Profit margin is perhaps one of the most widely used financial gauges in retail businesses of any kind dropshipping business included. Profit margin calculations tell you as a dropshipper if you are doing well or losing money as a business. For this reason, topics around profit margin are very trendy within the dropshipping communities on social media. In this article, we provide a guide for improving your dropshipping profit margins by providing practical approaches that will not only give you insights to staying profitable as a dropshipping business but also save your dropshipping business from losing money.
Profit margin is a measure of your dropshipping business activity’s relative profitability, and this can be determined by deducting all the expenses made towards selling a product in your dropshipping store. A higher profit margin is always good for a business, and as a matter of fact, it is the road to Eldorado for any dropshipping business.
Most dropshippers try to come up with a product pricing strategy that will give them a profit margin that allows them to run a profitable dropshipping business. Still, too often, a lot of dropshippers find themselves struggling to put together a working product pricing strategy that will deliver the profit margin they need to survive the high competition in dropshipping. Let’s delve into how important having a good profit margin for dropshipping is and even so how important it is for you to get your profit margin right when you start off dropshipping.
What is a good profit margins for dropshipping?
As a general rule, most dropshippers consider a 20% profit margin as a good profit margin for a dropshipping product. However, this can be trickier than just setting a 20% or more markup to all products in your ecommerce store. For one, each of your dropshipping products will attract different costs to source them, and they will also attract different costs to market and sell them.
Depending on the product, you can have situations where 10 sales from a product yield just as much profit as 50 sales from another product from a 20% markup of products on your dropshipping store. You can also have a situation where these products have different selling frequencies, and then it becomes even trickier for you as a dropshipper to ensure your ecommerce business is performing well financially, given the time and effort you put in. So, as you can see, it is not just about putting markups on your dropshipping product that ensures a good margin. We will, in this article, offer some practical approaches to ensure a good profit margin for your products to keep you earning more as you run your dropshipping business.
Approach 1: High margins for cheap products
Sourcing dropshipping products from China and other markets with a price advantage and selling them on your dropshipping store with a margin of as much as 150% markup on the purchase price can give you the perfect margin to stay profitable in your dropshipping business. This works so well because low-cost products are more likely to have a very high selling rate. They sell in huge volumes as compared to the more expensive products that consumers usually take more thought to before committing to purchasing.
For example, a dropshipper can source a microfibre cleaning cloth in packs of eight from China for about $1.5 brand, package them for less than a dollar, and sell them for $9.9 with a markup of $7.49. Because the product sells for under $10 and with the perceived value of quality and quantity – 10 in a pack, people can easily make a purchase decision for such an item, and for this, you have 7.49 USD with which you can invest 35% into marketing and sales and still have and still have almost 200% profit on each unit sold.
With the proper marketing for items like this that are always in use in our daily living, you can easily begin to sell huge volumes of them in no time. When going by this approach, it is essential to ensure you get your dropshipping product research right. Dropshipping is a very competitive business as you have millions of people trying to sell with this model, you may find that someone is already selling the same product you plan on selling or an alternative that serves the same purpose, so you want to make sure the price you list your product for, is competitive just enough to keep profit as possible.
Approach 2: Decent margins for high ticket products
High ticket products for dropshipping are products that sell for above $100 to anywhere around $1000 or more. These dropshipping products don’t sell in huge volumes, but they can create substantial profit for dropshippers who sell them because they have a high value. It is not uncommon to find dropshipping stores that sell items that cost $800 or $1000. Actually, many dropshippers prefer to stick to high ticket products for different reasons: the logistical needs (including packaging and order fulfillment) with them are straightforward, and also less bookkeeping to deal with since their selling frequency is relatively much lower than when dropshipping low-cost products. The tricking thing with high ticket products is that their marketing is not that simple. Consumer purchase decisions for high ticket products in dropshipping come very slowly, considering everything before committing money to buy such products.
So, if you are dropshipping high ticket products, you will need to prepare for some serious marketing. Your ads video creatives will need to be premium and so good that the consumer can easily see the product’s value. For technical items, you will need to create awesome how-to videos where targeted consumers can almost feel like they have already used the item from just watching your videos. There’s a lot that can go into markup for high-ticket products, so keeping this in mind, you will need to factor in all that.
Ads & Marketing
Ads and marketing will cost you to sell your high-ticket product, and with this figured out, you can have a better idea of how to work out your dropshipping margins by adding the proper price markup. For example, a dropshipping store selling home gym treadmills that can be easily sourced for as low as $200 from a dropshipping supplier in China and sells it for as much as $450, which is less than the average cost of a home gym treadmill on Amazon and other marketplaces. With the extra $250 markup on the home gym price, you can have a $100 monthly marketing budget and still do very well in sales as you cart away as much as $150 in profit. If you do as many as 25 orders a month, you can take home a decent $4500 every month from your ecommerce store, which is a good take-home that can sustain your dropshipping business for a very long time.
Now bear in mind that these two approaches differ on one particular and very important aspect; time. With the first approach, you will be able to start making sales almost as soon as your ads go out, but you will be in for some wait with the second approach. Sometimes this waiting time can be a determining factor for your dropshipping business’s success or failure if not well prepared, you could run out of cash, and when cash flow dries out, your ads and other marketing efforts could be ruined or dead as well. Not to say the long wait is entirely wrong, but it must be well planned through, especially if you are pretty new to dropshipping business. This can also be the case for selling cheap products in that before you start making any good profits for investing in your ads and other marketing efforts, you would have to invest money for this for a while. Because even if some sales start to come in after, let’s say two weeks, it’s still not enough money that you can now rest and rely on your ads expenses on profit from the sales as you will need more time before the sales volume that can support the marketing aspect of your business actually happens.
How to obtain good profit margins for dropshipping?
Step 1: Calculating your dropshipping profit margins
Dropshipping profit margins can be calculated simply and straightforwardly by calculating the difference between the price of an item from your supplier and your planned pricing, and then adding any additional costs that come from payment gateways services, ecommerce platform services or marketplace fees, dropshipping integration software and plugins, order fulfillment, etc. Most dropshippers make these calculations to ensure they stay within a 15%-20% margin. However, this is not a rule, so you can define your profit margin based on your own strategy.
Because determining the typical dropshipping profit margins depends on several of the parameters as pointed out above and the selling potential of your dropshipping product, it is possible that your profit margin base reaches higher rates than the 20% common with most dropshippers.
Let’s consider the following example to calculate the dropshipping profits we can expect from selling a low-ticket product.
Selling price: $24.99
The price we paid for sourcing the product: $3.7
Fees for fulfilling with Dropship China Pro: $6.3
Shopify and Payment gateway fees approximate per product: $1.5
Ads and marketing expenditure per product: $1.5 (projected)
Profit per sale is estimated: $11.99
Our calculations here give us a 48% profit margin here. This is just about what you can get plus or minus 10% of our dropshipping profit margin percentage. Based on your strategy to market, you can choose to reduce your margins to make for a better competitive advantage or help increase your sales.
Step 2: Take advantage of your product sourcing for a better profit margin
How you source your dropshipping products can highly impact your margins in more ways than one. When working with a dropshipping supplier, you will have lots of options for your products as well as how you want them delivered to your customers. Aspects like product branding, packaging, order fulfillment, shipping times, and after-sales are aspects of this process that can raise the cost for your dropshipping product and leave you struggling to add a markup and still have a competitive price for your product. This is why working with the right dropshipping supplier that can bring all your dropshipping business concerns should be considered when sourcing your products.
You will need a dropshipping supplier that offers a cost-effective solution for your dropshipping store, from packaging to branding and the actual product itself, while keeping quality in mind. Most dropshippers do this by seeking out dropshipping suppliers from China, as their services are often more affordable. Still, more than just the price, you need a supplier with effective quality control in place as well as excellent after-sales services and performs efficiently when it comes to order fulfillment and shipping times. This is even more critical when you are dropshipping high-ticket products as you do not want to spend hours facing the anger of a client who has committed good money for a product only to receive a product short of the quality promised or have them wait longer than they can manage after spending good money on a product otherwise you will soon be faced with the pain of return and refund requests.
Essentially, there are two ways that you can use to ensure a better profit margin for your dropshipping store, which are one generating revenue with high sales volume and low expenditure on the product, sales, and operational cost and two going with hight-ticket products with low sales volume with high price markup and minimal sales and marketing cost. Combined with a high-performing dropshipping supplier, there is no reason why you won’t be running a very profitable dropshipping business in under three months. This is precisely how to win the dropshipping profit margin game, and you can’t go wrong adopting these approaches. Hope this article benefits you in every way as you seek to improve your margins. Good luck in your dropshipping business venture!