The initial goal for any business venture is usually to make a profit and the dropshipping business model is no different. Still, it’s important to understand that profitability isn’t the end goal. Rather, competing for above-average dropship profit margins should be your focus. As an online store, you need to find a way to make a consistent profit to succeed.
What Is a Profit Margin?
The Profit Margin is the percentage of the total revenue that’s left after all expenses, costs and taxes have been deducted. It’s what you make as a profit on each dollar of sales.
Why Is Profit Margin Important for Dropshipping?
Dropship profit margins are important because they show you how much your online business is making and will indicate if there are any pricing errors that you need to address.
Assessing Profit Margins will Show you the Following:
- Your store’s performance vs. your competition’s performance
- The stability of your business
- How well you manage your expenses
- The effectiveness of your pricing strategy
- The potential for your store to get investors, etc.
What’s the Average Profit Margin Range for a Dropshipping Businesses?
It falls anywhere between 15-20% on average. With that said, it’s possible to get less or more than this average dropshipping profit margin depending on your niche as well as the average cost of your products. Some products can provide over 200% profit margins. The trick is to identify profitable dropshipping products as described below.
How to Calculate Your Dropshipping Profit Margins
There is a simple formula used to calculate profit margins:
Profit Margin = (Total Sales – Total Expenses) / Total Sales
This formula caters to each product that you sell in your store and not all products together. Practically, it means that you subtract the sum of expenses from the sum of revenues and then divide this number by the sum of expenses.
Factors to Be Considered When Calculating Dropshipping Profit Margin
These factors are also elements that play a role in the product journey and they include:
- Advertising costs
- Operating expenses
- Shipping costs
Types of Products and Their Profit Margins
There are two types of dropshipping products. The low-profit margin products and the high-profit margin products.
a. Low-Profit Margin Products
Engaging in low-profit margins may not sound like an exciting venture; however, there is an art behind this approach. The secret is in the number or volume of sales. You make up for the low margins by selling a high volume of your products.
For instance, if you have a margin of 10%, it will make great business sense if you sell about 400-500 orders a month. This is comparable to online dropshipping stores that sell at high-profit margins a few products per month.
Low dropshipping profit margins products include inexpensive items that are often on a daily or regular demand such as baby food, household consumables, hygiene products, etc.
Pros of Low-Profit Margin Products
Higher Traffic – with a good advertising strategy you can get sufficient exposure, traffic, and sales both for regular prices and discounted prices. Often because most of these products do not cost very much.
More Sales – a small discount can get customers rushing for the bargain especially when they are considering bundles of products rather than per piece purchase.
Increased Turnover – as an online store you will rarely have a slow period lasting for a long time because the products are constantly moving thanks to their regular consumption nature.
Cons of Low-Profit Margin Products
Marketing costs – running a marketing campaign for discounted items on products that are already offering slim margins can be hectic.
Meeting customers’ expectations – when you’re regularly offering discounted prices, customers might get attached to the trend. And make it difficult for your store to make any sales at a higher price level.
The Question on Quality – When you’re constantly offering discounted prices, your customers may start doubting the quality of your products. It is important to strike a balance.
Low-Profit Margin Products Best Practices
Sell by packs – one of the easiest ways to make a profit when selling low-margin products is to sell them by packs or small wholesale packs. That way even when discounting, you will discount per pack rather than per item.
Offer them in bundles – this is another best practice to ensure you stay in business. Cluster your products in bundles that function together. For instance, when selling roller-skates accessories, you can cluster the elbow and knee pads plus gloves together as a bundle.
b. High-Profit Margin Products
These are products that leave you with high net profits. For instance, you can buy the product at $10, but sell it for $70 or more. These products have a high return for a very small investment.
Some products that would easily give you high dropship profit margins include jewelry, beauty products, some electronic accessories among others. These are products with a wide variety and you can always have something to offer a customer.
Pros of High-Profit Margin Products
- Most of these items are often easy to sell, for example, beauty products sell easily.
- They are often easy to market and showcase e.g. jewelry.
- Their demand may last year-round.
- Most of them may offer sub-niches to enter into, e.g. electronic accessories; you may deal with mobile phone accessories, car radio accessories, computer accessories, etc.
Cons of High-Profit Margin Products
- The competition among dropshipping products with high-profit margins is always very harsh.
- More advertising is usually needed thanks to the high competition, especially from the big brands.
High-Profit Margin Products Best Practices
- The first best practice when dealing with high-profit margin dropshipping products is to know exactly the profit margin for each specific item.
- Adjust your retail pricing based on each of the above individual profit margins.
- Know how much it will cost you to acquire an individual customer.
How to Improve Your Dropshipping Profit Margins
There are several ways you can maximize your dropship profits margins. Here are some quick tips that double up as best practices:
1. Check Various Selling Platforms
You need to leverage the weaknesses of the market. Check the different platforms such as Amazon, eBay, Alibaba, and the rest to check on how they are leveling the competition and you can take advantage of whatever void that could have been left out.
Going through customer reviews will also give you insights into unique customer needs that you can use to rise above the competition.
2. Find Unique but Lucrative Products
You don’t want to sell what everyone else is selling. This will do nothing for your unique selling point. Find something unique that will help you stand out as a dropshipping retailer.
3. Get into a Niche
Another best practice to improve your dropshipping profit margin is to niche your inventory and get identified with it. This way you will create a name for yourself and make it easy to compete with other sellers.
1. Keep Up with the Trending Products List
Ecommerce can be quite volatile and unpredictable. Things are regularly changing and therefore you need to stay up-to-speed with what’s happening within your niche. This emphasizes why you need to narrow down your niche, it helps when you have to keep adjusting your pricing strategies as well as other product dynamics.
When you see a new product in your niche that has good potential, you can seize that chance and make a kill.
2. Avoid Back Orders
This is every dropshipper’s nightmare. A backorder happens when your sole supplier runs out of stock for the selected item and you have nothing to ship to your customer (who is waiting). Plus, plenty of explanations to provide. And it makes you lose credibility. That’s why you need to have more than one supplier whenever possible.
3. Cross-sell and Up-sell
These two play well into increasing the value of a customer. Cross-selling means selling a different product to an existing customer. For example, if a customer is buying a camera, then you sell them a memory stick to be used with the camera, then another lens.
Upselling on the other hand means persuading the customer to buy an upgrade or premium variation of what they wanted to buy. These two methods easily work since the customer has already shown interest and therefore easier to get them to spend a little more.
4. Pick Wisely Your Suppliers
Besides avoiding issues such as backorders, it’s necessary to wisely pick your suppliers in order to boost your dropshipping profit margin.
One reason for this is to get the best price for you to offer the most competitive retail price to your customers.
The second reason why this is crucial is to ensure your supplier has access to more than one producer of the product to avoid backorders.
How to Find Profitable Products to Dropship
Some products are more profitable and more sellable than others. Here is how to pick your products for a higher dropshipping profit margin:
1. Pick Passion Products
Most often people are more likely to pay attention to products that belong to their area of interest. Products that are related to their passions appeal faster to them.
For example, pet products, photography products, computer games products are considered passion products because they relate to deep interests and personal pleasure.
2. WOW Factor Products
Differentiation plays a huge role in sales. As such, products with attention-grabbing features or particular qualities sell easier and faster than common products. Think of the last time you saw a product and thought “look … how cool is that” – you just identified a Wow factor product.
3. Products with Varying Styles
Products that come in various styles, sizes, and designs tend to sell better especially when they are customizable. This means each customer will feel that what they have gotten is unique and personalized to them.
Take for example a rug. If customers can get a rug cut to fit their space or with the possibility of having colors that match the rest of their home, then it will definitely be easier to sell this than a rigid product.
4. Unique Products
Some products are so unique that a customer will be more than willing to wait as long as they can to get it. An example of this type of product is lighting. Think of a unique chandelier. You can take advantage of the uniqueness to level up your pricing strategy.
5. Know Your Customers
No matter the product you choose, it won’t be profitable unless you have clearly understood your customers. Get to know their preferences and identify the product categories that have greater selling potential based on your research findings.
Dropshipping has been changing the eCommerce industry a delivery at a time. And this definitive guide shows how to increase your dropshipping profit margin so you can reap the benefits.
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You will learn more about the dropshipping products with high-profit margins and get help with all your dropshipping work from page creation and order fulfillment to ad creation and market analysis. The only remaining thing for you to do is engage your creativity in researching the next high-profit margin dropshipping product. Sign up for the free trial and scale up your dropshipping business.