Running a dropshipping store without owning inventory can be
a very profitable venture – but you must be aware of the profit margin
statistics and what they represent for your business.
If you\’ve ever worked in retail, you know that profit
margins are one of the most important figures for a company.
Everything you sell must be priced correctly, which involves
knowing how much profit you will make on each item.
In this article, we will go over everything you need to know
about dropshipping profit margins, including how to calculate them and what
levels to aim for.
We\’ll also provide you some pointers in the conclusion to
assist you enhance your profit margin!
Why should you investigate your dropshipping
profit margin?
Isn\’t all this effort devoted to determining your
dropshipping profit margin a bit excessive? No!
Analyzing your profit margins is critical if you want to be
successful in the long run.
There are several causes for this:
·
It enables you to identify and dropship more
profitable products rather than less profitable ones.
·
It allows you to better understand your business
and make more informed decisions about where to invest your money.
·
It enables you to accurately price your products
and prevent losing money.
·
It allows you to track your progress and see if
you\’re getting better over time.
In summary, if you don\’t know your dropshipping profit
margin, you won\’t be able to discern which products are profitable and which
are not.
As a result, you may find yourself dropshipping a lot of
things that make you no money!
So, now that we\’ve established the importance of calculating
your profit margin, let\’s look at how you may accomplish it.
How do you figure up your
dropshipping store\’s profit margin?
It\’s easy to figure out your dropshipping profit margin.
Profit margins can be calculated in two ways: gross profit
margin and net profit margin. Both are used to assess a dropshipping store\’s ability
to generate profits.
Let\’s go over them both below:
Determining the gross profit margin
Given the expenditures associated with each sale, the gross
profit margin illustrates how successful your dropshipping store is for each
sale.
It is the simplest to compute and simply indicates how much
profit you make on a sold goods.
To determine your gross profit margin, simply add your
entire revenue from sales and subtract your cost of products sold (COGS). This
will calculate your gross profit.
Gross profit = total revenue minus cost of goods sold
Once you\’ve calculated your gross profit, divide it by your
total revenue to calculate your gross profit margin. Here\’s how it works:
Gross profit margin = total revenue / gross profit
Assume you run a dropshipping store that made $100,000 in
sales last month. If your cost of products sold is $60,000, your gross profit
is $40,000.
To calculate your gross profit margin, divide $40,000 by
$100,000 to get 0.40.
To summarize, your gross profit margin would be 40%!
Calculating the net profit margin
The net profit margin is the ultimate measure of
profitability for a corporation.
It is a bit harder to calculate than the gross profit margin
because it considers all of the additional expenses you incur when running your
dropshipping business.
For an ecommerce store, you can have expenses for items
like:
·
Marketing campaigns
·
Ecommerce platforms
·
Dropshipping vendors
·
A domain
·
Apps
·
Transaction fees
·
Taxes
·
And more!
To get your net profit margin, add your entire revenue from
sales and subtract your cost of goods sold and all other expenses. This will
result in your net profit.
Net profit = total revenue minus cost of goods sold less all
additional expenses
Once you\’ve calculated your net profit, divide it by your
total revenue to calculate your net profit margin.
Net profit margin is net profit divided by total revenue.
Assume you run a dropshipping store that made $100,000 in
sales last month.
Your net profit would be $20,000 if your cost of goods sold
was $60,000 and your other expenses were $20,000.
Divide $20,000 by $100,000 to get 0.20 as your net profit
margin.
To put it another way, your net profit margin would be 20%.
What is a reasonable profit margin
for dropshipping businesses?
After calculating your gross and net profit margins, you may
think, \”Are these good profit margins?\”
Unfortunately, there is no definite solution to this topic
because the \’correct\’ dropshipping profit margin depends on a variety of
circumstances.
These variables may include the type of products you are
dropshipping, your target market, your advertising budget, and others.
That being said, when it comes to dropshipping profit
margins, there are a few broad recommendations you can follow.
A gross profit margin of 30-40% is considered good by most
dropshippers.
This means that after purchasing the products from your
supplier, you should be left with roughly $30 to $40 for every $100 in sales.
In the meanwhile, strive for a net profit margin of roughly
20%.
In other words, after deducting all of your expenses, you
should be left with a profit of $20 for every $100 in sales.
Overall, the most important factor is that you are earning
enough money to pay all of your costs plus some. To put it another way, running
a profitable dropshipping store.
If you can accomplish that, you are on the right route!