Figuring out your dropshipping profit margins can be tricky.
It’s not just about watching the sales roll in. You have to understand and manage your expenses, too.
Get it wrong, and you’re in the red. Get it right, and the profits roll in.
We’re here to give you practical advice on calculating your profit margins, what a “good” dropshipping profit margin is, and how to increase your profits so you can keep more money from every sale you make.
The end result is not only increased profits, but a successful dropshipping business!
Let’s start by looking at why you need to closely monitor your dropshipping profit margin – not just your sales receipts.
Calculating your dropshipping profit margin is not just a numbers game – it’s a cornerstone of dropshipping success. A healthy profit margin is a clear indicator of the financial health of your Ecommerce business.
To calculate your margin, you need to understand exactly where money flows in and out of your business.
And even though running a high ticket dropshipping business is pretty straightforward, there can be some hidden costs you need to account for in your books. You also need to ensure you’re not overspending on non-essentials, or neglecting crucial investments.
By keeping the importance of your dropshipping profit margins in mind, you ensure that you’re not just making money, but keeping a good portion of your profits. Which you can keep for yourself, or reinvest in your business.
Now we’ll show you how to calculate net and gross profit margins, and give you examples of both so you can see how it works in real life.
In our dropshipping course, we offer a custom spreadsheet that helps you calculate profit margins in seconds.
What’s the difference between net and gross profit margins?
Gross profit margin is the percentage that represents the difference between sales and the cost of goods sold (COGS). It shows how efficiently you’re sourcing your products.
For example, let’s say you’re dropshipping a designer lamp that sells for $1,000. If it costs you $600 to source that lamp, your gross profit for each one sold is 40%.
Net profit margin factors in all expenses, not just COGS. It gives a clearer picture of your overall business profitability after all dropshipping costs, including advertising, platform fees, and returns.
Continuing with the designer lamp example, if your gross profit is $400 (as calculated above) and you have additional expenses totaling $150 (ads, fees, etc.), then your net profit margin is 25%.
So, after all your expenses, you retain 25% of the sales price as net profit.
Given the significant price tags of high ticket dropshipping products, even small percentage shifts in margins can add up to a lot of dollars in your pocket (or going to hidden expenses!). You need to calculate these numbers to ensure you’re profiting from your sales.
In our Facebook group and our course, everyone wants to know the average profit margin for dropshipping. But the answer to this question is “It depends.”
Low ticket dropshipping products are inexpensive, and it’s not uncommon to see average dropshipping profit margins of around 50% for these items. But keep in mind that a 50% margin on a low ticket item might not translate to a substantial profit, especially when you factor in acquisition costs like advertising, payment gateway fees, and returns.
Selling a $10 item with a 50% margin only yields a $5 gross profit. How many of these items would you need to sell in a month to pay your mortgage?
High ticket items are more expensive products that require longer sales cycles. The industry benchmarks for high ticket items tend to be around 25%. But don’t let the lower percentage deceive you. A 30% margin on a $5,000 item is a gross profit of $1,500.
The math checks out! High ticket products have significant profit potential, even with a low volume of customers and sales!
When considering acquisition costs, a 30% margin in high ticket dropshipping can be more lucrative than a 50% margin in low ticket.
Gross and net dropshipping profit margins aren’t the only financial metrics you should watch. Here are a few other stats that affect your bottom line and shape your business strategy:
Balancing CAC with CLV is crucial. If it costs more to acquire a customer than they’re worth in their lifetime, your business strategy needs to be adjusted.
Now that you know how to calculate your dropshipping profit margins, let’s give you some practical tips for increasing those margins so you can put more money in your pocket with every sale.
Dropshipping involves various fees and commissions. Here are the standard costs a dropshipper might incur:
It’s important to get an idea of how much it costs to start a dropshipping business, especially if you’re just starting out. It’s easy to fall into the trap of spending lots of money on the things you think you should, instead of spending on the things you really should!
Dropshipping can be a lucrative venture – we both know from experience! But understanding your profit margins is essential. It can mean the difference between turning a healthy profit and unwittingly operating at a loss.
By getting a firm grip on your financial metrics, from COGS to CLV to credit card fees, you can set up a thriving Ecommerce business.
Need to get started with dropshipping? Join our free training to get the tools you need to build and launch your own high ticket dropshipping business in just 30 days.
Watch this FREE, on-demand training session that will uncover the exact steps you need to take to launch your first high ticket dropshipping business in the next 30 days.
Ben Knegendorf realized at 29 he needed to find another career path. Since then, he’s:
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