Find your retail price for your product
It does not matter what you are selling in the online business whether it’s gifts, jewellery, clothing or even something in the service sector, if you have an online business using dropshipping. The retail price you charge will directly affect how your online business develops. Working out pricing may seem difficult, but in reality is clear-cut even when you work from home.
Your price has to cover costs and profit. It’s no use getting thousands of sales, but not making profit because you’re under charging. Some online businesses that work from Home price too low and fail to get enough revenue to give a profit. USA VAT Calculator
The price should be sufficient to safeguard sales; if it’s expensive you will not get customers to buy from you. Check you’re pricing and ensure they reflect your costs, product demand, the competition and your objectives.
An efficient way to cut prices is to lower your overheads. If your doing the work from home instead of in a shop or office its ideal. When using a Dropshipping Wholesaler to supply your online business you can then work from home without the need to find somewhere to store the stock.
Before you start on your pricing structure, you need to determine the operation costs of your business, even when you Work from Home. To make sure you do not get into a negative cash flow situation your income has to meet all your expenditures which otherwise may diminish your financial funds leading to the collapse of the business. Using a Dropshipping wholesaler can increase cashflow by cutting down on purchasing and stocking products in the online business.
You need to calculate all your online business costs, even if you sat on the laptop doing your work from home, you still have business expenses, such as rent or mortgage payments, council tax, utilities, phone and you also need to allow for your profit, you haven’t set up an online business to make a loss..
There are 3 main types of expense. Product costs, fixed costs and Variable costs.
The product costs, is the cost of the goods you sold, even using the Dropshipping process you need to cover the cost of stock, once you have calculated this it will provide your gross profit margin. Wrapping and carriage costs should also be comprised within this total. This working out is imperative to your online business, because at this point it is not viable, your not going to cover the cost of overheads, even when you work from home. The cost of products will be a reflection of your sales; you need to monitor any increase in the cost of the products and adjust the sales price accordingly (or reduce other overheads)
The fixed costs include premises costs, depreciation, salary, utilities, insurance, professional fees etc. If you Work from Home you should still allow for a portion of household bills borne by the online Business, in line with the amount of space used while you work from home. Fixed costs do not change very much, even when the amount of sales fluctuate up and down.
The variable expenses can change on a month to month basis, variable expenses like office and stationary, telephone, advertising, shipping and transport. Even if your doing work from home you should do some marketing to get prospective customers to see you. As you sell more then variable costs should also go up, for example the stock you buy from a dropshipping wholesaler, then as you sell less variable costs will drop. Seasonal periods throughout the year can cause variable expenses to change. To calculate the average monthly costing, determine your yearly cost and then divide it by 12.
Working out the selling price
The mark up formula is used by the majority of retailers and wholesalers and some manufacturers, irrespective of whether you work from home, office or warehouse. It’s computed by starting with the cost of the Dropshipping product, and then you add a percentage or predetermined figure to the equation, this then provides your selling price. Be vigilant when doing your calculations new online business owners sometimes get confused between mark-up, which is a percentage of the costs, and the gross margin, a percentage of the sales price.
A manufacturer using this formula would generally multiply the staff product material expenses between 1.05 and 1.3. So a product that costs £1.40 to make will sell for around £1.47 to £1.82
A Dropshipping supplier buying from the manufacturer would multiply the price between 1.25 and 2. So a product costing £1.60 will sell for around £2.00 to £3.20 the wholesale price is generally sold net of VAT or “plus VAT” so the retailer might pay £2.60 plus 52p VAT, totalling £3.12 make sure that you have allowed for VAT when working out the costs. Even if you work from Home with an online business, you’re still affected by VAT
An online business would multiply the Dropshipping price between 2.4 and 4 so a product costing £3.00 from a wholesaler would usually retail between £7.20 and £12.00 it is then normally rounded up to the appropriate sales price; in this example the final price would be around £7.50 or up to £11.99. The price should include any VAT unless selling to the trade.
You will probably have noticed that as the goods have passed through the different suppliers in the supply chain that the mark-up has increased. The reason for this is that the manufacturer produces products in large volumes, they sell 1000 items to a Dropshipping wholesaler at for £1600 earning 20p per item giving a £200 profit. The manufacturer will sell a number of product items to the Dropshipping wholesaler so by supplying 20 product items @ 1000 per item giving a total order value of £32000 providing a profit of £4000 per order.
The Dropshipping wholesaler will buy and store these products, then the online business retailer will order from the wholesaler, generally in multiples of 10 units at a time at a cost of £25 plus VAT per pack of 10 (£30 with the VAT), making the wholesaler 90p per unit or £9.00 per pack of 10. The retailer would buy a variety of different items, so they may order 30 lines of 10 units for £750, giving a profit of £270.
The retailer then retails each item at £7.99 making a profit of £4.99
The Cost + Formula
Most product manufacturers will use the cost plus formula for pricing. This method is where you start with the materials costs and then add on your staff outlays and a pre-determined quota for overheads then add on your desired profit, this will then give you a recommended selling price for the goods.
Competitive Pricing can be used when there is an existing product price already in the market. Usually whoever the market leader is, they will set the retail pricing, with other business attempting to contend by reducing prices to tempt customers away from the market leader. very often this can be a lethal mistake because in the end it can cheapen what could be a good product that is capable of long term rewards. When you’re considering going down this path its worth considering that businesses need large resources behind it to afford to go into a price war and survive..
To be able to price products correctly, you should be familiar with different pricing structures and know the difference between margin and mark-up. The margin is the sales percentage that’s your profit. As an example, the selling price is £16.00 Cost price is £6.00 the margin would be 62.5% then the mark up should come to 166.67% with a gross profit of £10.00. The terms mentioned may commonly be exchanged in order to find the gross margin, although this a frequent misconception. Mark-up and margin are not the same. Mark up percentage is the difference between the sales price and the cost of the product in question shown as a percentage. Gross margin % is the variance between the sales price of the product and your profit. Some traders mistakenly believe that if a necklace is marked up by 50% then you’re receiving a 50% gross margin on the sale. But in reality a 50% mark-up will only provide a gross margin of 33%
How to calculate profit margin after marking up.
Begin with the price of the product. Example 1 £5 cost price, mark up by 60% = £8.00 then £3.00 will be the gross profit, To obtain the gross margin divide your profit by the sales price £3.00/£8.00 equals 37.5%
Example 2 £7.00 cost price, mark up by £12.99 =£19.99 now your gross profit is £12.99 to work out the mark-up deduct the cost from the sales price then divide by the cost price £19.99 -£7.00 = £12.99 / £7.00 = 185.43% to obtain the profit margin divide your profit £12.99 by the sales price £19.99 £12.99 / £19.99 equals 64.96%
After you have worked out your online business costs such as rent, wages, business rates, advertising, office costs etcetera. You will then subtract these expenses from the gross profit margin. This calculation will be the pre-tax profit or loss. Although using a Dropshipping company for product sourcing and storage and by reducing costs and time if you work from home in the online business, you still need to correctly price up your Dropshipping products.