Dropshipping is an eCommerce solution for entrepreneurs who want to do business online without the hassle of carrying physical goods. The pricing strategy can be a significant source of competitive advantage for your dropshipping store.
Choosing the right products and suppliers is essential. However, if you get your pricing wrong, you would not have the income to sustain your store.
This article covers several proven pricing strategies for dropshipping stores. It will help you effectively use pricing to make sales and gain a competitive advantage.
Factors influencing pricing strategies
It can be tempting to set your prices as high as possible to get high profits. However, for several factors, this may not be the best option.
Some factors influencing your pricing strategies include:
The dropshipping niche in which you operate greatly affects the pricing direction your business takes. There are high sales volumes in some industries accompanied by a much lower margin, for example, clothing. In others, low volumes of sales but higher margins is the norm, for example, furniture.
Shipping costs significantly affect your profits. You should, therefore, consider them as you set your price
High shipping costs attract high prices for the customer and vice versa.
Many online retailers choose to include shipping costs in their final price and then offer “free shipping.
Your competitors’ pricing plays a significant role in setting your store’s prices. Online customers check at least 3 different stores before deciding where to buy. So to be competitive, your prices must match theirs.
You must consider your buyers’ characteristics as you set prices. Some are more price-conscious, and some buy based on the perceived benefit they derive from a product. Considering all these factors helps you to set a price that isn’t too high or too low.
Returns are a common occurrence in both online and offline shopping. There are higher return rates, especially in dropshipping, where you cannot control what the customer receives. You thus have to account for the costs of returns.
An excellent way to do this is to estimate the number of returns as a percentage of total sales. Then, you can add that estimated cost to your price.
Pricing strategies for dropshipping stores.
1. Keystone pricing
In this pricing strategy, you double your purchase cost to determine your selling prices.
Whereas this often a straight-forward and appropriate way to price your clothes, sometimes it might be too high or too low.
For items that are of high value, rare or unique, have slow turnover, etc., keystone pricing may result in underpricing them.
Similarly, it may be hard to use keystone pricing when the items are common and easily accessible everywhere.
2. Penetration pricing
The strategy is helpful for new brands trying to gain ground in the industry. You temporarily set a low price to attract many customers and gain market share.
With this strategy, you may have to forego profit initially in exchange for brand awareness. It also helps get rid of unsold stock and drives more sales to your dropshipping store.
However, you must use this tactic sparingly. Customers may grow too accustomed to your bargain deals and not buy products at regular prices, which affects your profit.
Furthermore, having constant discounts and deals on your site may affect some customers’ perception of your product quality.
3. Psychological pricing
Traditionally, prices with odd numbers like 5, 7, and 9 attract more purchases. So, it may be a good idea to adopt these tactics when dropshipping clothing. For example, instead of just $5, you can say $4.99, which studies have shown to attract more sales.
These pricing tactics create the impression of a good deal, thus driving impulse purchases. Customers, therefore, purchase more products priced in this fashion than those with regular even numbers.
4. Competitive pricing
Competitive pricing involves using the competitors’ pricing as a benchmark for your own. Often, you then set your prices below theirs. Competitive pricing may drive customers to buy from you instead of the competitor.
However, it is not always a sustainable strategy and may bring you losses in the long run, especially if you are still a small store. It is best to find additional avenues for differentiation.
5. Premium pricing
Premium pricing works in the opposite of competitive pricing. You benchmark the competition but then price your products above theirs to create an exclusive or luxurious perception.
Non-price conscious customers prefer such stores, as it portrays high quality. Your task is to show differentiation or additional value you provide to justify your higher prices.
This strategy is limited to unique and high-value products and applies to non-price-sensitive customers. If you are selling regular products, it may yield low sales instead.
6. Anchor pricing
This pricing strategy is where you list both the original price and the discounted price. Anchor pricing paints a picture of what the customer saves by buying your product. It could drive impulse purchases to your dropshipping store.
However, you must not over exaggerate the original sales price. Customers can easily compare your store price to other retailers. If they find that you have unreasonable prices, it may affect their trust and thus reduce your sales despite your “discounts.”
7. Fixed markup pricing
The fixed mark up is often the go-to strategy for low priced products. It means that you add a specific amount to the product’s cost price.
Although it is crucial to maintain a minimum of a $10 profit margin, this depends on the specific product. You need to account for other expenses like marketing and taxes to derive your fixed markup.
8. Tiered markup
The tiered markup strategy is best for dropshipping stores selling multiple products. Under tiered pricing, you set high markups on low price items, for example, 50% on $10 products. Then add low high markups on high price items, for example, 15% on $100 products.
This strategy enables you to maximize sales and profits from low-price high-sales volume products.
9. Manufacturer Suggested Retail Price
Using the MSRP is a viable strategy for smaller businesses. It enables you to earn customers’ trust while avoiding price wars and making a profit.
The MSRP gives your customers less price shock, thus encouraging them to buy. With MSRP, you are not outpricing what the consumer expects to find. At the same time, you are not underpricing and making them suspicious.
The downside of this method is there is limited differentiation from your competitors.
It, therefore, helps to include discounts below the MSRP to compete favorably.
10. Bundle pricing
As the name suggests, this tactic is where you bundle products together and sell them as a unit.
You can put together low-price low margin products. Alternatively, you can add accessories to larger products.
This method helps you sell off items faster and separates you from the competition if you can offer deals that customers are looking for. However, you must be careful not to overdo it; otherwise, customers could become suspicious.
11. Discount pricing
With this pricing tactic, retailers keep their prices high and add a special coupon or discount to make it look like a good deal.
This tactic requires you to have a good understanding of your customers and what they value. That way, you offer them promotional benefits based on what matters to them. They become more likely to buy.
However, to maintain adequate profits, start with high prices. If you start with low prices, you will not have any profit margins when you include the discount.
Your pricing strategies can make or break your dropshipping business. Pricing is critical for driving traffic to the store, driving sales, and creating a competitive advantage.
When setting your prices, you must consider your target customers, your store’s niche, total costs, and competitors. There are numerous pricing strategies you can adopt for your dropshipping store.
You must identify the right prices that are not too high in that they scare away customers. They must also not be too low in that it affects your brand.