Nov 23, 2020
 in 
Marketing

The Most Successful Product Pricing Strategies For Dropshipping Stores

I

f you're going to be running a dropshipping store, then you will need to select one of the many product pricing strategies. And, since not all pricing strategies for dropshipping are created equal, it is important that you pick the one that is best-suited for your circumstances.

Some pricing strategies, such as geographic pricing, are incompatible with most e-commerce platforms. Shopify won't let you arbitrarily set your prices higher for customers in one state versus another. Other pricing strategies, like predatory pricing, are simply incompatible with the dropshipping business model. As a beginner selling another company's products, it's unrealistic to slash your prices to take over market share.

In this article, we will be presenting and examining the most successful product pricing strategies for dropshipping businesses. We will give you a description of how each strategy works, their advantages and disadvantages, and leave you with a shortlist of the ones we perceive to be the most successful. Instead of forcing you to agree with our position, we will be arming you with the knowledge you need to make an informed decision that aligns with your store's business plan and values.

Let's get started!

8 Successful Product Pricing Strategies for Dropshipping Stores

Strategy #1: Cost-Plus Pricing

Value-based pricing is the second entry of our list of product pricing strategies for dropshipping

Cost-plus pricing is one of the simplest product pricing strategies for dropshipping. You basically take the cost of the product and add your desired profit margin on top of it. You can either do this with a global markup (e.g. adding a 30% markup on all of your products) or by customizing the markup based on the product or category. To execute this strategy correctly, all you need to do is make sure that your margin is big enough to cover the costs that your business will incur such as inventory, marketing, and order fulfillment.

Advantages:

  • You know exactly what your margin is across the board.
  • Doesn't require much (or any) market research.
  • It is extremely easy to change your prices, and some programs (such as DropCommerce) allow you to change the global mark-up on all of your products at once, with the click of a button.

Disadvantages:

  • The mark-up does not always align with the value that your customers perceive. Some customers will be willing to pay more for some products than you are charging, while other customers will find the same mark-up to be too expensive.
  • This strategy can leave you with some odd pricing if left unadjusted (e.g. $25.13 instead of $24.99).
  • It can be difficult to determine how your overhead costs (i.e. expenses like rent, wages, Shopify subscriptions) should be tied into each product's markup.

Strategy #2: Value-Based Pricing

Value-based pricing is one of the best product pricing strategies for dropshipping because it focuses on delivered value rather than cost. In this strategy, you price your products according to the value that the consumer receives. If they value the product at $100, let them pay it. This is a particularly relevant strategy if your product offerings are unique since this will make it difficult for consumers to accurately identify what they think the product is worth. This pricing will more accurately reflect what the customers are willing to pay, leading to higher profit margins.

Also, when you find that shoppers aren’t responding well to a particular price point, you can begin determining how to add more value, rather than just lowering the price.

Advantages:

  • Maximizes profits by accurately gauging customer willingness-to-pay.
  • The emphasis on delivering value opens the door to starting a loyalty or affiliate program.
  • You can add value through different methods like faster shipping, better packaging, or extended warranties, and then charge more.

Disadvantages:

  • It can be difficult to accurately quantify the value that your customers perceive.
  • Your customers won't appreciate it if you're constantly raising your prices every time they show an appreciation for your products.
  • Allows for other companies to undercut your prices, particularly when you are selling products unbranded (or the same brand of) products.

Strategy #3: Competition-Based Pricing 

Competition-based pricing is one of your options for products in your dropshipping store

Competition-based pricing is one of the most commonly-used product pricing strategies for dropshipping stores. In competition-based pricing, you set your prices according to what your competition is charging. If your competitors are all charging around the same price point, then you can select a similar price point without drawing much attention. This is an especially relevant strategy for businesses that sell homogenous goods because customers would be unwilling to pay more than the market price for something they can purchase elsewhere.

Advantages:

  • If you find a way to get your products for less, then you can undercut the market and take over market share.
  • You can piggyback your competitor’s brand perception by selecting a price point similar to theirs, despite not having built up your brand image to the same degree.
  • Takes advantage of how valuable people perceive your competitors' products to be.

Disadvantages:

  • Since your margins are fairly well established, your industry is vulnerable to predatory or penetration pricing (where a new entrant aggressively prices their products at a loss to take your market share).
  • If you focus your efforts on charging the same as your competitors, your margins might not be big enough to cover all of your costs. This is common if your competitors have more economies of scale (i.e. their per-unit costs are lower because they sell in higher volumes).
  • You'll need to constantly stay up-to-date with what your competitors' are offering and charging.

Strategy #4: Price Skimming

Price skimming is a product pricing strategy where you initially set your prices very high, knowing that you will slowly reduce them over time. This allows you to charge more from your enthusiastic early adopters, and slowly reduce your prices to a point that the mainstream audience will be interested in. This pricing strategy is commonly used for technological advancements. Brand new devices will come out with a new feature and a premium price tag, and over the next few month or years, the price is slowly reduced to a fraction of what it once was.

Advantages:

  • Allows you to test the price elasticity of demand for your products, letting you know how your demand varies by price point.
  • Allows you to start off at your most profitable and recoup some of the losses from developing and launching the product.
  • You can position the reduced price as a discount in your marketing activities, further incentivizing people to purchase.

Disadvantages:

  • Not especially suited for markets where shoppers have a lot of similar products to choose from.
  • Can alienate your early adopters (due to the later price increases).
  • It can be difficult to find a way to justify the higher price point if dropshipping products customers already have access to.

Strategy #5: High-Low Pricing

Price skimming is a commonly-used product pricing strategy, especially in clothing stores

High-low pricing is a product pricing strategy similar to price skimming, where the initial price is high and lowered at a later point in time. What makes this strategy different than price skimming is that the change in price is not so much related to the passing of time as it is to a decline in the product’s novelty or relevance. Most retail clothing stores operate with some version of this pricing strategy. During the last few months of winter and early spring, summer clothing is at its highest price point. As summer passes, and the cold weather approaches, the need for summer clothing is decreased, and prices are lowered to clear out old inventory. This strategy appeals to the human desire to capitalize on sales and also helps to explain consumer behavior during events like Black Friday. Everyone loves a good sale.

Advantages:

  • Allows you to test how demand varies at the different price points you offer throughout the year.
  • A useful strategy for clearing out old versions of products or unwanted inventory.
  • Appeals to the human desire for buying products on sale.

Disadvantages:

  • Customers might be hesitant to buy your products if they believe that you will soon be offering a sale.
  • This strategy isn't great if you are trying to create a premium brand image and high prices. Luxury brands like Louis Vuitton go so far as destroying old inventory rather than discounting it.
  • As a dropshipping merchant, you may not have much freedom (or need) to slash prices on your products since you are not investing in inventory.

Strategy #6: Psychological Pricing

Psychological pricing is a product pricing strategy where you capitalize on human psychology and biases to determine your prices. One of the best examples of psychological pricing is the human appreciation for rounded-numbers, and the famous “9-digit effect”. Rounded numbers like $25 are simpler and more memorable than highly-specific numbers like $25.37.

The “9-digit effect” is something you will surely recognize, and states that shoppers are more likely to buy products with prices that end with the digits “99”. For example, instead of selling something at $25, you can sell it at $24.99. As it turns out, this theory is backed up with some sound psychological practices that you can learn more about here. Another manifestation of this strategy comes from including the shipping cost in the product, versus charging for it separately. Even though the consumer pays the same final price in both instances, some people feel differently about paying for shipping than they do for products.‍

Advantages:

  • Takes an adaptive approach to consumer behavior, meeting your customers at a price point that makes sense to them.
  • Presents you with an opportunity to integrate your brand's values (e.g. simplicity or transparency) into your pricing strategy.
  • Gives you some actionable psychological 'hacks' that you can use to optimize your prices.

Disadvantages:

  • It can create long-term pricing expectations, or drive customers away if they feel like they are being manipulated.
  • It can require consistent levels of demand to be effective. If your demand is always fluctuating, you will have a hard time adapting your psychological pricing strategy to suit it.
  • It's not always convenient to bundle your shipping cost into your product prices if you are using a platform like Shopify or BigCommerce.

Strategy #7: Bundle Pricing

Bundle pricing is used in fast-food restaurants, among other places

Bundle pricing is a product pricing strategy where you bundle several products together and offer a single price. This is a good strategy for increasing your order value since you are increasing the number of products per order. It is usually best to offer a discount on the bundle, otherwise, the shopper might not see the point in buying more than they originally intended.  

A good example of this is the commonly recognized phrase “would you like fries with that?”, which has become standard practice in the fast-food industry. This simple question nudges the customer towards purchasing more, which increases the merchant's revenue and average order value (see our article on upselling for more info). Within bundle pricing, there are several sub-strategies. You can go with pure bundling (i.e. items are only available in a bundle). Or, you can opt for mixed bundling (i.e. customers can also purchase products on their own). But, we will leave those for a later blog post.

Advantages:

  • Can increase your average order value if implemented correctly.
  • Allows you to sell your lesser-known products with your most popular ones, which can also improve your margins.
  • Adds value to your users by suggesting products that they may desire or need.

Disadvantages:

  • Can cannibalize your margins on the products that consumers were likely to purchase on their own for the full price.
  • It will likely require you to offer the bundle at a discount compared to the sum of the individual products.  This can lead to higher revenue but lower margins.
  • You will need to keep an eye on the inventory levels of all the products in the bundle.

Strategy #8: Captive-Product Pricing

Captive-product pricing is one of the most profitable product pricing strategies when executed properly

Captive-product pricing can be one of the most profitable product pricing strategies when executed correctly. This is a strategy that is generally used when one product relies on another for usage. The customer must have the first product in order to use the second. The strategy then involves setting the price artificially low for the first product to incentivize them to purchase it, leading to them purchasing (and re-purchasing) the second product that has higher margins.

One of the best examples of this is printers and printer ink. Printers often have their prices heavily reduced or are even given away, because they rely on a specific kind of ink cartridge. Once the initial ink cartridge runs out, the consumer must purchase another at a much higher price point. While you might lose money on the printer, your losses are recouped by repeatedly selling the product with higher margins (i.e. the ink). This pricing strategy is also used on cameras and film, razors and razor blades, video game consoles & video games, and more.

Advantages:

  • Helps draw customers into your ecosystem and steal market share from your competitors.
  • Can make the customer dependent on you, if you are the only store that offers the disposable item.
  • Lends itself to a subscription model, which is great for recurring revenue.

Disadvantages:

  • The high prices of the product sold on a recurring basis can frustrate some customers into looking for alternatives.
  • You may take a loss on the sale of the initial products. This can be dangerous if the customer can purchase the disposable product for cheaper somewhere else.
  • Some customers simply won't repurchase. They would rather get rid of the printer than buy more ink at full-price.

Which Product Pricing Strategies Are Best for Dropshipping?

Here are our winners - The most successful product pricing strategies for dropshipping!

Value-Based Pricing:

Value-based pricing is the highest-ranked product pricing strategy on this list because it is a particularly effective strategy for dropshipping. This is especially true if you can position your product as a solution to a problem that the consumer is facing. For example, if you are selling back braces to consumers with back problems, then the amount they will be willing to pay will have little relation to the product's cost. People with back pain don't care if the product costs $50 or $100. The value of reducing one's pain is priceless. However, in order to be as effective as possible, we recommend you work with a small catalog of products. You want to solve a small number of problems well, so don't stretch yourself too thin. For more information on this, read our article on niche vs one-product stores.  

Competition-Based Pricing:

Competition-based pricing is another highly effective strategy for dropshipping because of how easy it is to perform market research. Since you are selling another company's products, you can research what other resellers are charging. You can usually find other stores selling your products by searching google for the product's name, images, or checking Amazon. Keep in mind that some of these other merchants may have developed a more prestigious brand image than you. You'll have to take this into account before you copy their price point. The one stipulation for this is that you will want to research and ensure that your competitors are actually selling. You don't want to benchmark your price with a store that is not performing well. If you do, they will drag you down with them.

Bundle Pricing:

Bundle pricing is our third recommended strategy in dropshipping for several reasons. First, it helps increase your average order revenue. This is important because you might be spending more marketing dollars on acquiring each customer than a larger, more established brand would. So, you want to make your marketing budget go as far as possible. Second, with dropshipping, you'll have access to a wide selection of products, so sourcing related products to bundle together is easy. Lastly, it provides you with insights into what your customers want. Do they prefer bundle A or bundle B? Do they purchase more at price X or price Y? Conducting these tests will give you a good idea of what your customers are looking for, and these insights will be great for your marketing activities and future business ideas.

If you enjoyed this list of successful product pricing strategies, then make sure to check out:

Useful Chrome Extensions for Entrepreneurs and Dropshippers - Top 6

What is Dropshipping? The Ultimate Overview

30 Free Online Resources for Dropshippers and Entrepreneurs

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