dropshipping profit margin

Dropshipping Profit Margin: Essential Metrics and Calculations

If you run a dropshipping store, you must have already known that to earn sales and make a profit, there will be endless costs, fees, and expenses involved. So if you don’t know what your exact dropshipping profit margin is, high chances are that your business is hanging by a thread with a too-thin profit margin or can’t even make it to the break-even point.

Don’t worry! In this article, we’ll walk you through all you need to know about tracking profits and costs properly to improve your dropshipping store’s bottom line.

Particularly, this article will cover: Which profit margin metrics to track? What are good dropshipping profit margins? How to calculate them correctly, and 3 tips for boosting profitability and more! (We even suggest some tools to help improve your profit margins)

So let’s dive right in!

What Is Dropshipping Profit Margin? 

Dropshipping profit margin is an indicator of how profitable your dropshipping business is. It is expressed as a percentage. And, of course, the higher your margin is, the better. 

Dropshipping profit margin illustrates how well your business’s financial health is by comparing profit to sales. In other words, it shows how much profit your dropshipping business has made per sale.

For example, you’re dropshipping a pair of boots with the assumed sales data:

  1. The wholesale price of the product: $50
  2. Your selling price: $100 
  3. Your ad expenses: $20

Then, your Gross Profit Margin = [($100-$50)/$50]*100% =  100%  and your Net Profit Margin = [($100-$50 -$20)/$50]*100%= 60%

Of course, this is only a simple illustration of how a dropshipping company generates profit. In fact, there are a lot of factors to consider when determining your profit margin. (we’ll discuss this further below)

Let’s take a look at the seven key metrics you need to optimize if you want to make a true impact on the profit margins of your dropshipping store!

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7 Key Metrics to Evaluate Dropshipping Profit Margin 

Now, let’s dig deeper into a few crucial dropshipping profit margin metrics that you should monitor while assessing your dropshipping business’ profitability.

#1. Cost of Goods Sold 

The cost of goods sold (COGS) is calculated depending on how much it costs to create the goods before an order is fulfilled. Costs for materials, production, fulfillment, and other services that support manufacturing are all included.

COGS = Starting inventory + Purchases Ending inventory

The COGS will vary for individuals that purchase in bulk or produce their own goods. You can utilize the built-in cost-per-product sections on Shopify and other eCommerce website hosts to track your COGS automatically. 

Overall, your gross profit margin is mostly determined by your cost of goods sold. So, it is an important statistic to focus on.

#2. Shipping costs

Costs associated with shipping come next in line after manufacturing. Even while you don’t ship your own products, you frequently still have to pay shipping costs to your suppliers. 

The shipping costs depend on a number of essential dropshipping stages, and they increase in price in accordance with your degree of customization and branding. This covers personalized labeling, packaging, and the shipping company’s delivery projections.

For instance, suppose you sent 100 orders in the previous month and paid your supplier $3 on average for delivery. Your shipping expenses would be $300 in that situation.

#3. Customer Lifetime Value 

Customer Lifetime Value (CLV) measures the average profit each customer is projected to bring to you over the course of a specific time period. Thus, it can serve as a tool to assist in estimating future sales at your dropshipping store.

It is simple to calculate this measure. You only need to multiply some measurements as below:

CLV = Average order value x Number of monthly transactions x Retention period

Your customer lifetime value will increase when they make purchases from you more frequently. Then, you will be able to raise your net profit margins as a result of this.

Note that the CLV can change depending on the products you sell, regardless of whether or not a single item from your store satisfies the customer’s expectations. Thus, you need to offer a diversity of products.

Honestly, customer lifetime value is very unpredictable due to its long-term nature, so you will need to make some predictions about the possibility that your customers will return to your store.

To see your Shopify store’s customer lifetime value by segment, install TrueProfit > Go to Customer Analytics. Herein, you can gain deeper insights into the lifetime value of your customers segmented by country, discount, etc.

dropshipping profit margin

#4. Average Order Value 

Average Order Value (AOV) is another formula-based indicator that reveals how much a customer spends while making a transaction in your eCommerce site. To calculate AOV,  here is your formula:

AOV = Total revenue / Number of orders

The types of goods you sell will have an impact on the average order value. A store selling phone covers, for instance, will have a lower AOV than that selling bicycles.

Generally speaking, the higher the AOV, the better your dropshipping business is doing. Thus, you should focus on making improvements to it. In fact,  raising your average order value is one strategy to boost your average dropshipping profit margin. 

Besides, understanding this eCommerce measure is essential since it enables you to better understand customer behavior and develop marketing tactics to cater to your customers’ needs.

#5. Conversion Rate

The percentage of customers that actually make a purchase after visiting your store is referred to as your eCommerce conversion rates. Your conversion rate is 10%, for instance, if only 15 of your 150 monthly visitors make a purchase from your shop.

Since a good eCommerce conversion rate ranges between 2.5% and 3%, your conversion rate is probably in the single digits. Here is the formula to calculate the conversion rate of your dropshipping store:

Conversion rate = Number of orders / Number of unique visitors

Conversion rates can increase your profit margin for dropshipping, but keep in mind that not all niches and products have the same conversion rates:

Conversion rates can boost your dropshipping profit margin, however, bear in mind that not all markets and items will see the same level of conversion.

Take a look at the Conversion Benchmark Report, which analyzed B2B and B2C landing page conversion rates across 16 industries in 2021.

dropshipping profit margin
Image Source: Smart Insights

By enhancing click-through rate through SEO and dynamic content marketing – as well as sustaining regular advertising and outreach initiatives – you will boost the number of unique user sessions.

Remember that the higher your conversion rate is, the better it is for your business. That means your customers really like your store and the products you offer.

#6. Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is the next eCommerce figure you must track. These are the expenses you incur to bring in more customers, typically through marketing, advertising, or content-related initiatives.

To calculate your CAC, here is the formula:

CAC = Total marketing expenses / Number of new customers

Understanding CAC is crucial because it enables you to make better use of your funds and arrange your marketing budget wisely.

As an illustration, suppose you spent $1,000 on marketing and promotion in the previous month and added 50 new customers. Your CAC would be $1,000 divided by 50 = $20.

You are on the right track when your CAC is less than your CLV. In other words, a customer will pay you more money overall than it costs you to acquire them as a customer. Thus, you should always strive to lower your CAC.

#7. Refund Rate

Finally, we can’t forget to mention the frequently agonizing procedure of issuing refunds to dissatisfied customers, whether it’s because of a problem with the supply chain, in the product quality, or a dispute with the buyer.

The proportion of orders that are returned is known as the refund rate. The formula to determine your refund rate is as follows:

Refund rate = Number of refunds / Number of orders

Particularly with dropshipping, high refund rates will probably lead to a substantially smaller profit margin. First off, since you have to give the buyers their money back, your revenue declines. Second, your costs go up because you often have to cover all shipping costs and transaction fees in the case of product returns and refunds.

It is critical to research your suppliers and personally evaluate the product you are selling to make sure the level of quality meets the requirements of your customer and yourself.

How to Calculate Profit Margins For Your Dropshipping Store? 

Gross and net profit margins are two distinct profit margins that are used to gauge the effectiveness and expansion of dropshipping businesses. That’s why you should pay the most attention to calculating these dropship profit margins.

#1. Gross Profit Margin Formula

The gross profit margin shows the profit you receive after deducting manufacturing costs from the total revenue.

First, you need to calculate your gross profit:

Gross Profit = Total Revenue COGS

Then, you can calculate the gross profit margin:

Gross Profit Margin = (Gross profit / Revenue) x 100%

Say, for illustration, that your dropshipping business generates $50,000 in monthly sales. Your partnership with a dropshipping provider calls for $20,000 in COGS, which pays for all costs associated with sold goods.

With the initial formula, you yield a $30,000 gross profit. Then, using the second formula, you can find out your gross profit margin at 60%.

💡 Not all your products have the same gross profit margins. To improve your overall gross profit margin, you have to focus more on products with better margins. If you have a Shopify store, install TrueProfit > Go to Product Cost. Then you can see Gross Margin per variant.

dropshipping profit margin

#2. Net Profit Margin Formula

Net profit margins take into account the cost of the product as well as all other dropshipping expenses related to running your business. This is a more thorough metric that shows your sales-related charges, with all gains and losses.

Expenses that are part of production expenses include:

  • Advertising costs
  • Taxes 
  • Website hosting costs
  • Subscriptions fees
  • Transaction fees
  • Shipping fees
  • Utility costs

To start the computation, you must figure out how much money remains after all other costs are covered—this is known as your true profit.

Net Profit = Total Revenue COGS Other expenses

You can determine your net profit margin now that you know what your net profit is with the following formula:

Net Profit Margin = Net Income / Total Revenue x 100%

We will use the same example as in the previous part, but now you need to include all of your other costs.

Your net profit would be $20,000 if you had $50,000 in monthly sales, less $30,000 in COGS and $10,000 in business expenditures. Next, divide the net profit of $20,000 by the total revenue of $50,000, then multiply it by 100%, which results in a net profit of 40%.

However, calculating your net margin every once in a while doesn’t help. Therefore, try TrueProfit’s P&L Report so you can see your incremental margin by month, quarter, and year with real-time updates. 

What is a Good Profit Margin for Dropshipping?

Now that you have your gross and net profit margins in hand, you may be wondering if these are at good levels.

Unfortunately, there aren’t any clear-cut answers to the question because the right dropshipping profit margin will vary depending on a lot of factors. The kind of products you are dropshipping, your target market, your advertising budget, etc., are among them.

Having said that, for the majority of dropshippers, a 30 – 40% gross profit margin is regarded as favorable. This means that after purchasing the goods from your supplier, you should earn $30 to $40 for every $100 in sales.

Meanwhile, you may want to strive for a net profit margin of roughly 20%. In other words, for every $100 in sales, after all costs are deducted, you should still have $20 in profit.

How to Increase Dropshipping Profit Margin? 

Now that you have figured out your profit margin for dropshipping, you may need to find ways to improve them, whether they are to your satisfaction or not. Because the higher the margin, the better! 

Hence, we give you 3 tips to boost your margin and profitability.

#1. Find a supplier with a good price 

If you are just getting started, you should look for a provider with reasonable pricing to prevent future cost increases. You should:

  • If your customers are price-sensitive, make sure you obtain price quotations from various vendors before placing an order with the best value. You will have a greater comprehension of the general market price for particular goods. 
  • Be honest and upfront with potential suppliers about the price range you are looking for, but avoid haggling the price too low because you might exchange prices for product quality. And we all know that poor-quality products scare your customers away.

If you love to dropship on AliExpress, then we recommend the Ali Hunter Chrome extension to make finding your suppliers easier. The extension will help you find suppliers with the best prices and ratings.

Find the right supplier to improve your dropshipping profit margin
Choose your suppliers carefully because this directly impacts your profit margins

In particular, you have the right to bargain for a better deal if you regularly conduct business with that supplier.

#2. Constantly monitor your key important metrics

At first, tracking your dropshipping profit margin may seem difficult. Yet, once you have your net and gross margins in hand, you will be able to monitor many aspects of your dropshipping business.

Therefore, be sure to constantly track your profit margin statistics so you can be knowledgeable, adapt to changes in a specific market, maximize your pricing strategy, and actively track your management costs.

Overall, this routine will help you keep a close eye on your development and assess the performance of your dropshipping business.

   See Your Shopify’s Real-time P&L     

#3. Upsell and cross-sell

Last but not least, upselling or cross-selling your products is one of the most effective techniques to raise your profit margins. 

They are sales strategies designed to persuade customers to spend more by purchasing extra or related goods. To raise the average basket value, you can add premium add-ons to your current products.

dropshipping profit margin
For instance, a little add-on could help expand your margins

Let’s use the example of an Etsy store selling phone cases. In addition to the custom phone cases, they also offer custom phone grips, phone holders, phone standers, etc., to increase sales and revenue.

You can raise the average order value and, consequently, your dropshipping profit margin by providing these extra products.

Frequently Asked Questions

  • What is a good profit margin on dropshipping?

The average dropshipping profit margins are between 15% and 20%. In general, you are heading in the right direction for a good profit margin if you are selling above 10% of the wholesale price.

  • How much profit can you make from dropshipping?

In your first year of dropshipping, you can anticipate earning between $1,000 and $3,000 per month with 10% to 30% margins.

  • Is dropshipping actually profitable?

Yes, dropshipping is a profitable investment. If retailers use dropshipping instead of maintaining their own stock inventory, they can increase their profits by 50%.

Besides, according to the “Drop Shipping Global Market Report 2022: Ukraine-Russia War Impact”, it is estimated that the dropshipping market will increase from $150.88 billion in 2021 to $192.31 billion in 2022. 

  • What is the profit margin on Amazon dropshipping?

According to Shopify, the average Amazon profit margin for dropshipping stores is between 10% to 30% margins. 

Wrapping Up!

Understanding dropshipping profit margin is crucial if you want to be successful in the industry. You will improve your pricing strategy, save expenses, and boost sales in your online business by regularly monitoring them. 

Ultimately, you will manage a profitable dropshipping business with a high-profit margin and more flexibility.

Discover what proper profit-tracking looks like at trueprofit.io