Once you've chosen to start a dropshipping business, you'll be putting all your effort into learning how to make money dropshipping. This starts with finding trustworthy dropshipping vendors and creating a storefront with a dropshipping website builder.
With your tools in place, it's time to put your math hat on. One of the most appealing aspects of dropshipping businesses is their profit margin. You need to be able to calculate and optimize it as you grow.
Keep reading to understand the average margin for dropshipping, how to calculate your profit margin, and how to increase it.
What’s A Good Profit Margin For Drop Shipping?
A good margin for a dropshipping business is anything over 20%. However, this can vary depending on the products you sell and where you sell them. If you participate in reverse dropshipping, your margins will be much higher since you sell more expensive items. If you sell only low-cost products, your margins will be much lower. Understanding your costs and market demand is key in setting prices that will get you the best margin without losing sales. You can also use drop surfing to lower your costs and increase your margin without having to raise prices.
How To Calculate Dropshipping Profit
How to calculate margin for a dropshipping business is no different than calculating it for any other business. You just need two numbers: the cost of the product and the price it's being sold at. You can further increase the accuracy of this number by factoring in other costs related to product procurement like additional fees you pay the supplier.
With those numbers in hand, you can use the following formula to calculate dropshipping profit margins:
Margin = ((Sales Price - Cost) / Sales Price) x 100
Remember, it's important that you calculate margins for each product you list for sale. Otherwise, you'll be leaving money on the table and making one of the most common dropshipping beginner mistakes.
Average Dropshipping Profit Margin
The average dropshipping profit margin is between 15%-20%. This can vary greatly depending on your chosen dropshipping niches and the average cost of your goods. Try to aim for a profit margin of higher than 20% to get the most out of the best dropshipping products you sell. Some dropshippers can actually see a profit margin of 300% or more, so keep an eye on your competitors' pricing model and see where you can increase your markup without upsetting customers.
How To Price Your Dropshipping Products
Pricing dropshipping products can seem daunting, but it's fairly simple once you know the formulas to use, and you set some eCommerce KPIs. Even the best dropshipping business ideas are only as successful as their pricing model. Too high and you'll scare customers away, too low and you'll lose money and burn out.
Here are a few tips on how to price your dropshipping products:
First, it's important to understand the right dropship markup will be different for every product you sell. You can't just pick a percentage and price all products to hit it. Lower-cost items often have higher margins than higher-cost ones. This means you can pocket more from items like socks than from items like electronics. On the flip side, you have to sell many more of them to hit the same total dollar value. Pricing needs to be product-specific to get the most out of each sale.
Second, think long-term when pricing your products. It can be appealing to increase your prices as much as possible to make some quick money. This may even work for some time. However, this will undoubtedly lead to damaging your brand and possibly destroying your entire business. This method has been used by many short-lived dropshipping businesses that caused many consumers to get angry and begin asking "is dropshipping dead?" and "is dropshipping legal"?
Third, make sure to cover advertising costs. Though not always part of the profit margin formula, advertising costs play a major role in dropshipping businesses. That’s because dropshipping ads are the primary source of website traffic and sales for most dropshipping businesses. Try to increase your prices enough to cover these costs or you'll lose out on more money every time you advertise your products.
Dropshipping Fees and Commissions
One of the few drawbacks to the dropshipping model is that there are a number of fees and commissions associated with it. All suppliers who participate in dropshipping will charge dropshipping costs. These charges cover a range of activities on their end. These activities include production or manufacturing, order fulfillment, shipment tracking, and more.
The most common fees a dropshipper will face are fees per order, account setup fees, and membership fees. The “per order” fee is the most common and will be paid every time you make a sale. The account set-up fee is a one-time fee that dropshipping suppliers make you pay to establish your relationship. It gives you access to the wholesale price of their products and access to any product data. These fees typically cost between $15 and $50.
The membership fee is a newer fee to the dropshipping model and is charged monthly or yearly. This fee is dependent on the vendor but, on average, can cost $20 per month or more. Usually, this fee is required to access the vendor's full product catalog or pay discounted prices for certain products. Really, this fee just serves to add recurring payments to the vendors' revenue stream.
Typical Drop Shipping Fee
The most typical dropshipping fee you'll have to pay is a "per order" fee and can range anywhere from $2 to $15. This fee is highly specific to the product types you sell and the services provided by your suppliers. Some suppliers may call this a commission and charge you a percentage of each sale instead of a fixed rate. Make sure to check your contracts during supplier relationship management to see what this fee will be and what you get in return. You don't want to have to turn over 20% of each sale to a supplier who doesn't provide superior customer service or shipping.
Dropshipping Commission Rates
The typical dropshipping commission rate is between 15% and 20%. The commission rate is the percentage of revenue from each sale that you pay out to vendors, the sales team, or another party for driving sales. In dropshipping, the most common ways you'll pay commissions are to the product vendors and influencers who help advertise your products. The latter is also called affiliate marketing and is its own business model. As a dropshipper who uses influencers for marketing, you no longer have to choose between affiliate marketing vs dropshipping, you can use both to drive sales and only have to offer a discount or low commission in return.
The Price Is Right
Calculating the profit margin for every product you sell and adjusting prices takes a lot of work. But, this work is the key to getting the most revenue you can and will ensure you never have to ask "is dropshipping worth it?" Just make sure to create a detailed drop shipping business plan so you can get the most out of reinvesting profits into the business.
Learning how to dropship and increase your revenue can seem overwhelming. We recommend starting your journey with our drop shipping for dummies guide, and reading dropshipping books, eCommerce books, or taking dropshipping courses. This will give you the best foundation to build your successful dropshipping business from.
Frequently Asked Questions About Dropshipping Profit Margin
While dropshipping is a business model that’s full of opportunity, it can be difficult to get going. If you’re just starting your dropshipping business, check out these common questions and answers:
Is dropshipping a get rich quick scheme?
Dropshipping is not a get-rich-quick scheme. Though it’s easier than ever to set up an eCommerce website and list products for sale, you still need to reach customers and convince them to purchase.
Dropshipping is advantageous because it doesn’t require a lot of overhead and you don’t have to inventory your own products. However, there are other reasons dropshipping isn’t a fast path to big profits. You still need to:
- Sell high demand products
- Offer products at good pricing
- Execute strong marketing strategies
- Provide fast shipping and handling
- Have a unique value proposition
What is the downside of dropshipping?
There are several downsides of dropshipping. One, you have less control over your supply chain than other businesses. The nature of dropshipping is sending products to customers as soon as they buy them. This means you don’t do any warehousing, so you’re 100% reliant on how well your suppliers gauge their demand.
Two, dropshipping profit margins tend to be low. Think about it. The essence of dropshipping is selling premade products to new customers, which means the manufacturer has already built their profit margin in. This means you have to add more to the consumer’s cost in order to be profitable.
Three, dropshipping is competitive. It first became popular in the late 2000s, when eCommerce websites were gaining traction as well. Dropshipping is simple so it caught on quickly, and now the market is heavily saturated. In order to have a successful dropshipping brand, you need clear market differentiation.
How much does dropshipping cost?
There’s no exact price you can boil a dropshipping business down to, but if you want to get started for minimal costs, you’re looking at about $40-100. Most eCommerce site builders are about $30 per month (after a free trial), you can get a domain for $14 or less, and dropshipping software will run you about $20-30 per month.
The more features and services you add to your business, the higher your costs will be. If you want to bootstrap your way to success, it’s recommended to start with the above costs. You can drive traffic through content marketing, eCommerce SEO, and word of mouth. As your business expands, you can use other marketing approaches like eCommerce PPC and social media advertising.