Having a good dropshipping profit margin plays a crucial role in your dropshipping business’ financial health and profitability.
Generally speaking, your profit margin is an indicator of how much money your online store is making.
As a dropshipping store owner, your dropshipping product pricing strategy is another cornerstone decision you will have to make. It affects almost every aspect of your business. Therefore, it is a deciding factor in everything from your dropshipping profit margin to your cash flow.
Now, you are probably asking yourself, “What is a good profit margin for dropshipping?”, “How do I calculate my profit margins?”, “How should I price my products?”, and “What type of dropshipping product pricing strategy should I use to increase my profit margins?”
You, as a dropshipping beginner, may not like the retail math, i.e., the strategies and formulas for pricing your products and calculating profit margins.
But the reason you want to go into business selling products to customers is to make a profit. And armed with this information, you can easily come up with a fair and profitable pricing strategy and earn a good profit.
So, let’s dive in.
Table of Contents
What is a good dropshipping profit margin?
With the dropshipping business model, you buy a product from a dropshipping supplier at a certain price. To earn a profit, you sell that product for more than what you paid.
Simply put, a profit margin represents what percentage of sales has turned into profits. It is actually a ratio calculation that suggests how much out of your overall sales your business keeps.
In general, a good profit margin for dropshipping is anything over 20%. But, it can vary based on what types of goods you are selling and where you are selling them.
What is the average dropshipping profit margin?
The average profit margin for dropshipping is between 15%-20%. As mentioned earlier, your profit margin depends on the types of goods you are selling and where you are selling them.
But regardless of that, you must keep your pricing competitive while ensuring your product markups are adequate in order to make a good profit.
Make sure you have our ultimate dropshipping checklist before starting a dropshipping store in front of you. To avoid any challenges during the journey, also have this business starting checklist on your side.
How to calculate your profit margins for dropshipping
The good news is that there is a simple profit margin formula that you can put into practice. And here is the formula to calculate your dropshipping profit margin:
{(Sales Price – Costs) / Sales Price} x 100 = Profit Margin
Let’s assume that you have a dropshipping business for electronics and made $1 million in sales last year.
Then, you need to subtract all of your expenses and costs, including the cost of your products, shipping, marketing, fees, etc., from your sales price. Let’s say that all of your expenses and costs stand at $700,000. In that case, you are left with net profits of $300,000.
To calculate your profit margin, just divide your net profits by your sales price and multiply that number by 100.
Now, we will show you the steps to help you learn how to simplify the formula on your own.
{($1,000,000 – $700,000) / $1,000,000} x 100 = 30%
- Sales price = $1,000,000
- Costs = $700,000
- Net profits = $300,000
- Profit margin = 30%
Just follow these steps:
- Subtract costs from sales price: $1,000,000 – $700,000 = $300,000
- Divide net profits by sales price: $300,000 / $1,000,000 = 0.3
- Express it in percentages, i.e., multiply it by 100: 0.3 x 100 = 30%
According to this formula, your profit margin is 30%.
But keep in mind that it is essential to calculate margins for every single item you list for sale. Of course, the calculation process is the same.
Now that you know how to calculate your dropshipping profit margin, let’s move on to the next topic: Dropshipping product pricing.
Dropshipping product pricing: How to price your products
Have you ever been in the retail industry, found a popular item, and promoted it, only to end up with no sales?
Unquestionably, it is an extremely unpleasant feeling, which can make you second guess yourself.
“Did I choose the wrong product?” “Why is my marketing strategy ineffective?”
The truth is, there are many factors that can have a negative effect on your dropshipping business’ financial success.
Luckily, one of those factors is easy to fix. And all you need to do is to price your products correctly.
In fact, a great product does not guarantee success. Not only should you have a great product to sell, but you should also price that product correctly.
Specifically, if you set your prices too low, it will lead to lower margins, causing you to miss out on potential profit and revenue. And if you set your prices too high, it will cause you to miss out on a lot of sales.
But pricing your products correctly is not all about covering the expenses and having an adequate profit margin.
It is much more than that. It is actually a complex process that involves a few steps. Just do not rush and take it one step at a time!
And here is how to do so:
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Know what your business expenses are and define your minimum retail price
To get started, you need to calculate a base retail price for every single item you are about to sell. However, that price needs to cover all of your expenses.
The most common expenses you will need to cover include:
- Wholesale product costs
- Shipping costs
- Website fees (e.g., logo design, store theme, etc.)
- Recurring monthly/annually fees (e.g., e-commerce platforms like Shopify, Shopify dropshipping apps, etc.)
- Marketing/advertising costs
Needless to say, you also need to take into account any unexpected costs. Therefore, it is advisable to increase your total expense number by an extra 10%.
Moreover, when defining the minimum retail price for any item, make sure you do not lose money on your items. This can give you a good start, enabling you to avoid risking profitability and understand how low you can possibly go.
Find out what the risks of dropshipping are and ways to avoid big loses.
Try to include and calculate all those information while creating your dropshipping business plan
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Understand your target market
As you can see, not everything revolves around covering the costs and expenses. To set the right prices for your products, you must have an understanding of your target market.
But what does this mean? This means that you must be familiar with product availability and seasonality.
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Product availability
Product availability is, without a doubt, a major factor in deciding how much to charge for an item. On the one hand, certain dropshipping products aren’t widely available. So, if you choose to sell these products, there may be a higher demand for them, and you may increase your price.
On the other hand, certain products, such as phone cases, are quite common. As a result, they usually require a lower price point to be competitive. Having an idea of how much you can charge for a product while still encouraging sales is crucial.
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Product demand and seasonality
Another important factor you need to consider when pricing your dropshipping products is product demand and seasonality.
In short, different items sell better during different seasons. For example, the demand for swimsuits is much higher during the spring and summer, whereas the demand for wool coats is higher during the winter.
Being aware of the impact of demand and seasonality on sales allows you to adjust pricing to maximize profits all year round.
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Scan the competition
Analyzing your competitors and identifying how much they charge for similar or identical products is a must for you. As a new online merchant, do not look at the largest online retailers such as AliExpress or Amazon.
Instead, focus on competitors within your specific dropshipping niche and analyze their websites and online stores. This can help you see how much they charge for similar or identical products.
If they offer the same product as you do, you should not charge more unless you provide something different and extra. For instance, you can charge more if you offer impeccable customer service and free delivery.
Also, do not try to compete on price alone. Do not continuously lower your prices to gain that one step ahead of your competition. This can be too risky and contribute to financial instability.
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Learn more about your target audience
This is where things may get a bit complicated. Your dropshipping product pricing should depend on how much your customers are willing to pay for the item you sell.
In other words, if you do not know your target audience, you may end up with bad pricing and no actual customers.
Knowing who your customers are—their geographic location, age, interests, income, etc.—allows you to make the best decisions when it comes to pricing and marketing.
There are a few points that enable you to find a viable price range. In addition, this viable price range should generate sales and maintain a solid profit margin at the same time. These points are as follows:
- Consumer buying behavior
- Purchase rate (e.g., one-time, weekly, monthly, etc.)
- How much they are willing to pay
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Determine your markup
Markup is the difference between the sales (retail) price of a product and the total cost of the product. Furthermore, the markup is typically expressed as an extra percentage that you charge your customers (on top of your cost).
Some people confuse the dropshipping profit margin with the markup. However, there is a difference between them.
Namely, the dropshipping profit margin refers to the profit as it relates to an item’s sales price or revenue generated, whereas the markup refers to the profit as it relates to the product cost.
Let’s take a look at the same example using the electronics dropshipping business and the same numbers as above to calculate the markup.
{(Sales Price – Costs) / Costs} x 100 = Markup
{($1,000,000 – $700,000) / $700,000} x 100 = 42.9%
As you can see, your dropshipping profit margin and markup are two different things. But they both are used to help determine profitability.
Once you have done all this work, it is time to decide on your dropshipping product pricing strategy.
Dropshipping product pricing strategies
Prior to discussing the dropshipping product pricing strategies, it is important to know that there are three main pricing methodologies:
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Cost-plus pricing
This is a simple pricing methodology. And the only thing you need to do is to calculate your total costs and add a particular profit margin to set your sales/retail price.
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Market-oriented pricing
This methodology is based on market conditions and competition. Here, you set your prices based on the prices of similar or identical items set by your competitors.
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Consumer-oriented or value-based pricing
The consumer-oriented pricing methodology is based on the perceived or estimated value of the item you are providing to your customers.
The high-end clothing retail industry is a good example of this pricing methodology, to be more specific. Luxury fashion products are priced higher to represent their social value, rather than their functional value.
To price your products correctly and increase your profit margins, use one or more of the following methodological approaches, i.e., dropshipping product pricing strategies:
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Penetration pricing
As its name suggests, this dropshipping product pricing strategy is ideal for dropshipping beginners who want to penetrate the market.
You are a dropshipping beginner, aren’t you? So, in the beginning, drop your prices below the competition to gain a foothold in the market and boost sales. After you have attracted a substantial customer base, you can GRADUALLY raise your prices.
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MSRP pricing (Manufacturer’s Suggested Retail Price)
For some new dropshippers, including you, it may be difficult to set the right prices. But this is where MSRP comes into play.
It is a dropshipping product pricing strategy where you set prices recommended by your suppliers. In reality, this strategy is a good choice for you if you want to find safe middle ground.
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Bundle pricing
You have probably seen sales promotions like, “Buy two, and get 15% off” or “Buy three, get one free”. And this is the bundle pricing strategy. You can use it to drop your item’s retail price and turn a higher profit in the end.
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Premium pricing
Interested in dropshipping luxury clothing brands? Then, opt for this dropshipping product pricing strategy and set high prices to highlight your products’ quality and exclusivity.
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Psychological pricing
This is an old method of setting pricing, as you probably know. Additionally, the idea behind this pricing strategy is that people will see the slightly lowered price and “think” it is lower than the actual price.
Even in the dropshipping industry, this strategy works well. Unsurprisingly, $99.99 does way better than $100. So, why not utilize psychology to encourage your visitors to buy something from your website?
Your Dropshipping Profit Margin matters
As discussed above, pricing is a complex process. Plus, it plays an important role in your business’s financial health and profitability.
But we walked you through the process to help you calculate your dropshipping profit margin, choose the best dropshipping product pricing strategy and set the right prices for your products.
Get our expert advice for everyone starting his first Dropshipping Business.
