Pricing and margins for a dropshipping store

Many dropshipping stores fail not because they can't make sales, but because each sale makes less money than they think. A product that costs $15 and sells for $45 looks like it makes $30. Once you subtract GST, shipping, platform fees, payment fees, advertising and refunds, the real figure can be a few dollars, or a loss.

This guide shows you how to calculate your true cost per order, set prices with a buffer, find your break-even advertising cost and make price claims that comply with Australian consumer law. The examples use made-up round numbers to illustrate the method. They are not typical or recommended figures. Use your own costs, and try the margin calculator.

The true cost of an order

For each order, list every cost:

The first six are per-order costs. The rest are often monthly costs that you spread across orders.

A worked example

Here's an illustrative order. Your numbers will be different.

In this example, the profit is $8 on a $55 sale, and the break-even advertising cost is $23 per order. If advertising costs rise above that, every sale loses money.

Try your own numbers

Margin and markup

These two terms are often confused:

• Markup is profit as a percentage of cost. A $15 item sold for $30 has a 100% markup on product cost.
• Margin is profit as a percentage of the selling price. The same item has a 50% gross margin before other costs.

Gross margin before fees and advertising is a starting point. What matters is your net margin after every cost.

Setting prices

There are several ways to approach pricing:

1. Cost-plus. Add up your costs per order and add your target profit. Simple, but ignores what customers will pay.
2. Market-based. Look at what similar products sell for, then check whether you can make a profit at that price.
3. Value-based. Price according to the value to the customer, often possible for well-branded or specialised products.

In practice, most stores combine these: check the market, then make sure the numbers work at that price. If they don't, find a better supplier, increase the order value with bundles, or drop the product.

Ways to improve margins

• Raise average order value with bundles, multi-packs or complementary products.
• Negotiate supplier prices once you have volume.
• Reduce refunds by improving descriptions, photos and supplier quality.
• Improve ad efficiency by testing creative and targeting, and stopping campaigns that don't convert.
• Build repeat customers through email, which can cost less than paid ads.
• Move best sellers to local stock, which can cut delivery times and sometimes shipping costs.

GST and pricing

If you register for GST, one-eleventh of your GST-inclusive price goes to the ATO. If you keep your prices the same after registering, your margin shrinks. Plan your prices so they still work once you're registered, and remember that registration is required within 21 days of reaching $75,000 GST turnover. See our GST guide.

Legal rules for prices

Show the total price

The ACCC requires businesses to display the total price when advertising to consumers, including GST and any compulsory charges that can be calculated. Delivery fees must be disclosed clearly. Don't add surprise fees late in checkout.

Honest discounts

Sales and discounts are powerful but heavily regulated:

• 'Was/now' and strikethrough prices must reflect a genuine previous price at which the product was offered for a reasonable period.
• 'Up to' discounts must apply to a reasonable proportion of products.
• Countdown timers and "limited stock" claims must be true.
• "Free" offers must really be free, with no hidden costs built into another price.

Inflated or fake discounts can mislead consumers. The ACCC monitors online pricing practices.

Free shipping

Free shipping often improves conversion rates, but it's a cost you pay. Options include:

• building shipping into the product price;
• offering free shipping above a minimum order value;
• offering free standard shipping and charging for express.

Whatever you choose, make sure your advertised prices and delivery claims stay accurate.

Review your numbers regularly

Costs change. Suppliers raise prices, advertising gets more expensive, and currency movements affect overseas costs. Review profit per product every month, using actual data from your accounting software and ad accounts. Stop selling products that consistently lose money, however good the revenue looks.

Key points

Work out your true cost per order: product, shipping, GST, platform and payment fees, refunds and advertising. Your margin before advertising is your break-even ad spend. Price so you still profit after every cost, including GST once registered. Show total prices, make discounts genuine, and review your numbers monthly.

Related guides

Read GST for online sellers, refunds and consumer guarantees and delivery times and shipping promises.