In traditional e-commerce, the seller determines the price based on the cost of the product, expenses, and the desired profit margin. They purchase the product, rent storage space, pay taxes, logistics, customs duties, employee salaries, and cover website domain, hosting, and advertising costs.

In dropshipping, it's a bit different. The seller doesn’t buy the product, rent warehouses, or handle delivery. Essentially, they only spend money on marketing and promotion. The profit comes from the markup. The amount of markup directly impacts the net profit in dropshipping.

To calculate the markup correctly, it’s crucial to understand what makes up the product price. Otherwise, you risk losing money and not even covering your marketing costs.

In dropshipping, the price is made up of the wholesale price, retail price, margin, and markup. Let’s break it down:

1. Wholesale Price — This is the price of the product from the supplier. For example, the prices in the 4Partners catalog.

Wholesale price of the New Balance 530 sneakers in the 4Partners catalog.

2. Retail Price — The price at which the partner sells the product in their store.

Market price of the New Balance 530 sneakers in Alimart online store.

3. Margin — This is the difference between the final price of the product and its cost price.

Margin ≠ Revenue. It’s the difference between revenue and variable costs. Revenue refers to all the money the online store owner receives after selling the product.

Example: A partner buys New Balance sneakers from the supplier for $161. They then add their fixed and variable expenses, such as advertising, taxes, employee salaries, and website hosting. In the end, they sell the sneakers in their online store for $217. The margin will be $56 or 25%

4. Markup — The amount the partner adds to the product's cost price in order to make a profit.

Example:
The supplier's price for New Balance NB 530 sneakers is $161. The online store sells them for $217. Markup — 34%

Pricing strategy is a crucial part of any dropshipping business. It helps determine the final price of a product that will satisfy both the buyer and the seller.

Pricing directly affects the ability to compete with other dropshippers:

• If the products are priced higher than the market average — the online store will lose many potential customers.

• If the products are priced below the market average — the online store risks devaluing its brand and may lose the trust of skeptical buyers.

In dropshipping, the markup has a direct impact on the store’s profit. It can vary as long as the final price is lower than competitors' and higher than the breakeven point.

The optimal markup is usually between 20% and 50%, but it can vary depending on the niche and the competition. To calculate the markup correctly:

1. Determine the Minimum Price — This amount should cover all expenses, such as advertising, employee salaries, taxes, and hosting fees. The minimum retail price ensures that the seller doesn't lose money.

Here’s how to do it:

• Determine the cost price of the product — This is the price you pay to the supplier for the product.

• Consider payment system fees — Take into account any transaction fees from payment processors.

• Calculate marketing expenses — Include the costs of advertising and promoting the product.

• Account for taxes — For example, VAT (Value Added Tax).

2. Determine the Break-even Point — This is when your revenue equals your expenses. In other words, it’s the price at which the seller sells "at zero" — neither making a profit nor a loss.
The break-even point can be calculated using the following formula:

Example: The online store sells sneakers. Fixed costs: hosting, advertising, manager's salary — $250. One pair of sneakers is sold for $80, and the supplier price is $40. Margin — $40.

Break-even point calculation:
Break-even point = 250 / 40 = 6.25

To avoid a loss but not make a profit, the dropshipping store needs to sell at least 7 pairs of sneakers per month.

Break-even point with target profit can be calculated using the formula:

Example:
The online store sells sneakers. Fixed costs: hosting, advertising, manager's salary — $250. One pair of sneakers is sold for $80, and the supplier price is $40. Margin — $40. The store wants to earn $400 in profit.

Break-even point with target profit calculation:
Break-even point = ($250 + $400) ÷ $40
Break-even point = $650 ÷ $40
Break-even point = 16.25

To cover the fixed costs and earn $400 in profit, the store needs to sell at least 17 pairs of sneakers.

Let’s imagine: the online store seller has analyzed the income, expenses, profit from sales, and advertising costs, and realized that the prices are either too high — above the market rate, or too low — below the market rate.

• If the markup is too low — the profit won’t cover the expenses, resulting in a loss for the business.

• If the markup is too high — fewer people will buy the product. The online store will then have to spend more money on marketing to attract customers

Here are two approaches to fix the prices:

1. Quickly adjust the price if the online store doesn't yet have a loyal customer base.

2. Gradually adjust the price if the online store already has regular customers.

4Partners has supported the launch of over 20 online stores, including ShopoTam, Eqsla, Dadamart, Happybunny, Navisale, Alimart, and Electrodela. Let’s explore how our partners determine their markup by looking at Alimart.

Alimart is a large dropshipping store, which offers 7 million original branded products across 9 categories: clothing and footwear, beauty, electronics, home appliances, computers, construction, home improvement, vitamins, and dietary supplements.

Let’s compare the prices of Alimart’s products with those from other online stores and marketplaces:

The price of the Smeg Electric Grinder at Alimart

The price of the Smeg Electric Grinder at Amazon

On Amazon, the Smeg electric grinder costs $329. This is $100 more expensive than in our partner’s online store. While the marketplace delivers the product within a week, customers will pay 30% more for their purchase. Alimart, on the other hand, delivers the grinder in two weeks but offers a significantly better price.

Let’s check the price of the Smeg Electric Grinder from the 4Partners' supplier and calculate the margin:

The price of the Smeg Electric Grinder at 4Partners

The wholesale price of the Smeg Electric Grinder is $202. Alimart sells it for $229.

The Smeg Electric Grinder is cheaper at Alimart. This means customers can save 30%. At the same time, the store will have a margin of $27.

To calculate the net profit, let’s assume the total expenses for selling the grinder are $13.

→ Pricing strategy is crucial. It helps you compete with other sellers.

→ The price of a product is made up of the wholesale price, retail price, margin, and markup.

→ Incorrect markup leads to losses. If the online store doesn’t yet have a loyal customer base, prices can be adjusted quickly. However, if there are regular customers, it’s best to adjust prices gradually, in several steps.

→ Alimart is a dropshipping store that sells over 7 million original branded products. The prices at our partner’s store are lower than on well-known marketplaces. Moreover, Alimart maintains a stable margin and, most importantly, profitability.