Effective Pricing Strategies and Their Importance in 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 dropshipping suppliers. We encourage you to monitor your costs and offer better deals, but most retailers don’t focus on this.
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 dropshipping business.
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 dropshipping 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.
  

Market-oriented pricing

This is a pricing strategy based on market conditions and competition. You compare the prices of similar products that match with your product inventory offered in the entire or a specific part of the market. Sometimes this strategy is referred to as competition-based pricing.

How you can do it?

First, you need to know who your competitors are both directly and indirectly. Direct competitors are companies that offer the same products as you while indirect competitors offer similar products as part of a wider offering, or which can serve as a viable substitute.

Then, you need to know how your product prices compare with both types of competitors. To figure this out, you can do a basic search of each product in a search engine and record the top 10-20 results into a spreadsheet. Following 2-10 products is easy and can be manageable but if you’re going to follow more than that, you can enter all that data in a pricing software which will provide automatic monitoring of your competitors’ prices every day, 4 times a day :)
With software, you’ll easily know exactly where your prices are positioned among the others. You’ll see the highs and lows and know how to take your competitive level to a better place. Also, make sure your software checks the stock availability of your competitors as it will bring another leverage for you.

Advantages of this strategy

• Helps to avoid price competition that can damage the company.
• Combined with cost-based pricing it can be a powerful strategy.
• It enables you to do your competitor research and stay a step ahead.

Disadvantages of this strategy

• Might be difficult for smaller companies with low budgets.
• You rely on the assumption that competitors have priced their products correctly.
  

Now, you have an idea of where you and your competitors are standing. We’re ready to get things to the next level which is what your customers want.

Consumer-oriented pricing

Also known as value-based pricing is a strategy in which you set prices according to the perceived or estimated value of the product you’re providing to the customer. This is where most of the science and art of pricing comes into play.

How you can do it?

To benefit from this strategy, you need to understand your customers and keep in mind that your customer segments probably won't be the same. Some will do comprehensive research before shopping, while others might only look for coupons or discount sales.

For this approach to work well, you have to know and segment your customers but don’t overdo it. Don’t have hundreds of segments which will put you into analysis paralysis. Keep it simple and try to know who they are and what they value about your product.

We already analyzed some reasons for purchasing motivation at the beginning of this article, but there is still a proportion of customers that don’t care much about the price. Like in luxury shopping. If your customers fall into this category, you don’t have to emphasize price too much. You should avoid deals and offers. This is the opposite for price-sensitive consumers. You get the point.

Advantages of this strategy

• Consumer-oriented pricing enhances your customer loyalty.
• There is a good chance that you’ll work with higher profits.

Disadvantages of this strategy

• Takes a lot of time and resources to determine an optimal price.
• Understanding customer habits in a fast-paced environment is hard.
• Might lead to ignoring your competitors, as they might start offering similar products for a much lower price.

What’s in it for drop shippers like me?

Everyone knows the highest benefit of drop shipping is that you never have to store inventory or spend time managing it. Your main focus is on selling and increasing your profit margins. Your financial risk is minimized as you don’t have to buy a product until you make a sale.

All of these give you the opportunity to set your pricing strategy in a way that is most beneficial to make your drop shipping business prosper and for you to earn more profits.

There is no single pricing strategy that will fit all types of drop shipping businesses. However, there are a number of ways that you can improve your pricing and cater it better to your products.
Let’s look at the common factors that affect your pricing in dropshipping.

The product: The type of product determines the pricing strategy that can be implemented, as every product is different they should be priced individually.

Discounts: Discounts, deals, and offers can put a spark on getting fast traffic. Remember cost-based pricing here.

Shipping: These costs always reduce the profit margin. It’s always better to focus on products with no shipping costs as it will be preferred by your customers too.

Returns: It can be very stressful for a drop shipper to get products returned. The aim here is to focus on the satisfaction of the customer and lower-priced products have a lower rate of return.

Change: Change is the only constant. Don’t stick to the same strategy forever. Try new prices, explore new products, and see if these make a difference.

Customer service: Pay close attention to the needs of your customers and aim to provide the best customer service. You can include this in your expenses when putting a price on your products.

Cheap products: Simply listing cheap products might not work wonders for your dropshipping business. You need to work on building a reputable image as a drop shipper and continuing to list your products at the cheapest price may lead to your customers feeling that you offer low-quality products.

Supplier relations: Before getting started it is advised to talk to your supplier and share your pricing strategy thoughts with them. By contacting your supplier directly, you can get to know whether they have any pricing recommendations for you.

Is this the end?

As you’ve seen throughout this article, pricing is a decision that has a lot of factors to take into consideration. The company itself, competitors, and customers are the three top areas to think of. I don’t think there is a single person in your business who is an expert on all three. So take advantage of the fact that a group makes better decisions than a single isolated person, and make pricing a strategic decision that involves more people in your company.

If you nail your pricing strategy for e-commerce your conversion rates will rise, and your company will be more efficient.

Besides, you will have a better knowledge of dropshipping sales dynamics. Mix the approaches mentioned above and experiment with your prices today. Good luck!