Dropshipping Profit Margins Explained: Key Metrics for Keeping More of Your Revenue

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.

Why Calculating Your Dropshipping Profit Margin Is Critical

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.

How to Calculate Dropshipping Profit Margin

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.

Net vs. Gross Profit Margin

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.

What’s a “Good” Profit Margin for Dropshipping?

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.

Keep Track of These 4 Important Dropshipping Profit Margin Stats

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:

Cost of Goods Sold (COGS): Your dropshipping revenue hinges on this. COGS is the direct costs of producing the goods sold by a company. It includes the cost of materials and direct labor.
In dropshipping, it primarily refers to the price you pay your supplier for the product. A lower COGS can lead to higher dropshipping profits.

Shipping costs: As a dropshipper, shipping isn’t free for you (and in most cases, it’s not free for your customers!). Negotiating better shipping rates can significantly raise your overall profit margin. Lower shipping costs for your customers can also help you stand out from competitors.
Customer Lifetime Value (CLV): This statistic measures the total revenue you can expect from a single customer over the course of their relationship with your business. A higher CLV means that a customer continues to return and buy from you. Repeat buyers increase your dropshipping profits over time without additional acquisition costs.
Customer Acquisition Cost (CAC): Acquiring a new customer always comes at a cost. These expenses, whether advertising, discounts, or other promotional activities, can stack up. CAC represents the average cost to acquire one new customer.

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.

4 Ways to Increase Dropshipping Profit Margins

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.

Offer bundles: If everyone else is selling a product individually, offering it as part of a thoughtfully curated bundle can give you an edge. It provides value to customers and increases your average order value.
Deliver superior customer service: Responsive customer service (via email, chat, and/or phone) can lead to repeat business and referrals. It can also help you stand out from your competitors.
Negotiate with suppliers: Unlike low ticket dropshipping where you source products from directories like AliExpress, high ticket dropshipping involves purchasing from established individual companies. Each of these suppliers will offer different margins.
Once you’ve made some sales and established your commitment to a supplier’s products, consider contacting those suppliers to renegotiate prices or terms. Come prepared for the conversation and be able to show sales data.
Leverage multi-channel marketing: Don’t rely solely on advertising to drive traffic to your site. Optimize your site for search engines using smart SEO for dropshipping practices, use email marketing to reach prospects and previous customers, and develop partnerships with others in your industry so you can cross-promote.

Dropshipping Fees and Commissions

Dropshipping involves various fees and commissions. Here are the standard costs a dropshipper might incur:

Account setup fee:There are no account setup fees when high ticket dropshipping. However, when low ticket dropshipping, this is a one-time charge, ranging between $15 and $50, that suppliers require when you begin a partnership with them. It allows access to their products at wholesale prices and any product data.
Membership fee: Again, in high ticket dropshipping, you won’t run into membership fees. Though, when low ticket dropshipping, some suppliers have introduced monthly or yearly membership fees, often starting at $20. This fee may grant access to the supplier’s entire product catalog or offer special product discounts.
Per-order dropship fees from suppliers: While this is a rare occurrence, it does happen so that they can recoup the costs of team members fulfilling the item.
This is charged for every sale you make. Typically, it ranges from $5-$10 for high ticket products. Some suppliers might label this as a commission and charge a percentage of the sale instead of a fixed amount.
You can use this to your advantage to land suppliers who initially say no by offering a small fee to help their bottom line.

Credit card fees: You can’t avoid payment processing fees. Every company will charge them, but most are in the same range.
If you do Shopify dropshipping, the platform will charge you credit card processing fees when you use Shopify Payments. The rate varies based on your Shopify plan, but will likely be approximately 2.9% + 30¢ per transaction.

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!

Understanding Profit Margins: The Takeaways for Dropshippers

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.

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Article by Ben Knegendorf

Ben Knegendorf realized at 29 he needed to find another career path. Since then, he’s:

Successfully exited a high-ticket drop shipping business that he helped take from $1 to $11M annual revenue in just 2.5 years
Eliminated $40,000+ of personal debt
Joined Dropship Breakthru as co-owner in 2021