How to Price Dropshipping Products: Margins, Fees and Break-Even

It is tempting to price a product by doubling the supplier cost and calling it a day. Sometimes that works. More often it hides a loss, because the supplier cost is only one of several costs on every order. A few minutes of arithmetic before launch is better than a month of ads at a loss.

List every cost per order

For each product, write down:

• Product cost from the supplier.
• Shipping cost from the supplier, if charged separately.
• Payment processing: usually a percentage of the sale plus a fixed fee.
• Platform fees, if your store plan or marketplace takes a cut.
• Advertising cost per order. In a test, this is unknown, so you use a target.
• Refunds and chargebacks. Assume a small percentage of orders.
• Tools and overhead, spread over your orders.

A worked example

All numbers here are for illustration only. A product sells for 34.90.

1. Product cost and shipping from the supplier: 13.40
2. Payment processing at about 3 percent plus a fixed fee: 1.50
3. Allowance for refunds: 1.00

That leaves 19.00 before advertising. This is your break-even ad cost: if you spend more than 19.00 on ads to get one order, you lose money on it. If you spend 10.00, you make 9.00.

Work out the break-even return on ad spend

Divide your selling price by your break-even ad cost. In the example, 34.90 divided by 19.00 is about 1.84. This is the minimum return on ad spend (ROAS) at which you do not lose. Any ad campaign that returns less than that is losing money, and your target should be comfortably above it so there is a profit left over.

If your usual ROAS in your niche is much lower than your break-even, the price is too low or the product is wrong.

Choose a price

Three methods, in order of usefulness:

• Margin first. Decide the margin you need, then check that the market will pay the price this gives.
• Competitor comparison. See what similar stores charge. You do not have to be the cheapest, and being the cheapest is a weak strategy for a small store.
• Value. What would the product save or give the customer? A product that solves a real problem can carry a higher price.

Small tricks that help

• Prices ending in .90 or .95 are common in many markets and are tested widely.
• Offering a bundle, such as two for a slightly lower price each, raises the order value and makes ads more efficient.
• Showing the shipping cost inside the product price and offering free shipping often converts better than a separate charge, but check that your margin allows it.

Review regularly

Supplier prices change, and so do ad costs. Check your margin on your top products every month. If the supplier price goes up, our guide to what to do when a supplier raises prices covers the options.

Good pricing will not rescue a product nobody wants, but bad pricing can ruin a product that people do want.