Dropshipping is a popular eCommerce fulfillment option that’s taking over the market. 33% of all online stores relied on dropshipping in 2021 — and that number is expected to continue to increase over time.

Dropshippers act as the middleman between suppliers and shoppers, focusing on fulfillment and marketing. 

As a dropshipper, you don’t have to keep stock of the products you sell, which lowers your costs considerably. But even though you do not have warehousing costs, you still have to manage the costs you do have to come out on top. 

Dropshipping is a business, and like any business, you have to understand your margins to understand how profitable you truly are. 

Profit margins can tell you how profitable your business is as a whole, as well as how profitable each product you sell is. 

If your margins are low, it means you aren’t making a lot of profit on your sales. You typically want to get your margins as high as possible, but that’s easier said than done. 

Dropshipping profit margins require a delicate balance between revenue and expenses. Whether you’re already a dropshipper or you want to start a dropshipping business, it’s important to maximize your profit margins. 

Check out this guide to learn how to calculate profit margins for dropshipping, as well as five ways you can increase your profit margins. 

What is a Good Profit Margin for Dropshipping?

It’s hard to know the average dropshipping profit margin because all dropshippers are different. Typical dropshipping margins range from 10% to 30%, but your average will differ based on your business model, niche, and products. 

At a minimum, your margins should be at least 10% — if they’re any lower than that, something needs to change in your business. As a beginner, it’s good to shoot for a 20% profit margin, although it’s ideal to get it as high as you can.

How to Calculate Dropshipping Profit Margins

You’ll need to calculate your profit margins both on a net basis, to understand your overall profitability, and on a per-product basis to see how much you’re earning on every item in your store.

Net Profit Margin

The good news is that the net profit margin formula is super easy! All you need to know are two things: 

• Your business expenses for the month

• Your monthly revenue

To start, calculate your net revenue with this quick formula: 

Revenue - Expenses = Net Income

Next, plug your net income into this formula: 

(Net Income / Revenue) X 100

This will express your net profit margin as a percentage.

For example, if you spent $1,000 this month and earned $5,000:

$5,000 - $1,000 = $4,000 in net income

($4,000 / $5,000) X 100 = 80% profit margin (which is very impressive!).

Per Product Margin

If you want to calculate the profit margin for every product you sell, you’ll need to use this formula: 

Total Revenue Per Product - Total Cost Per Product = Net Profit Per Product

Then you take your net profit per product and divide it by total revenue per product, times 100: 

(Net Profit Per Product / Total Revenue Per Product) X 100 = Product Margin

So, if your total revenue on the product is $10 and your total costs are $5 the formula is as follows: 

$10 - $5 = $5 net profit for every unit of this product

($5 / $10) X 100 = 50% product margin

The only way to improve your product margins is to adjust the variables in these formulas. 

That means you either need to slash expenses or increase revenue to boost your margins.

What Costs are Associated with Dropshipping?

Dropshippers earn 50% more profit than sellers who manage their inventory. This is because as a dropshipper, you don’t have to deal with the cost of designing products or keeping them in stock, you focus solely on logistics and sales. 

However, even though the costs for dropshippers are lower, there are still a lot of expenses that go into running a successful dropshipping business. 

Although it’s easy to calculate product margins, it isn’t always easy getting the inputs right. You have to get an accurate number for your total costs to calculate your true profit margins, but that isn’t always simple. 

Your calculations should include any costs that you incur operating the business. 

While this isn’t an exhaustive list, you should make sure that you take the following costs into account when calculating dropship profit margins.

Taxes

Regardless of where you work from, you likely have to pay some kind of taxes. Are you paying sales tax? Federal or state taxes? Monthly or quarterly taxes to the IRS? Don’t forget that taxes count as a liability against your earnings, so factor them into your costs.

Marketing

• Influencer partnerships

• Paid ads

• Marketing software

• SMS campaigns

• Email marketing

• Podcast equipment and hosting fees

Cost of Goods Sold (COGS)

Your cost of goods sold (COGS) is how much you spent to buy products from your suppliers. COGS is usually a dropshipper’s biggest cost, so the cheaper you can get your COGS, the better your profit margins will likely be.

Shipping

Since over 66% of shoppers expect free shipping, it’s best to offer free shipping on all of your products. Of course, the “free” shipping isn’t truly free; you simply roll the cost of shipping into the final price of the item itself. For example, if the product is normally $15, you might price it at $20 to account for the cost of shipping.

Some suppliers will offer you shipping included on every order, while others require you to fulfill shipping yourself. At any rate, shipping is a cost that you need to consider to calculate your dropshipping profit margins.

Returns

Unfortunately, shoppers will return the items they buy from you; that’s just a reality of eCommerce. Returns are expensive and annoying, but they’re a cost of doing business.

Many returns will be in unusable condition, too, so returns are usually written off as a loss. It is a good idea to track your average amount of returns over time so that you can accurately factor in this cost.

Fees and Commissions

As a dropshipper, you don’t have to worry about storing products yourself, but since you work as a middleman, you have a lot of fees that you need to pay other parties. This can include:

• Fees paid to dropshipping platforms like Shopify or Magento

• Fees to eCommerce platforms like Amazon, eBay, Walmart, or Etsy

• Commissions paid out to affiliates

There’s nothing wrong with relying on another platform to bring in business, but it’s important to factor these costs into all of your product margins.

Make sure you read the fine print before working with a third party so you understand all of the “gotchas” and fees before you sign on the dotted line.

What is a Good Dropshipping Pricing Strategy?

As you can see, a lot of variables can affect your dropshipping product margins. While optimizing your expenses can certainly boost margins, a solid pricing strategy is one of the best ways to increase your revenue. 

A pricing strategy is a method you use to price your products. 

Ideally, you want to find a pricing strategy that helps you set a price point that enables you to make as much profit as possible without turning customers off from your products. 

A solid dropshipping pricing strategy should account for at least the following.

Your Audience

What do your shoppers want? Does this product fulfill a need? How much will they spend on this item? How will shoppers react to pricing changes?

The Competition

You need to be competitive enough that you have an advantage over the competition. The problem is that dropshipping often becomes a race to the bottom, which can hurt your margins. Know what your competitors are charging, but don’t let that dictate your entire pricing strategy — otherwise, you’ll never turn a profit.

Expenses

How much do you pay to send an item to a customer? How much are your COGS for a particular type of product? You might want to price differently based on how cheap or expensive it is for you to sell a product, so expenses can have a big impact on your pricing strategy.

Psychology

Like it or not, psychology affects dropshipping prices. You want to price based on perceived value, or what shoppers think the item is worth. For example, if you sell a luxury item for $10, shoppers are likely to think it’s low-quality simply because it’s cheap. You have to understand what psychological factors are at play so you can boost margins.

Wielded skillfully, a dropshipping pricing strategy can help you avoid underpricing (and overpricing) while staying competitive in your niche. If you’re tired of playing a guessing game with product pricing, try these dropshipping pricing strategies to add more structure to your pricing.

33% Rule

With the 33% rule, you break down the final price of a product into thirds: 

• One-third for marketing

• One-third for COGS

• One-third for profit

This is a very simple way to price your products, but if you’re just getting started, it’s an easy way to ensure that you stay profitable.

Fixed Dollar

With the fixed dollar dropshipping pricing strategy, you apply a fixed dollar amount to the product’s price. For example, if you buy most of your products for $1, you can add $9 to each product across the board and sell everything for $10. 

This is ideal if you sell lower-cost items that are similar to each other. But if you sell a variety of products with different price points, the fixed dollar strategy might be too simplistic.

Fixed Percentage

Going with a fixed percentage allows you more flexibility than the fixed dollar approach. This way, you can customize the price for every product. To use the fixed percentage dropshipping pricing strategy, you’ll apply a particular percentage to all of your products. For example, maybe you apply a 300% markup to your COGS, and that gives you the final price of each item.

Perceived Value

Perceived value is a tricky pricing strategy that requires you to do a lot of research on your shoppers. 

A perceived value pricing strategy determines a price for products based not on their cost or by adding a fixed percentage to cost, but on how much shoppers think the product is worth. So even if you buy a product for $1 from your supplier, you could ask for $40 from shoppers if they think it’s worth the money. 

This pricing strategy is ideal for dropshippers who have a quality brand, website, photos, videos, and great customer service. You also need to put in a lot of time researching your customers’ ideal price points, so approach this strategy carefully.

How to Increase Profit Margins

At this point, you’ve calculated your profit margins and picked a pricing strategy. But even then, you might notice that your profit margins aren’t as high as you’d like them to be. 

Profit margins rely on optimizing your expenses and your pricing — and fortunately, there’s a lot you can do to influence these two important variables. If it’s high time to boost your profits, follow these five tips to increase your dropshipping profit margins.

Offer Product Bundles

Do you want to sell more products in each transaction? Try bundling. This is when you lump several items into one bundle, which is typically marketed as a “starter kit” or a “customer favorites” collection. 

You can command a higher price for bundles, which is good news for your profit margins.Bundling is a great strategy because it allows you to sell more products for the same cost. 

You don’t have to separately market or pay fees for all of the products piecemeal — instead, you can sell more as a bundle with fewer expenses.

Automate Where You Can

As you grow your dropshipping business, you’ll quickly realize that you can’t do it all by yourself. Even if you hire a team to help you, there’s just too much work for you to handle without automation. 

Human labor is expensive and time-consuming, so it makes sense to automate certain finicky tasks to reduce your labor costs. 

Solutions like Spark Shipping allow you to minimize the hands-on time (and expenses) of managing your business. Plus, with real-time pricing updates, you can optimize your margins 24/7 while boosting profits.

Negotiate with Your Suppliers

You likely work with several suppliers to source products, so why not negotiate with your suppliers? 

It’s hard negotiating in the early days because you don’t have a rapport or history with the supplier, but if you’re an experienced dropshipper, you might be able to negotiate for better terms. 

It can’t hurt to ask your supplier for: 

• Cheaper shipping costs

• Wholesale pricing

• Favorable invoice payment terms

Relationships don’t form overnight, though. Put in the work to get to know your supplier on a personal level. They’ll be much more likely to work with you if you prove you’re an all-star client first.

Sell In-demand Products

As a dropshipper, you get to decide which products you sell. The products you choose can have a tremendous impact on your profit margins, so choose wisely. 

Pick trending items that you know will be profitable. Try niches like home goods or pet accessories, for example. While electronics or fashion might sound like fun, these niches are infamous for out-of-date stock and sizing issues. It’s best to stick with in-demand products that shoppers are less likely to return. 

You can find trending products on TikTok, Google Trends, or Amazon analytics. However, it’s best to try new products on a trial basis before you invest in them too much. See how new products perform for a few months and check your sales data. If your sales volume or margins are low, that’s a sign that you need to focus on other products. Over time, it will become easier for you to spot which products will give you the most bang for your buck, so don’t be afraid to experiment and learn!

Sell on Multiple Platforms

If you’re selling on your own Shopify eCommerce store, that’s a great place to start. But even then, it’s tough getting traffic to your website. If you want to increase margins, you’ll need to increase sales, and that means selling on big eCommerce platforms. 

Shopping platforms like eBay, Amazon, Walmart, Etsy, and others allow you to connect with thousands of shoppers. The downside is that these platforms do come with rules and fees, so make sure the platform’s rules make sense for your business. 

We recommend trying one platform at a time instead of going all out. This will help you learn the nuances of selling on each platform so you don’t get overwhelmed with orders all at once.

How Spark Shipping can help increase profits

Dropshipping is an innovative business model for eCommerce, but that doesn’t mean it’s always sunshine and roses. 

The key to successful dropshipping is minimizing your expenses and maximizing your earnings so you can come out on top. It’s good to minimize your expenses, but savvy pricing is a must for boosting your profit margins. 

The thing is, you can’t do pricing willy-nilly. It has to be methodical, and that requires real-time adjustments. If you want pricing that changes dynamically — without the manual work — go with Spark Shipping. We automate dropshipping businesses to increase profits through: 

• Pricing automation: Spark Shipping removes the need for you to manually adjust your pricing multiple times a day. Comply with MAP, change prices in real-time, and maintain your margins regardless of the price. 

• Product management: Automate your supplier’s product feed with Spark Shipping’s integrations. We automatically upload products to your store and even sync your inventory with your supplier.

• Order fulfillment: Intelligently route orders to the supplier who has the products you need in stock at the lowest price point. Spark Shipping can even automatically send tracking information to your customers to keep the sales process moving. 

Is it time to increase your dropshipping profit margins? Request a Spark Shipping demo to see how our platform can boost your profits.