Drop Shipping Business

There is no fixed relationship between profit and price. Consider two examples:

You buy Product A for £6 and sell it for £9. Profit: £3. You buy Product B for £2 and sell it for £7. Profit: £5.

That elementary arithmetic is easily overlooked. Of course, you will want to think of your possible selling price as you consider different products, but you must also keep in mind the profit margin that the product offers. The selling price matters to your customers; the profit margin matters to you.

Price is a major factor in any selling operation. The lower the price, the more sales you can expect to make, though whether the increased sales lead to increased profits depends upon the make-up of the selling price. For example, if by keener purchasing you reduce your cost from £3 to £2 an item, you can reduce your selling price from, say, £9 to £8, and still make the same number of pounds profit per item sold, with the chance of increasing your number of sales. By contrast, lowering your price from £9 to £8, while still purchasing for £3, must reduce your profit per item, and only testing the market will show whether your lower price leads to a sufficiently increased number of sales to compensate for the reduced profit margin.

The narrow competition

As far as product choice is concerned, you must be able to price competitively, both in competition with other mail order dealers and with the shop trade. Few people will order by post if they can pick up a similar product at a similar price on a local shopping expedition.

The broad competition

Bear in mind also that you’re just one of many people trying to get the public to part with its money. You’re therefore in competition with all other traders, not just those dealing in similar products to your own. People only have a limited amount of disposable cash. Anything spent on booking a holiday in Spain is not available for buying a new wheelbarrow; anything spent on a new wheelbarrow is not available for a new pair of shoes; anything spent on shoes is not available for a crate of beer — and so on. When customers buy your product, they are at the same time denying themselves very different but doubtless equally appealing products from someone else. The less painful you can make this denial, the more disposed people will be to buy from you.

Easing the pain of purchase

Assure the customer that he is not making an irrevocable commitment to your product: if he finds he doesn’t like it, he can return it for full refund. This money-back guarantee helps the customer to feel that he is not really making a final choice: if he is disappointed with the binoculars he buys from you, he can always get his money back and buy a digital watch from someone else.

Another way of easing the pain of purchase is by price. If the price of your product is low enough, the customer may feel it to be only an incidental expenditure that barely influences his other possible purchases at all. But how low is low? The executive on a five figure salary will not have the same view of what constitutes incidental expenditure as a schoolgirl doing a Saturday job in the local bread shop. But most prospective mail order customers would probably consider anything under £5 as a minor outlay, and anything up to £10 as not terribly significant. That defines the price range in which it is easiest to sell.