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DropShipping up-to-date: Correct calculation made easy
DropShipping offers immense advantages for founders and entrepreneurs in the e-commerce sector. In order for the trading model to run really smoothly, the sales prices in the shop must be calculated in a professional manner. We explain step by step what characterizes an optimal calculation and provide you with the necessary specialist knowledge to confidently calculate the sales prices for your shop.
If the price calculation fails, your business is on the brink
In the field of drop shipping, the motto “learning by doing” is often the method of choice. As a founder and prospective entrepreneur, you can often find the right solutions to certain questions through concentrated reflection or by acquiring the experiences that, over time, lead you to make the right decisions.
In one respect, however, it is imperative to go to work with a solid foundation of specialist knowledge instead. We are talking about the calculation of the sales prices in the shop. The rule here is that even small mistakes can lead to major consequences. Ultimately, a mistake in the calculation does not affect the entrepreneur once, but with every single sale. With this the scope of this area should already have become clear.
In the following article we explain the consequences of incorrect calculations, show you the differences between the price determination for DropShipper and classic online retailers, explain all the terms that play a role in the calculation and provide you with a complete spreadsheet for your own price calculations to disposal. In addition, we provide you with selected practical tips on all aspects of the topic and give you instructions on how you can always keep your calculations in the optimal range over the long term.
The calculation determines your success with DropShipping
One thing is clear to all of us: Anyone who takes the effort to found their own company and get it started with a lot of work will definitely want success. This is understood to mean a status in relation to one's own company, which leads to stable sales and profits through economically good results. There are a number of factors that ultimately determine whether a company will be and will remain successful or not. Examples of such factors are, for example, the selection of the products and the maintenance of the assortments, the suitability of the suppliers or the service level in the web shop.
Unfortunately, one important success factor is often forgotten or at least not considered intensively enough. We are talking about the calculation of the sales prices in the shop. Of course, theoretically, you could go about it by taking a single product and developing an idea of what price you might be able to sell to interested customers. This intuitive approach ultimately also means that at the end of the day every item in the shop has a sales price. However, if you set your prices more or less from your gut, you run the risk of making serious mistakes.
A decision with far-reaching consequences
Let's take a closer look at the consequences of such errors. It always becomes problematic when our sales price is not sufficient to cover all the costs and also generate a certain profit. Now, dealers who calculate intuitively would reply that they know the purchase price of their articles and that they are careful not to set the sales price below it. Nice and good. However, the costs that have to be taken into account are by no means limited to the pure purchase prices.
There is a multitude of other cost potentials that must be taken into account. If this is not the case, losses creep into the company, sometimes over a longer period of time. Often you do not even notice this because the billing of costs and fees takes place at different times. If we are simultaneously dealing with a phase in which sales tend to increase, then the account balance may even suggest a profit, while at the same time we are losing massive amounts of money.
Particularly bad in this context: With every additional sale, we automatically increase our losses. We have then reached a situation in which the actually desired development of our shop, the highest possible growth in terms of visitor numbers and sales, is causing us great damage. As a dropshipping retailer, you shouldn't let it get that far and you have to develop strategies for a professional calculation early enough.
Calculation for DropShipper and classic online retailers
The difference between the situation of a classic shop operator on the one hand and that of a drop shipping retailer on the other is considerable. The very different processing models of the two groups are particularly important in this context. While the classic online retailer buys goods in advance at their own risk and even stores and dispatches them expensively, the DropShipper actually has nothing to do with the entire area of logistics. On the one hand, this has an effect on the risk-opportunity ratio of the business concepts and, on the other hand, it also has an influence on the optimal calculation, as we will see in a moment.
If you compare the calculation of the sales prices with the DropShipper and the classic shop operator, then different factors are decisive. On the one hand, there are cost items that only the DropShipping retailer has to consider, while the normal retailer can ignore them. On the other hand, there are costs that have to be included in the calculation that only the classic retailer knows, while they are unknown to the DropShipper. One can clearly see that it would be disastrous to lump both forms of online trading together. Instead, the differences must be meticulously considered.
DropShipping and traditional online shop
Let's start with the aspects that the DropShipping retailer also has to consider. Firstly, there are fees that the DropShipping wholesaler charges for shipping to the end customer. These costs have to be negotiated individually with the suppliers and can vary widely. In this context, it is important to actively negotiate such cost items with manufacturers and wholesalers.
In addition, as a DropShipper you often have to pay a little more for items than the classic retailer. After all, they buy several products at the same time and in this way usually receive a better discount. In addition, with regard to the general costs in the company, you have to pay attention to whether the additional requirements for a suitable DropShipping shop system, such as B. Shopify may lead to higher costs here.
For the classic online retailer, it looks much more drastic at this point. Among other things, he has to take into account the costs for storage, storage ancillary costs, warehouse personnel, packaging material and shipping costs within his calculation. In summary, these expenses can add up to considerable amounts that must be taken into account in the calculation of each individual sales price.
If you include this, then the dropshipping retailer usually has an advantage even if you include its additional cost items. In any case, it is important to always adapt the calculation of the specific sales prices to the respective business and trading model selected with its individual costs and expenses, if you want to prevent unconsciously producing losses.
These terms and parameters play a role in the calculation
Sometimes newcomers to online trading imagine that they only have to determine the purchase price of their products and then add a certain mark-up to them, which then automatically turns into a profit on every sale. However, this does not apply in this form. Of course, the pure purchase price is an important factor when it comes to calculating sales prices. However, there are many other factors as well, as the table below shows you quite clearly. So that you know exactly what the individual cost items and calculation parameters are all about, we explain them below.
First of all, it is important to distinguish between net and gross prices. One speaks of a gross price whenever a price already includes the statutory sales tax, which is usually 19 percent for most products. The net price, on the other hand, is the price without sales tax. As a businessman, when you talk to your wholesaler about prices, they will always give you the net price. The additional sales tax is a transitory item for you, as you can claim it directly from the tax office.
If, on the other hand, you talk to your customers about prices, it is mandatory that you state the gross prices. The private consumer has no way of getting the sales tax paid back from the tax office. Calculations of prices are therefore always based on the net purchase price and ultimately lead to a gross sales price.
Discounts and discounts:
Possible deductions for you as a DropShipper
Depending on the negotiations with your suppliers, a total of three different items can be deducted from your actual purchase price. First, the wholesaler can give you a discount because you are a reseller. Second, you can receive a bonus of a certain amount because, for example, you have bought a certain amount of items during a certain period of time. Thirdly, you have the option of deducting a discount from the invoice price if you pay the invoice within a certain period of time.
Conversely, however, it is also possible for the supplier to charge you a certain surcharge for handling the shipping for you. If you subtract the discounts from the net list price and add the surcharges, you will receive your actual subscription price.
Purchasing alone, however, does not fully cover the costs of purchasing goods. You have to take into account trading costs, marketing costs, fees for shop systems and marketplaces, and fees for payment processing. Commercial costs are all the administrative and general costs that you have to divide by the number of items sold per month to find out how they affect each product.
The same applies to the marketing expenses as well as the fees that you, either fixed or percentage, for the use of shop systems such as Shopify, and marketplaces have to pay. Payment transaction costs must also be taken into account. After all these costs have been listed and added to the purchase price, you will receive the cost price. All you have to do is add your desired profit and finally the sales tax to get the gross sales price.
[Info table] The way to an optimal calculation
In the last section we explained all the terms that play a role in the calculation. So that the calculation of sales prices for your DropShipping shop does not remain an abstract matter, you will find a table below that explains step by step how you should proceed with the calculation. On the one hand, you will rediscover the various discount and cost factors that we have already presented. These are briefly explained again.
We also provide you with an initial assessment of the amount of the individual positions. Another column shows you which you have to calculate the individual factors specifically. And finally, on the right-hand side, we have used an example to show you the results of the individual arithmetic operations. This column is used for clarity and control.
The best thing to do is to transfer the positions and calculation steps to your own Excel table, which you can then use to semi-automatically calculate the sales prices for your DropShipping shop in the future.
|Pricing factors||Calculation step||[€]|
|Net list purchase price||100,00|
|- Discount||5,0%||100,00 * 0,05||-5,00|
|- bonus||2,5%||100,00 * 0,025||-2,50|
|= Target purchase price||92,50|
|- discount||2,0%||92,50 * 0,02||-1,91|
|= Purchase price||90,59|
|Wholesalers' fees for dropshipping handling||up to € 20 per shipment, here € 7||7,00||+7,00|
|= Subscription price||97,59|
|+ Operating costs||All administrative and sales overheads (per month) per product sold (per month)||€ 5,100: 1,500 products sold||+3,40|
|+ Marketing costs||Depending on the advertising channel between 3% and 100%, here 20%||97,59 * 0,20||+19,52|
|+ Shop system / marketplace fees||Depending on various factors, here shopify $ 29 / month¹ + 2.0% of the sales price||(29 €: 1,500 products sold) + (194.40 * 0.02)||+3,91²|
|+ Payment provider fees||here PayPal with 1.9% of the sales price + € 0.35 per payment process||(194,37 * 0,019) + 0,35||+4,19¹|
|= Cost price||128,61|
|+ Profit||Depending on the product between 5% and 100%, here 27%||128,61 * 0,27||+34,72|
|= Cash sale price||163,33|
|+ Sales tax||19,0%||163,33 * 0,19||+31,03|
|= Gross sales price||194,36|
¹ Take into account the daily exchange rate when converting
² if the gross sales price is not yet known, an imputed approximate value must be used here
With these tips, the DropShipping calculation works optimally
The calculation of sales prices in the DropShipping shop and the routine handling of all important cost items require a little time and practice. In order to make the transition to systematic and professional calculation a little easier for you, the following tips and information describe how you should proceed specifically.
The price calculation determines your economic survival
Always keep in mind that the calculation of your sales prices is a success factor with considerable consequences. It cannot be presented drastically enough: Even a comparatively small calculation error when determining the sales prices in the DropShipping shop can end in disaster with a higher number of sales.
Just imagine if you made a mistake like this and lost only two euros per product sold. The consequence would not only be that your company would constantly remain in the red and not bring in a penny of profit. In fact, you would see a significant loss. With 1,000 products sold per month, the loss is already 2,000 euros. With 5,000 products we are already talking about a minus of 10,000 euros. This goes for month after month and will ruin you in no time.
Therefore, take the subject of costing very seriously and make it a top priority in the company. If you don't have any money to give away, which of course we assume, then every single item in the range has to be meticulously calculated and precisely calculated.
The sales prices are part of modern marketing
Ask yourself a very interesting question with us. What do you think: Is the quality of a higher-priced product generally higher than that of an item in the lower-price range? Let's give it a very specific name. For example, think of jeans. On the one hand, this is offered in retail for around 20 euros per pair of pants.
If you switch to the branded segment, it will be no effort to find jeans for 80 euros, 100 euros or even 200 euros in stores. And if you switch to the very exclusive area, there will even be jeans for 500 euros. 1,000 euros or even higher amounts are required. Do you assume that a pair of jeans for € 200 is ten times better than a pair of pants for € 20?
In order to be able to answer this question, you have to know that from a purely technical point of view it is almost impossible to produce jeans that cost more than 10 euros to manufacture. This applies to the cheap pants as well as to the exclusive and extremely expensive product. So we have to realize that sales prices are above all marketing. The expensive trousers have a higher quality due to their price and you should also take this principle into account in your own shop.
The systematic calculation is an absolute must
There may be one or the other dealer, including an experienced businessman from time to time, who more or less calculates his prices on his own instinct. This type of entrepreneur considers a certain purchase price and then intuitively determines the price at which the product is to be offered in the store or in the web shop. On the one hand, one can of course admire such an approach. After all, these candidates save a lot of time because you don't have to spend a lot of time calculating sales prices.
On the other hand, they also run a considerable risk of having to accept losses.And even then, if your intuitive setting of prices does not lead to losses, then you can never say clearly what you actually earn with which product. On closer inspection, this gives a rather dubious impression.
Instead, we would like to recommend that you always calculate sales prices for your DropShipping shop in a standardized and systematic manner. This is the only way to keep full control over the price level in the shop and the profit that your company generates.
Monitoring the competition and the market is essential
Undoubtedly one of the toughest questions when it comes to calculating prices in online trading is determining the actual profit you want to make on a product. There is a considerable range of percentage surcharges, the specific amount of which is determined on the one hand by your personal wishes and ideas and on the other hand by external circumstances. This primarily refers to the prices of other providers who offer their customers identical or similar products.
Ultimately, it must be clear to you that you have no chance of successful sales on the Internet if you are more expensive than the competition. And on the other hand, there is no point in foregoing profit if, given the level of the market, there was no problem with charging more for an item.
With this in mind, we advise you to deal regularly and thoroughly with the prices that your competitors are charging. Try to get an overview in relation to the price level in the entire market segment and orientate yourself strictly and consequently when determining your own profits.
Sometimes sales prices need to be extremely fixed
So far, we have conveyed to you that the calculation of sales prices for your DropShipping shop can and must always be based on very clear, unambiguous and comprehensible criteria. Within the spreadsheet there are various factors that we need to prove with numbers. If you then carry out a corresponding calculation, you finally get a sales price that is within the safe range. As a rule, one should not deviate significantly from this.
There are, however, certain exceptions. Sometimes it can be useful or even necessary to consciously make changes to the calculation basis of certain products. This is especially the case when it comes to gaining market share or keeping competitors at a distance.
We are talking about offering goods much cheaper than the spreadsheet suggests and thus consciously accepting that there will be losses. In this way you can reach many customers very quickly and record numerous sales within a short period of time. Of course, such a measure can only ever be an exception that is rarely used and only after careful consideration. Basically, you are investing your profits directly into marketing, which can sometimes be very useful.
With regard to the calculation, you should always stay on the ball
At this point you have gained a lot of specialist knowledge on the subject of costing and now you know exactly how to proceed if you want to calculate the sales prices in the DropShipping shop professionally and seriously. In this context, we have not only conveyed the basic terms to you, but have also made it clear to you again and again how much errors in the calculation can damage your company.
This presentation is intended to motivate you in the long term to always make your calculations around the sales prices very thoroughly and carefully. Always be guided by concrete facts and never by your gut instinct.
Over time, the temptation will increase to simply calculate intuitively in one case or another. Do not get weak at such moments and commit yourself to checking the results of your asking price at least by entering the central data into your spreadsheet. If you have set up the relevant charts well and carefully, it is usually sufficient to enter very little data to be on the safe side when it comes to calculations.
Stick to this procedure permanently and remind your employees, if you decide to entrust them with one or the other task in terms of costing, to proceed in the same way.
Take a look at expenses:
Reduce costs within the calculation
On the other hand, you should always try to keep the costs that play a role in the calculation as low as possible. If you can realize savings here, then either the profit can be increased or you can offer your products more cheaply in the future and in this way receive additional market shares. It is therefore always worthwhile to take a critical look at the expenses and also to think about possible savings.
This works particularly well through regular negotiations with your suppliers. If the wholesalers give you higher discounts or bonuses, increase the discount limit or reduce the costs for shipping processing, then this will have a direct impact on your profit. Talk to all your suppliers at regular intervals and try to actively negotiate the terms. Always have your current sales figures for the last few months ready in order to substantiate your demand for price accommodation.
After all, you don't ask for handouts, but convincingly point out to your business partners that if your business goes well, you are entitled to better conditions. The more convincingly you express your ideas, the better the chances that your suppliers will give in to your wishes.
As you can see, a lot depends on the pricing. So that your ideas are met or, in the best case, even exceeded, we will show you exactly how you should in the next article Find your ideal partner for a successful drop shipping business.
About the author Sebastian Huke
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