our strategy, let's look at some numbers which give a glimpse into the motivations behind a purchase.

By looking at the chart above, let’s break down the reasons and motivations behind a purchasing decision.

First

21% of consumers’ motivation to purchase is something that makes them happy, it can be anything from a new shoe to a mobile device. The consumers' lifestyle and demographic data can say a lot about their motive but it can also depend on the product’s sexiness as well.

Second

17% of consumers’ motivation to purchase is bought out of a necessity to keep living their lifestyle. For example, everyone needs toilet paper. The difference here is whether they choose to buy the cheapest, average, or the most expensive one.

Third

16% of consumers’ motivation to purchase is about a discount/promotion which is something that seems like a good bargain and awakens the FOMO.

The first and second stats depend on your product assortments and brands you’re working with. But to make discounts the smart way, you need to know your business costs precisely and this is where we proceed with our first pricing strategy.

Cost-based pricing

This is a pricing methodology in which we calculate our total business costs and add it up with a certain profit margin to set its selling price.

Basic cost-plus pricing:

Expenses + desired profit margin = price

It’s the simplest way to set your prices unless you want to go for a loss-driven business. With this, you can build a solid layout for growth and persevere in a harsh market.

How can you do it?

Any type of cost-based pricing strategy begins by calculating the costs attached to the product you’re selling. In order to calculate the costs of your products, you need to include many factors. Below are some common expenses we’ve seen in most e-commerce businesses.

• Salaries and payments
• Sourcing products
• Platform fees
• Shipping
• Returns and refunds
• Bank and processing fees
• Software

Now, let’s take a look at the best part. Profit margins. How do you really know how much you should profit from each item? The ideal scenario is you want to make as much as possible, but you have to make it buyable for consumers too. Finding a balance here is key to finding optimal price points.

Advantages of this strategy

• It’s simple.
• Doesn’t need in-depth customer or market research.
• Ensures a minimum return on each product sold.
• Acts as a buffer that grows beyond initial expectation.
• Better coverage and tracking of costs.

Disadvantages of this strategy

• Possibility to lose from profits.
• Lower awareness of the market.

With around 860,000 E-commerce companies around the world, cost-based pricing is not so efficient to determine how you price your products. You need also need to look at what the market is offering at what price.