Planning to launch a dropshipping store but unable to decide how much profit you should keep?
Unfortunately, this is where the majority of the inexperienced dropshippers go wrong.
It can be tempting to shoot high from the get-go, but there are a variety of factors that come into play before you can make the decision.
This is why in our Ultimate FAQ Guide we’re going to walk you through everything you need to know about dropshipping profit margin.
Let’s get started!
How to Calculate Your Dropshipping Profit?
Calculating your dropshipping profit margin is quite straightforward.
You only have to deduct the amount you pay to the supplier plus the overheads like returns, shipping, marketing or website maintenance from your sale price.
After that, whatever you’re left with is your profit from dropshipping.
How Much Profit Can You Make from Dropshipping?
People often say that the biggest drawback of dropshipping is that the profit margins are too low. However, dropshippers are making over $100,000 per year.
So it’s safe to say that dropshipping packs quite a lot of potential.
The success you’ll see from it depends on a variety of factors including the product and pricing, marketing strategy, website design and much more.
But in general, when you’re starting a dropshipping store, you want to keep your profit margin as low as possible.
What are Good Profit Margins for Dropshipping?
A good dropshipping profit margin is considered to be selling the product for more than 20% of the sourcing price.
This is well in reach, especially if you take your time to search through the most profitable dropshipping niches and build a good reputation for your store.
After that comes the average profit margin which is scaled at 15-20%. Dropshipping stores that haven’t been around for too long, but are getting steady sales can consider this range.
Last comes the low-profit margin range, which is below 15%. New dropshipping stores are recommended to start from this so they can capture the attention of the customers.
How Much Dropshipping Profit Margin You Should Keep?
Deciding how much dropshipping profit margin one should keep depends on a variety of factors. Let’s discuss a couple of them below:
When was your Store Created?
More than 33% of online stores use dropshipping as their fulfillment model. So it’s safe to say that the competition is tough.
If you’re keeping high product prices from day one, you’ll have a hard time surviving. Unless you’re bringing a unique product to the market.
So if your dropshipping business is still in its initial stages, then stick to a low or an average profit margin.
What is your Seller Rating?
Your seller rating is determined by the number of positive reviews you get. This is what all the online stores are racing for nowadays.
The higher your seller rating, the higher the number of orders you’ll receive. A good seller rating is considered to be 4.3 or above. And a fantastic rating is 4.7 or above.
If your store is in the latter category, then you can consider going for a high dropshipping profit margin.
How Many Sales Are You Getting?
Before you increase the prices for a higher profit margin, assess the number of regular sales you’re getting.
Increasing the prices of your products is always risky. If only a handful of customers are shopping from your store, then reconsider your decision for now.
In most cases, it will make you lose a couple of customers. However, if you’re already getting hundreds of monthly orders, then increasing the prices wouldn’t be as risky for you.
3 Golden Product Pricing Tips for a Higher Dropshipping Profit Margin
Dropshipping is a game of numbers. You have to strategically set and increase your product prices to earn more cash.
So here are 3 golden tips you could implement for your store:
1. Don’t Jump Too Quick
If your dropshipping store is performing well, it can be tempting to increase the prices.
But jumping the gun too early can do more bad than good for your business.
Instead of making a single big leap, take multiple small steps. Otherwise, it can even give your competitors a chance to break through the market.
Plan monthly increments to make it more digestible for your customers. This way, not only can you retain your existing customers, but also get closer to your desired profit margin.
2. Use Odd-Even Pricing
Nowadays almost every other store uses the “odd-even” pricing technique. The way it works is that, let’s say your desired price to sell a product is $50.
So instead of setting the price on your listings to $50, you’ll instead go $49.95 or a number closer to your desired price.
We know, there isn’t much difference. However, customers often end up rounding the number down and taking it as $49.
So although this pricing technique is mainstream, it’s still quite useful and can be a great way to make more profit while disguising it as less.
3. Display Discount Offers
Creating a sense of urgency with the “once-in-a-lifetime” discount offers is another way to capture the attention of your customers.
This can especially work well with both of the tips we’ve already discussed above.
You could slightly increase the price of your product, and then put up a “discount” to make the customers believe that they’re getting a better deal.
Keeping in mind how displaying discount offers also encourages impulsive purchases, it can be a great way to make more profit.
When Should You Increase Your Dropshipping Profit Margin?
Timing plays a crucial role while running a dropshipping store. So if you’re wondering when to increase the profit margin then here are a couple of pointers to look out for:
Positive Store Reviews
The initial aim of any online business is to get as many good reviews as possible. Your dropshipping store is not an exception to this.
So before you increase your profit margin, thrive towards getting positive customer feedback.
Once you have bagged enough reviews, you can set things in motion for the next step.
Even if your competitor sells the same product for a lower price, the customers will purchase from you due to your great track record and satisfactory response rate.
After all, the more people talk about your store, the more credible it becomes. And ultimately, credibility is all that’s needed to increase the price.
Check your recent order history to see if you’re getting recurring orders. The goal of any business is to not only get new customers but also to retain the old ones.
So if you’re getting consistent orders from the same customers, then you can consider increasing the profit margin.
Recurring orders indicate that the customers are satisfied with the product quality. This also means that in most cases, they wouldn’t mind paying a bit extra.
Rising Product Demand
You never know which product may go viral. This is why continue monitoring the search volume of your product on the SERPs to assess its demand.
If you think it’s being searched more often than before, then consider increasing its prices.
How to Increase your Dropshipping Profit Margin?
Rather than randomly increasing the price of your products, here are some techniques you could follow for a higher margin:
Offer Bundle Discounts
Bundle discounts can do wonders for your business. For instance, if you’re selling a product at a rate of $20 per piece, you could instead, sell a bundle of 3 at $55.
Now you might be thinking that you’re losing $5, so how is this profitable? Well, it’s simple – higher volume means higher profit.
Instead of making a meagre $20, you’re making $55 with a single sale.
Besides, discount offers are one of the best ways to attract more customers. So by doing this, not only will you get more sales, but also make faster profit.
Free Shipping Strategy
There are two ways for you to adjust the shipping fee while running an online store.
To give an example, your first option is to set the product price to $45 with a $5 shipping fee. Alternatively, your product price can directly be set to $51 with a “free shipping” tag. That’s right, you can even earn an extra dollar or two this way.
An increasing number of stores have been adopting this strategy and trust us, it really does work.
Customers are often compelled to purchase from shops that offer “free shipping”.
While in reality, the shipping fee is already included in the product price and for that too, they’re charging slightly higher.
Change your Supplier
The supplier controls the flow of a dropshipping store. Changing one might be all that you need to do to get a bigger profit margin.
But how to decide you should change your supplier? Simple, browse through the product prices of your competitors.
If they’re selling the product at a much lower price, then this also means their sourcing price is far lesser than yours.
So now your only option is to source the product at a lower or a similar price. This will significantly help you increase your profit margin.
Market yourself as a Brand
Your dropshipping store doesn’t have to be based on a copy-pasted theme like hundreds of others out there.
Spending a bit of time on branding and creating an aesthetic website can help you vamp up those profit margins.
Wondering how? Well, it’s simple – customers often feel more compelled to purchase from a brand, in comparison to a regular store.
The reason for that is, brands often look more credible. This is why you need to start marketing your dropshipping store as a brand.
You can take further inspiration from these 20+ successful dropshipping stores to learn how you can stand out in the competition.
Improve Customer Service
Efficient customer service can be the ultimate game-changer for any online business.
Even if you’re keeping a higher margin than your competitors, customers would prefer purchasing the products from you.
The reason for that is your responsive customer service and your dedication to their satisfaction.
5 Key Factors that can affect your Dropshipping Profit Margin
Sometimes, your dropshipping profit margin is tied to multiple factors than just its pricing. Here are to name a few:
1) Choice of Products
Some dropshipping products can naturally be sold at a higher price. This often includes gadgets and accessories.
So choosing a niche with more expensive products can both be a curse or a blessing in disguise.
A blessing because if the product is naturally expensive, you could sell it at an even higher price and keep a decent margin.
But if everyone knows the product is cheap, to begin with, then you don’t really have too much flexibility with its price.
2) Market Competition
Before you increase the prices of your products, don’t forget to analyze the competition.
If most of your competitors are selling the product at a lower price, then you might want to wait it out.
Showing haste may affect your sales and even drive some of your customers away.
3) Area of Operation
The location where you’re operating your dropshipping store can also significantly matter.
If a product is trending in one country, it doesn’t mean it is also in another.
This is why to secure the highest profit margins, before you launch your store, evaluate which demographics the product is performing the best in.
4) Sourcing Difficulty
The profit margin of the product also significantly depends on its difficulty to source.
If you’re dealing in regular phone accessories then you’ll have to be a bit careful while increasing the margin. There are hundreds of other stores your customers could purchase from.
However, if you’re dealing in a layered niche market that isn’t easy to source, then you naturally have the opportunity to keep more profit.
5) Shipping Costs
Dropshippers are recommended to search for suppliers who have warehouses in the countries they plan on operating.
The reason for that is not only timely fulfilment of orders but also, reducing shipping costs.
Importing products to another country can be a long process, and also impose a heavy fee on you. This, as a result, can affect your overall profit margin.
5 Reasons for Low Dropshipping Margins
If you’ve tried to increase your dropshipping profit margins but failed time and time again, then these might be the reasons:
1) You Rely on the Same Supplier
In dropshipping, the supplier controls the overall flow of your business. The more they increase the product sourcing price, the more your profit margins drop.
This is why you shouldn’t put all your eggs in one basket.
Note that, we’re not suggesting that you should change your supplier too often, but there’s no harm in being on the lookout for better options.
Especially, if your supplier is increasing the product prices more frequently.
2) Your Products are Difficult to Ship
Dropshippers often avoid bulky products as they’re difficult to ship.
If you’re ready to take on the challenge, the real problem still stands: What if they get damaged?
And even with extra care to get them delivered to their destination, a large chunk of your money would go towards shipping.
This is why it’s normally recommended to choose products that are lightweight and easy to ship.
3) The Competition is Too Much
There’s also a chance that the product you’re trying to dropship might just have too much competition, to begin with.
Higher competition means a lower profit margin because you would have to keep your product prices similar to what other stores have.
So what can you do in such a situation? Go back to the drawing board.
Take your time to search for a low-competition product. Although difficult, it will be worth it, especially, when you see the profit coming in.
4) Your Choice of Platform
We often emphasize the importance of creating an attractive website for your dropshipping store.
However, you don’t always have to churn out big bucks for it.
Your choice of platform alone can make all the difference. To give you some perspective, there are hundreds of free themes on Shopify that you could tweak to prepare your website.
So if all your money is going on website maintenance and design, then reconsider the platform you’re using.
5) Too Many Refund Requests
Refund requests are downright a nightmare for dropshipping store owners.
In most cases, buyers who ask for refund requests also leave a negative review. This not only puts a dent in your profit but also on your reputation.
So this isn’t a problem that you can simply ignore.
Try identifying the reasons behind the recurring refund requests, and rectify the problems, otherwise, it can even put your store at risk.
The answer to how much profit margin dropshipping stores should keep isn’t as black and white.
There are a variety of factors that come into play which we’ve tried to cover in detail. But a general target you should set is to keep a margin of over 20%.
With that said, to maximize the profit, your top priority should always be to look for a supplier who offers the lowest rates combined with the highest quality.
Short on leads? This is where Niche Dropshipping can assist you.
If you have a product in mind then drop us a message and our agents will help you source it!