Dropshipping has a reputation for having low profit margins. As a beginner, this can be discouraging. Sure this can be true for a lot of drop shippers, however, it’s not always the case.
In this article, I’m going to provide you with realistic profits you can expect with dropshipping, how you can increase your profit margins, profitable dropshipping products as well as your own personal dropshipping profit margin calculator.
What is the Average Profit Margin with Dropshipping?
Some dropshipping stores may have a profit margin of 5% whilst others will have a 200% profit margin. Because of the massive profit variations, don’t assume you need to price your products so they reach the average profit margin. There are many factors which can impact profit margins.
Whilst the margins for individual dropshipping stores can vary drastically, the average profit margins with dropshipping are between 20% – 30%. The biggest factors for the large profit disparities are product price, competition level, ad optimization and branding.
If you’re dropshipping a $20 item with a profit margin of 20%, you’re making $4. Hardly seems worth it unless you’re selling hundreds a day. On the other hand, if you’re dropshipping an $800 product with a 20% profit margin, you’re pocketing $160. Now that’s worth it!
My point is you shouldn’t always take too much notice of an average profit margin. You should sell a product for what people are willing to pay for it. If you can’t make an adequate profit margin after expenses, it’s not worth selling.
It’s important to have a realistic view of profit margins with dropshipping. If you’ve seen drop shippers on YouTube show how much money they’re making, you may have a distorted view of the amount of income they are actually generating.
If a YouTuber is showing you that they are making $50k a month dropshipping, it’s very misleading. $50k revenue is very different from $50k net profit! Factor in all their expenses and it’s more likely they are profiting around $10k a month.
What is a Good Dropshipping Profit Margin?
If you want to see some dropshipping stores with huge profit margins, I suggest you read my article on the most profitable dropshipping products. In it I provide you with some examples of stores selling products with more than a 2,000% markup price, it’s worth checking out to see what is possible.
As a general rule, after expenses including product cost, shipping, advertising costs and payment processor fees, a good dropshipping profit margin is considered 30% and above.
Obviously, you want to maximize your profit, to do this you need to find the pricing sweet spot that provides adequate profit margin without impacting your sales volume.
Unfortunately, there is no exact pricing markup that will give you that sweet spot. It’s different for every business and will require some split testing and optimizing.
For example, lowering a product price to a 10% profit margin may increase sales substantially and be more profitable overall for one business. Conversely, another business may actually increase sales by increasing the product price as the product now has a higher perceived value. There are no set rules when it comes to product pricing.
Related Article: How much money do dropshipping businesses make?
Is Dropshipping Always Profitable?
If you’re a newbie and wondering if you can actually lose money dropshipping, the answer is yes. Not only can you lose money, you most likely will lose money in the early stages. In the first 6 months of a dropshipping business, it’s unlikely you’ll be making much of a profit, more than likely you’ll be running at a loss.
This is not only the case for beginners, but even experienced drop shippers may not be profitable when they first open up a new store. There are many key factors that will require optimization or changing before a dropshipping store is consistently profitable. Some of these factors are:
- The niche or product itself
- The design and branding of a store
- The actual ad you’re running
- The actual ad platform you’re selling on
- The audience you’re targeting
- The offer
- Your sales angle
The reason experienced drop shippers are better at making their stores profitable is they know which aspects of a store require changing or optimizing. They better understand which changes need to be made based on the data they are receiving.
Most beginners can see their profits are fluctuating but have no idea which changes they need to make to increase profit and revenue. This is something that will become more evident as you become more experienced.
Dropshipping Profit Calculator
I’ve included a profit calculator so you can work out your exact profit margin for each product. The calculator is based on individual products but you may also have some additional expenses you will want to factor in.
Costs such as Shopify subscription, Shopify apps, website hosting, domain name, or virtual assistant fees may need to be included if you want to get an accurate view of overall expenses and gross profit margin.
Dropshipping Profit Calculator
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Dropshipping Products with High Profit Margins
I’ve read in online forums that the margins are so thin with dropshipping that it isn’t a viable business and I’ve also read that dropshipping is the easiest way to make money online. It’s no wonder many beginners to dropshipping are confused when it comes to profit margins.
Some dropshipping stores manage to sell a ton of products with healthy profit margins whilst other stores can barely make a sale with thin profit margins. So which are the main factors that can cause the disparity in profit margins between these stores?
1. Low Competition Products
In general, the more competitive a product is the more price wars will ramp up and the lower your profit margins will be. I have an article on some of the best unsaturated dropshipping niches if you’re interested.
The key to finding unsaturated products is to use a tool such as KeySearch to search for the demand of your product and compare that to the number of websites and advertisements selling that specific product. For more info on this, check out my article on How to tell if a product is too saturated!
2. Branded Products
If you want to maximize your profit margin, branding your store is imperative. One common factor the most lucrative Shopify stores all have in common is how they have branded their store to align with their target audience.
This includes store design, logo, customized products, private labeling, imagery, social media, content, customer experience and more. I have a full step-by-step tutorial on how you can brand your dropshipping store.
3. Unique Products
Nobody will pay a premium price for items they can find at their local shopping mall. Conversely, they will pay a premium price for something that is unique and appears specialized.
For example, if you wanted to create a dropshipping store selling pet supplies. If you sold regular products such as collars, leads, beds and toys, your profit margins will be low because consumers can find them anywhere.
However, you could try selling glow in the dark dog collars, heated dog beds, personalized dog art or pet urns. For more examples, I suggest you read my article on 40 unique products to sell online.
4. Problem Solving Products
If you can prove to your customer that you can solve a problem for them, you can charge high prices and consumers will pay it. The larger the problem you solve, the easier it’ll be to persuade them to pay your prices. Click here for a full list of problem solving products.
How to Increase your Profit Margins with Dropshipping?
Let’s assume you’re dropshipping products that meet the above criteria, they aren’t saturated, they’re branded, they’re unique and they solve problems. What else can you do to increase your overall profit margin?
To increase your profit margin with dropshipping, monitor your analytics and perform split testing on various aspects of your store until it’s fully optimized. These optimizations can include advertising strategies, offers, conversions, upsells, and negotiating lower product costs with your supplier.
If you want to fully maximize your overall revenue and profit margin, below are the main aspects of a dropshipping store you will want to optimize.
- ROAS (return on ad spend) – This is one of the most important metrics you can optimize to impact your profit margin. Do a lot of testing to increase your ROAS. This will include things such as the platform you’re advertising on, the audience you’re targeting, your ad creatives and much more.
- Increasing Conversions – You’ve got traffic to your store now you want to maximize the number of sales you convert. There are endless strategies you can test but for the most impactful changes, I’d recommend this 30-in-1 Shopify app and using a Shopify theme such as Booster or Debutify.
- Offer – Many store owners will simply just increase or decrease the price to see how it performs. Experiment with bundles, 2-for-1 deals, various percentages off, discount codes, free giveaways and much more.
- Increasing your AOV (average order value) – You’ve paid to acquire your customer and you’ve got them to make a purchase, now you need to maximize the amount of money they spend with you. This will include offering upsells, cross-sells and bundle deals.
- Supplier Negotiation – If you’re making consistent sales with a supplier, you are entitled to negotiate a better deal. This may be a lower product cost but may include lower or better shipping options as well as your supplier including marketing materials to all packages.
- Cost Price – The reason dropshipping is not as profitable as it could be is you are purchasing products from your supplier individually. Once you know a product is profitable, purchasing the product in bulk and using a fulfillment center (3PL) to ship the products individually will reduce your cost price and increase your profit margin.
How to Price Dropshipping Products for Maximum Profit
It’s hard to give exact price guidelines as it varies depending on the niche you’re selling and the type of items within that niche. I will however, provide you with some general guidelines so you know if a product is a feasible option before selling it.
How to Calculate Product Price
|Product Cost Price||Sale Price|
|Under $5||Minimum $19.95|
|$5 – $10||4x cost price|
|$10 – $25||3x cost price|
|$25 – $100||2.5x cost price|
|$100 – $1,000||2x cost price|
|$1,000 and over||1.5x – 1.75x cost price|
If you can’t make a minimum of $15 net profit (after all expenses) it may not be a viable dropshipping product. The main reason for this is the additional work involved. You may need to fulfill the order with your supplier, provide customer support and process returns and refunds.
The amount of time or virtual assistant costs this will incur may mean the lower profit margins may not be worth it. Especially if there are other higher profit product options available.
It’s important to test and monitor your product pricing closely. Depending on your product, pricing your products too high or too low can raise red flags to your customers.
What are the Profit Margins on Shopify when Dropshipping?
You have 2 main options when it comes to the platforms you plan to dropship from. You can dropship on an already established marketplace such as eBay and Amazon or you can choose to start your own store using an eCommerce platform such as Shopify, Wix or BigCommerce.
The average dropshipping profit margin on Shopify is higher than if you dropship on marketplaces such as Amazon, eBay or Etsy. With Shopify, you have the advantage of building a branded store specializing in a specific niche which increases the perceived value enabling you to have higher profit margins.
There are many big advantages to dropshipping from your own Shopify store, however, the biggest disadvantage is trying to drive traffic to your store.
Many online shoppers already go straight to Amazon to purchase products meaning you don’t have to spend money on advertising. As a brand new Shopify store, if you want to drive traffic to your products, you will most likely need to pay for some form of advertising.
Advertising is one of the biggest costs you will incur as a drop shipper, however, the benefits of a Shopify store far outweigh the advertising costs that will eat into your profit.
It’s important to have realistic expectations when it comes to dropshipping profit margins. If you’re a complete beginner and you’re profiting anything after expenses, that’s a win! Many newbies are running at a loss.
If you’re just getting started, I suggest you read my article for a full step by step tutorial on creating your own dropshipping store.
There are many components of a store that can be changed and optimized to increase your income. As you become more experienced you will better understand which of these components require you to make changes.
The key takeaways from this article should be:
- Although 20% – 30% is an average dropshipping profit margin, these vary drastically so don’t be disheartened if you’re not in this bracket.
- When it comes to pricing your products, test multiple prices and offers, then analyze the results until you find that sweet spot for maximum profits without reducing your conversion rate.
- Don’t believe the screenshots most YouTubers are showing you as their overall net profit.
- You can expect higher profit margins with a branded Shopify store as opposed to dropshipping on marketplaces such as, Amazon and eBay.
- The profit margins will vary depending on the niche you’re in. For example, a branded store selling apparel can have higher profit margins than a store selling pet supplies.
- Most successful online stores transition from dropshipping into bulk wholesale purchases for higher profit margins.