If you have an online dropshipping store, your pricing strategy is definitely something that you should think about.
When it comes to pricing your product, you can’t just pick a price based on your feelings. You will have to consider expenses like product costs, marketing costs, taxes, hosting fees, app costs, and psychology.
Don’t worry though. In this guide, you will learn about what a dropshipping pricing strategy is, how to choose the best retail price for your product, various pricing strategies you can use, the best way to round your product’s price, and much more!
So, if you were asking yourself what retail price you are going to pick for your products, this article is for you.
Let’s get started!
What is a pricing strategy?
When adding new products to your dropshipping store, you might ask yourself:
“How do I price my products?”
That’s precisely what a pricing strategy covers!
A pricing strategy generally takes all the expenses you have into account and calculates an optimal selling price as an output.
To determine your pricing strategy, you will have to think of various aspects for the best chances of being profitable.
Some things to consider are:
- Audience: How does your audience look like? For example, if you target a wealthier audience, you can probably set your prices a bit higher than average.
- Perceived Value: What is the perceived value of your product? If you are selling a neck massager, you can set your price higher than when selling a neck pillow.
- Price Elasticity: How does your audience react to price changes? If a 10% price increase results in just -5% sales, it’s probably a smart move!
- Business Costs: What are the business costs you will need to earn back? What do you pay for your email, apps, domain, and other business expenses? Tip: If you are interested in setting up a free business email, check out this Do Dropshipping article.
- Taxes: The obligation to pay sales tax, VAT, or profit tax could really eat into your profit margins, which is why it’s an important point to consider when thinking about your products’ pricing strategy. To learn everything you need to know about dropshipping taxes, check out our article here!
- Marketing Costs: One of the more essential costs to consider. Why? They are variable! The more products you sell, the more your marketing costs will rise. Basically, it all comes down to your average Cost Per Purchase across all your marketing channels.
- Psychology: What is an attractive price for your product from a psychology point of view? Do you round your prices? If yes, at X.90, X.95, X.98, or X.99? These are all questions to think about and can actually differ from product to product (more on that later)!
- Product Costs: The last, but not the least! Your product costs a.k.a. COGS (Cost Of Goods Sold) is a significant expense to consider. In fact, pricing strategies exist which are based on someone’s COGS only!
Why should you have a pricing strategy?
Maybe you’re thinking: “Why all this effort? Can’t I just pick a price based on my feeling or use the same price as my competitors?”.
Simply said: No, you can’t!
Having a well-researched pricing strategy can make or break your business.
Without it, you will probably:
- Set your price too high, which causes you to miss out on a lot of sales.
- Set your price too low, which causes lower margins. You will miss out on potential profit and revenue, which you might have had with a proper pricing strategy.
And that’s not all.
You need a pricing strategy to make sure that you are profitable.
Let’s say that you buy your product for $5 from your supplier and sell it on your store for $20.
That might seem great, but it’s not when you also have to pay:
- $2 shipping per product
- A $10 Cost Per Purchase for your marketing costs
- A $1 transaction cost for your payment provider
- $100 in monthly apps fees
- $30 for your ecommerce platform
- And the other extra costs!
In this case, you will have a though time if you’re trying to be profitable.
This is why thinking about these things is critical before you start selling, and it’s the reason you should have a pricing strategy!
What is the best price for the products on my dropshipping store?
So, what is the best price to set for your dropshipping products?
I will explain it with a simple graph. Maybe you’ve even seen this one some time already. It’s the classic demand and revenue curve:
On the vertical axis, you will see the product price. On the horizontal axis, you will find the number of products you will sell.
Furthermore, you will see the demand curve. The higher your price, the less demand you will have, and the fewer products you will sell.
If your goal is to maximize revenue, you should pick a price point at which the price x #products sold is maximized (that’s your revenue).
In most cases, this price point of maximum revenue equals the price point of maximum profit. It is marked as the orange box in the graph.
But be careful! If a large part of your product costs comes from variable costs like Cost of Goods Sold, it may be possible that you will have more profit if you raise your price. In that case, your revenue will be a bit lower, but you will save more money from not having to buy additional products from your supplier!
To make this more clear, let me give you an example.
Let’s say that for your product, the maximum revenue point lies at $10. At that price, you will sell 100 products. Let’s assume that you have high variable costs, and buy the product from your supplier for $8.
In this case, this will be your profit (assuming you have no other expenses):
|Revenue||$10 * 100 = $1.000|
|COGS||$8 * 100 = $800|
|Profit||$1.000 – $800 = $200|
Now, let’s say you raise the price by 10%. The retail price will rise from $10 to $11. Because of this, let’s assume you will sell 10% fewer products. You will now sell 90 products instead of 100.
In this case, this will be your profit (assuming you have no other expenses):
|Revenue||$11 * 90 = $990|
|COGS||$8 * 90 = $720|
|Profit||$990 – $720 = $270|
As you can see, your revenue has decreased by $10. However, you’ve now saved $80 in COGS! Therefore, your profit is now $70 higher.
This is my point! In this case, your revenue is lower, but your profit is higher. So, always try to find a price point for which you generate maximum profit and not maximum revenue.
It’s your goal to find the optimal price point for your product. Sadly, there isn’t one formula that gives an answer for all businesses.
But, as I said, pricing strategies exist which will give you a reasonable pricing point to start from. Keep reading to learn more about the best pricing strategies for dropshipping!
Dropshipping pricing strategies
Are you ready to learn about the best way to price your products when dropshipping?
Since the best way to price a dropshipping product can depend on the product’s price at the supplier, I’ve split this section, and I will tell you how you can price low-ticket, medium-ticket, and high-ticket products!
If you like to learn with examples, don’t worry. I will pick an example product for each price level and walk you through on how to price it!
Low-ticket product ($0-$10) dropshipping pricing strategy
We will start with the low-ticket products. These products will cost you between $0 and $10 to buy from your supplier. So, what do you have to consider when pricing low-ticket dropshipping products?
- Perceived value: Typically, low-ticket products won’t have a high perceived value. Having a profit margin of $20+ is often pretty tricky with low-ticket products.
- Audience: If you’re selling low-ticket products, your goal should be to sell as many products as you can. Try and get visitors to impulse buy your product. Since your COGS are so low, you can sell your product for a lower price as well.
- Marketing costs: A good rule of thumb is to reserve 30% of your product’s retail price for marketing costs. The marketing costs depend on your product price because it’s a much bigger step to buy a 100$ product compared to a 5$ product. Therefore, the more expensive product requires a bigger marketing budget.
In other words, low-ticket products generally have a lower cost per purchase. This makes them attractive for beginners since your ad budget doesn’t need to be too big!
And now, I’m going to reveal the example product!
Here it is:
A baby anti-spill bowl!
This product will cost you around $7, including fast AliExpress Standard Shipping.
So, how should you price this product?
Actually, there are three main methods you can choose from! I will discuss them below.
Fixed dollar markup
For really low priced products, a fixed markup is often a good-enough pricing strategy.
A fixed dollar markup simply means that you add a specific dollar amount to the product’s price at your supplier.
As a rule of thumb, you should always try to maintain a $10 profit margin per sale.
This will leave you with some margin to pay for your marketing costs, taxes, and monthly fees.
For this product, applying the fixed markup pricing strategy would result in a retail price of $17. However, since this product already costs us $7 to buy and we still have all our other business expenses, we might struggle to be profitable at this price point.
So, let’s move on to the next pricing strategy.
Fixed percentage markup
With this strategy, you set your product’s retail price at a certain percentage of your purchase price.
Setting your product’s retail price at 3x (300%) of your purchase price is a good practice. This method ensures that you will have enough margin to pay for all your business expenses.
By applying this product to our product’s price ($7), we get a retail price of ($21).
However, remember what I said about people often impulse buying low-ticket products?
The lower the product’s retail price, the higher the chance that they won’t think about it more than once and just purchase the product. With low-ticket products, people don’t really care a lot about your customer service and aren’t looking for the best quality products.
Also, the lower your price, the fewer people will do market research to find a cheaper similar product.
So, in this case, I would lower the product’s price by just over one dollar, from $21 to $19.9X (I will cover the topic about rounding prices in more detail below).
By doing this, you get almost three times the money you pay for the product. And, the retail price will still start with a “1”, which makes the chance of a parent impulse buying your product once they see your awesome video ad on Facebook a lot higher!
Free plus shipping strategy
This is another pricing strategy that could work great for low-ticket products!
In case you don’t know what the free plus shipping strategy is: it is an offer where you sell a product for $0.00 and only charge the customer for shipping costs.
Here’s an example of a free plus shipping offer:
The reason why this method works so well with low-tickets products is that your COGS are so low. You can simply get away by only asking for a shipping fee and providing the actual product for “free”!
However, you will actually need to recover all your costs from the shipping cost you charge your customer.
In terms of the shipping cost, I recommend not going over $9.99. At that point, people will definitely notice that the shipping costs include the product’s price, and you are trying to trick them by letting them think you’re giving the product to them for free.
This method works best with products you can buy and ship out for less than $3 or $4 because it will be hard to extract all your business expenses otherwise.
Sadly, our example product costs $7 to buy and ship out, which is why it won’t work that well with this method.
However, if you are still interested in the free plus shipping method, click here to learn how to set it up for free on Shopify!
Medium-ticket product ($10-$25) dropshipping pricing strategy
Next up, medium-ticket products!
These products will cost you between $10 and $25 to buy from your supplier and ship out to your customers.
As we move up the price range of the products, your COGS will be rising and rising. So, to keep your profit margin sustainable, keep in mind that the retail price will be higher as well!
Here are some things to consider when pricing medium-ticket products:
- Audience: Don’t forget to think about what kind of audience you are targeting. For example, is your product for hobbyists or for people who will have a WOW moment after seeing your ad and impulse buy your product?
With hobbyists, chances are that they are passionate and know the right prices for products within their hobby. In that case, you can’t afford to price your products higher than most of the competition.
- Perceived Value: If most of your audience doesn’t know about the product yet, you can more easily price it at the product’s perceived value. This might be an advantage or a disadvantage, depending on the high of the perceived value.
- Product costs: Is there still room to make a profit when selling this product? Suppose the product costs you $20 to buy and ship out, but you can only price it at a maximum of $30 (without lowering the conversion rate significantly). In that case, chances are you won’t be profitable with this product.
I’ve chosen this product to give you pricing strategy examples for medium-ticket products:
It’s a cat toy, which shines a laser light at random places so that your cat can play with it!
This product even fits in one of the best dropshipping niches -> the pet niche!
If you’re interested in the other best dropshipping niches, take a look at our article: The 25 Best Dropshipping Niche Ideas
This product will cost you around $18 to buy from your supplier and ship it to your customer. So, how to price it?
I will discuss two effective pricing strategies:
The first one is cost-based pricing. Here, we will try to determine a selling price based on your expenses like marketing costs, COGS, hosting fees, and app costs.
When advertising with Facebook, you can expect to pay around 30% of your product’s retail price per purchase.
Let’s compare two different scenarios:
In the first one, we will set the price at $30 and see if we can be profitable.
I will assume that you sell 3-4 pieces a day, which comes out to around 100 products a month. You have a monthly Shopify basic plan of $29, Shopify app fees of $50 per month, and a monthly domain & email hosting cost of $11.
So, your total monthly fixed cost is $90, which comes out to be $0.90 per product you sell.
|FB Ads (~30%)||-$9||+$3|
|Transaction cost (~3%)||-$0.90||+$2.10|
You will see that it is possible to be profitable, but with this price, you will hardly have anything left over! And, if you get some terrible advertising days, you will probably generate a loss.
To conclude, this analysis tells us that a price of $30 is too low for this product.
So, let’s try to set the retail price at $40 and see what we will have left over at the end of the expenses:
|FB Ads (~30%)||-$12||+$10|
|Transaction cost (~3%)||-$1.2||+$8.80|
As you can see, the marketing and transaction costs are a bit higher now, but we have a nice profit of $7.90 left over at the end! This gives us a nice profit margin of around 20%.
Conclusion: you will have to charge at least $40 for this product in your dropshipping store. So, I suggest to start with a price of $40, and if it doesn’t work out as well as you’ve hoped, you can always make the price higher or lower!
By starting with a lower price like $40, you can gather some data on what your buyers look like. Once you’ve got the data, you can always try to make the price higher and use Facebook Lookalike Audiences to target people who are more likely to buy your product.
There’s one more thing left, how should you round your pricing? Do you keep it at $40? Or do you lower it to a more psychologically attractive number, like $39.95, $39.98, or $39.99?
If yes, which one do you pick? If you’re interested in this topic, keep on reading, and you will find out!
Believe it or not, there is actually a way to lower your product’s retail price, and come out with a higher profit at the end!
You can do this by using product bundles.
By doing this, you offer a product bundle: customers can buy your product and a different matching product and get a discount for both.
So, how do you use this strategy in combination with our example product ‘the laser cat toy’?
Well, here’s an example of a great product to bundle it with:
It’s an automatic water dispenser for cats. With shipping, it will cost you around $20 to get to your customer.
Now, you might think that it’s a bit expensive, but the thing is that you won’t be marketing this product, so you will save the marketing costs and can offer this product a lot cheaper in your store!
Here’s an example of what you could say to promote the bundle offer:
After working out, wouldn’t you like a nice glass of cool water? Well, guess what? Your cat would like one as well! After playing, cats need water to stay hydrated. With this automatic water dispenser, your cat will always be able to drink some water, even when you’re not home! As a one time offer, we offer our laser cat toy and the automatic water dispenser as a bundle with a 15% bundle discount on each!
Let’s now see how much extra profit you will generate with the bundle, each time someone buys it.
We will assume that the standard retail price of the water dispenser on your store is $40.
So, here’s the profit you will get when a customer buys the bundle:
|Laser toy purchase (15% discount)||+$34||+$34|
|Water dispenser purchase (15% discount)||+$34||+$68|
|COGS (Laser toy and water dispenser)||-$38||+$30|
|FB Ads (only for laser toy) (~30%)||-$12||+$18|
|Transaction cost (~3%)||-$2||+$16|
As you can see, you’ve now almost doubled your profit per sale if someone buys the bundle (from $7.90 to $15.10 left over)!
Assuming 20% of your customers pick the bundle, let’s calculate by what percentage your monthly profit will rise.
This is your monthly profit without the bundle:
|100 sales||100*7.9 = $790|
And this is your monthly profit with the bundle pricing strategy applied:
|80 sales without bundle||80*7.9 = $632|
|20 sales with bundle||20*15.10 = $302|
|Change in profit (%)||+18%|
In this situation, your monthly profit will rise by 18%, only by applying the bundle pricing strategy!
Obviously, each situation is different, and this number could be higher or lower for you.
You can also try to test with a 30% discount on the laser toy, and a 0% discount on the water dispenser, or the other way around! By experimenting and testing, you will find out which combination will get chosen the most.
Another thing to test is the bundle product. Suppose the water dispenser isn’t working as well as you had hoped. In that case, you can always try and bundle your product with a low-ticket product like a cat collar, for example.
Note that I didn’t include any additional costs of having this bundle available on your store. For example, for Shopify, you will likely pay an extra monthly price to get this feature on your dropshipping store
High-ticket product ($30+) dropshipping pricing strategy
At last, we’ve arrived at the high-ticket products.
These products will cost you at least $30 to buy from your supplier, but prices for other high-ticket products can be as high as $1.000+.
Just like the low- and medium-ticket products, high-tickets also have their own specific things you will have to consider when pricing them:
- Perceived value: When selling high-ticket products, you will have to make sure that the product’s perceived value is high. You can’t dropship a product which costs you $40 to buy, but is only worth $50 to most people. It’s essential that your product solves a big problem for people and that the product’s quality is really high. Only then will people pay a relatively high price for it.
- Taxes: Since the product you’re selling has a high-value, you will have to look into taxes to make sure you comply with all rules. For example, the EU currently has a rule which states that someone can import products with a value lower than €22 without paying import tax. So, if you’re dropshipping high-ticket products to the EU, this will be something to consider. For more information about taxes when dropshipping, this article is a good starting point.
- Marketing costs: Remember what I said about a higher marketing cost for a more expensive product? Well, high-ticket products take this to the next level since the CPP’s (cost per purchase) can be relatively high for these products. That’s why you will often need a big budget at the start to start dropshipping high-ticket products. I don’t recommend starting with these products if you are a beginner.
To discuss some pricing strategies for high-ticket dropshipping products, I’ve chosen this product as an example:
It’s a massage gun, which mainly helps relieve muscle soreness and stiffness, but has many other benefits as well. It will cost you around $50 to buy from your supplier, including shipping.
High-ticket products are probably the most difficult to price. With these luxurious products, people won’t really care about a $10 price decrease or increase. Instead, they care about a high-quality product that will solve their problem and comes with superior customer service.
If you are interested in this topic, check out this article: Customer Service for Dropshipping Stores – Complete Guide!
So, what pricing strategy fits with these luxurious high-ticket products?
Perceived value pricing
With these products, the main thing that determines how much you can charge for the product is your brand and your product’s perceived value.
If you just create a simple 1-hour one-product Shopify store and put this product in it, you will probably struggle a lot to sell this product at a “cheap” price of $75.
However, suppose you can come over to your customer as a real brand, with an excellent website, self-made videos and images, a social media following, and maybe even your logo or brand name on the product. In that case, you will be able to sell this product for $300 or more!
One example of this is Hyperice, they have taken this exact product and build their personal brand around it. Now, they are selling it for $299 apiece, and it’s a tremendous success!
As you can see, Hyperice has a fantastic website design. They make their own videos and photos and work with influencers a lot. They even have their own app!
Doing all this increases the perceived value of their product, and is the reason why people are paying such a high price for it.
So, when it comes to pricing a high-ticket product, it’s all about your brand.
If you are struggling with being profitable on your high-ticket product store, here are some tips for a higher profit margin:
- Upsell your customer with accessories: By trying to let your customer include some discounted accessories with their purchase, your profit margin and AOV (Average Order Value) will increase.
- Provide outstanding after-sales: Make sure that your customer knows exactly how the product works and what benefits it can have for them once they get it. And, in case they have any questions, provide 24/7 customer support for them. If a part is missing or the product is broken, send them a new one for free.
- Keep engaging with your customers: People who have purchased your product are extremely valuable for your business. Did you know that a study from Adobe showed that repeat customers are nine times more likely to convert than first-time shoppers?
A great way to keep your customers engaged is email marketing. Check out this article, which covers everything you need to know as an email marketing beginner.
By engaging with your customers, you can increase your Customer Lifetime Value (CLV) and potentially increase your profit margins (more on that later)!
To conclude: It’s hard for me to give you a reasonable retail price for this product. It all depends on the way the product is presented in your store!
Free shipping vs. lower product prices: Which strategy wins?
This is a dilemma that many ecommerce store owners face.
Do you set your product’s price at $50 and include free shipping, or do you set it at $45 and charge $5 for shipping?
When a customer places an order, you will get $50 in revenue in both situations, but which one is better?
Obviously, customers love free shipping. A survey from 2019 found out that half of the respondents avoid retailers that do not offer free shipping. Furthermore, 84% of respondents have specifically made a purchase because shipping was free.
Because of this, you would think that offering free shipping is a better option.
This is also my favorite strategy, but it isn’t always the best choice.
Let me tell you why.
Let’s say you’re selling $10 bowling balls. Because they are so heavy, the shipping costs are relatively high, and therefore, offering free shipping wouldn’t make a lot of sense.
You would have to price your bowling balls at $20 or $30 apiece, which could make your customers think that they are getting a better quality bowling ball than it actually is.
In this case, offering free shipping doesn’t make a lot of sense.
But, imagine you are selling 1TB USB-sticks for $200. They are small and light, so shipping won’t cost much compared to the product’s price. In that case, offering free shipping would be a great way to make your offer even more attractive!
How to round your pricing?
As you’ve probably noticed, I stuck to round prices throughout this article.
That’s because in this section, you will learn how to round your pricing!
And again, this question often depends on the kind of products you are selling.
So, let me start by answering the following question:
Should you use “odd-even pricing” (e.g. $39.95 instead of $40)?
For most products, yes!
By using odd-pricing, customers will often unconsciously perceive the price to be cheaper than what it actually is. When the product’s price is $39.95, some people will round it down to $39, while in reality, the price is much closer to $40.
However, high-ticket products often don’t use odd-even pricing. The theory behind this is that they won’t come over as a cheap, low quality, or an always-on-sale product. Rounding the pricing to whole numbers shows the customers that these products are luxurious and high quality.
Often, jewelry and luxury clothing brands apply this strategy. And even Hyperice uses it! They didn’t round their price to $349.99, for example, but kept it at a whole $349 for their Hypervolt Plus.
Best ending values for odd-even pricing
If you are selling a low- or medium-ticket product, you might be asking yourself: “What are the best ending values for odd-even pricing?”.
Sadly, I will have to disappoint you here because there is no consensus on the best ending values to round your pricing.
However, I can tell you my favorite, which is either .95 or .99. The best way to find out which one works best is to test it with your store!
Here’s some good news. We are planning to do case studies in the future, so we are probably going to test and find the best ending values for odd-even pricing ourselves. So, subscribe to our newsletter at the bottom of the page. Otherwise, you might miss the results!
How to calculate your profit when dropshipping?
Now that you know how to price your product when dropshipping, let me give you a quick overview of how you can calculate your profit when dropshipping. After all, equipped with these pricing strategies, your profit could grow quite a bit!
I’ve given some profit calculation examples already in this article, so this will just be a quick recap of some of the expenses you should consider.
The formula to calculate your profit is very simple:
Profit = Total Revenue – Total Expenses
Getting to know your revenue is easy. If you are dropshipping with Shopify, you can just go to the analytics tab and find your total revenue there:
But, calculating your total expenses can be harder. That’s because revenue only comes from one source: sales, whereas you have multiple expense sources when dropshipping.
Generally, your expenses can be split up into two types: fixed expenses and variable expenses.
Fixed expenses are independent on the number of sales you make. Some example of fixed expenses are:
- Shopify or Woocommerce hosting
- Ecommerce services
Variable expenses depend on the number of products you sell. Some examples of variable expenses are:
- COGS (Cost Of Goods Sold)
- Shipping fees
- Transaction costs
- Marketing costs
Once you’ve gathered all your expenses, calculating your profit is easy. However, keeping track of all your expenses can be a struggle. You can also use a profit tracker app to calculate your profits, but that’s a topic for another time!
What is a good profit margin when dropshipping?
Once you’ve calculated the profit, you might be wondering: “Is this a good profit margin?”.
Well, first of all, congratulations that you’re profitable! That’s already the first big step.
In terms of a good profit margin, most dropshippers aim to get a profit margin of 20%. But with some products and a lot of effort, people have also achieved profit margins of more than 50%!
So, everything is possible. But, the most important thing is to be profitable!
Don’t forget that if your profit margin in the first week is on the low side, for example, 15%, it can become higher later on if your customers decide to come back and purchase from you again. When this happens, you essentially get a “free purchase” (since you didn’t pay marketing costs for it), and your profit margin will increase!
In this scenario, the CLV (Customer Lifetime Value) is an important concept to understand. The customer lifetime value is the total revenue you get from a customer over your relationship’s total duration. The more often a customer comes back and purchases from you again, the higher the customer lifetime value will be!
If you would like to learn more about customer lifetime value, check out this article.
Congratulations, you now know everything about pricing strategies for dropshipping!
It probably was a long read for you, but I hope you have learned a lot and can apply your new knowledge to improve your dropshipping store.
In case you feel like reading another couple of great articles, then don’t forget to scroll down to my recommendations.
If you have any questions or just want to share how you are going to improve the pricing on your dropshipping store, just drop a comment below. I will be happy to hear from you!
If not, I wish you a great rest of your day, and good luck with your dropshipping journey!