Pricing is one of the most important strategies to keep your eCommerce shop profitable. But there are so many pricing and cost types out there: what do they mean for you?
Retailers sometimes use these terms interchangeably, even though they’re very different. With so many acronyms in the world of eCommerce pricing, you need to choose the right options to keep more money in your pocket as a dropshipper.
Dive into these 5 common-but-confusing pricing options to see how they affect your eCommerce margins.
Your 5 pricing options and what they actually mean
1 - MSRP
MSRP stands for “manufacturer’s suggested retail price.” This is an unofficial number, so you won’t be penalized by the manufacturer for not following it.
MSRP is more of a guideline to help you set a price for your products. Instead of shooting in the dark, MSRP gives you a guideline to fairly price your product.
Basically, this is a product’s sticker price. You’re free to sell a product above or below MSRP as you see fit. MSRP isn’t legally binding, but manufacturers provide it to standardize their prices and give you a starting point.
2 - MAP
MAP is a different story. This stands for “minimum advertised price” and it’s a guideline provided by your manufacturer.
MAP is a dollar amount the manufacturer sets in your contract with them. The MAP price is the lowest they’ll allow you, as a reseller, to advertise the price of a product.
Notice how this is about the advertised price, though. MAP is only concerned with advertised prices, so if your customer uses a coupon or discount code to bring the price below MAP, that’s okay. As long as you advertise its price at or above MAP, you’re allowed to privately negotiate with shoppers on a lower price.
If you advertise your products below MAP on your website or online eCommerce platform, your manufacturer can ban you from selling their products, refuse to let you order more stock, or terminate the relationship entirely. Make sure your advertising efforts are aligned with your pricing strategy so you don’t step on your manufacturer’s toes.
3 - Unit cost pricing
While your manufacturer sets the MSRP and MAP, you have control over unit cost pricing. This is when you price your products based on the amount of money you spend to produce one unit.
You can calculate it like this:
Total costs of producing the product / The total number of units
The issue is that a lot of dropshippers forget to factor in all of their costs, skewing their true unit cost and profitability. Make sure your total cost includes:
- Fixed costs: These are the unchanging costs of running a business, like rent, vehicle payments, taxes, and salaried employees.
- Labor costs: This is just for hourly or wage workers. Labor costs are variable because hourly employees work based on your production needs.
- Material costs: This is also a variable cost. This should account for all the materials purchased to make a production run.
Once you calculate your cost per unit, you need to price the product so you’re profitable. You want to price the product above your costs, or your breakeven point. For example, if it costs you $5 to make a product, you need to price it above $5 to make a profit.
In practice, that means selling the product for $25 to generate a $20 profit per sale, or an 80% margin. Play with your margins using this calculator to come up with a profitable price that consumers will accept.
4 - MRP
MRP, or “maximum retail price,” is actually set by the government or industry regulators. It designates the maximum price you can sell a product for. For example, MRP might dictate that you can’t sell toilet paper to customers for more than $20 a pack.
What’s important to remember is that MRP should include all customer costs, including taxes, transportation, commission, advertising, packaging, etcetera.
And since MRP is set by the government, the penalties are pretty steep for violating the guidelines. MRP keeps goods affordable for customers, so follow these guidelines carefully to stay on the government’s good side.
5 - JOBBER
JOBBER is the price that a company will sell its goods to another retail company. As a buyer, you raise the price and sell it for a profit.
Put simply, this is the suggested price you should pay when you buy from a distributor, like list price. This is just a number, though: the actual price you pay depends on your relationship with the supplier.
JOBBER pricing is very similar to wholesale pricing because your profit margins tend to be very low. For example, if you frequently buy in bulk, the supplier will probably give you a rate that’s below JOBBER. If you’re a small operation and buy in small quantities, you’re probably stuck with pricing above JOBBER.
The bottom line
These 5 common pricing and cost types can get confusing. Ideally, your pricing and cost models should work together to keep your operation profitable. When in doubt, use a solution like Spark Shipping to make your dropshipping operation less complex and more profitable.