Is dropshipping profitable?
This is the most common question that aspiring dropshippers find themselves asking when they plan on venturing into a dropshipping business. You’ve read many success stories that seem too good to be true. Is it possible to make a steady income from this business model with little to no upfront cost and no inventory?
Indeed, the state of the dropshipping business today has grown exponentially because of its low barrier to entry and promising benefits – especially finance-wise. The path to profitability with this business model relies on one crucial factor: employing the correct pricing strategies.
Before you build your own dropshipping business, take time to learn about what’s a good profit margin for a dropshipper to determine the selling price for your products.
Shall we get started?
Article Overview
What is a Good Profit Margin for Dropshipping Business?
Best Products to Sell for a Good Profit Margin
Guide to Developing a Dropshipping Pricing Strategy
How to Calculate Your Dropshipping Profit Margins
Different Pricing Strategies for Dropshippers
How to Increase Profit Margins
How to Increase Profit Margins
What is a Good Profit Margin for Dropshipping Business?
According to some dropshipping industry experts, a good profit margin for a dropshipping business model is 20%. This percentage rate is only the average because the specific margin could vary depending on the type of products you sell and the e-commerce platform you use for your dropshipping store. Your target market and niche will also determine your profit margin. If you’re specializing in low-cost products, you can expect a slim profit margin in exchange for higher sales volume, and vice versa for more expensive items.
However, several factors come into play when you calculate dropshipping profit margins. It is important to consider the factors that are unique and relevant to your specific circumstance to ensure you don’t lose money in the process.
Need a fantastic dropshipping business model? Check out this guide on dropshipping on eBay to find out more.
Best Products to Sell for a Good Profit Margin
All dropshippers aim to make high profits from the products they sell. Adding these products to your catalog will enable you to leverage your ability to make dropshipping profits.
Below, you will find the best products that will help you generate a high-profit margin.
1. Women’s Clothing
There is always a high market demand for women’s clothing and fashion. Plus, the niche is quite diverse with several other sub-categories to explore, such as dresses, pants, lingerie, and more. You can also maximize the sales potential during certain holidays when most women like to spend more on shopping.
Check out our Clothing Dropshipping suppliers guide here.
2. Jewelry
Like women’s clothing, there is a consistent market demand for jewelry and fashion accessories. You can earn profits from lower-priced items by targeting a higher sales volume. Or you can specialize in higher-end jewelry, such as diamond and engagement rings.
Learn about dropshipping jewelry on eBay here.
3. Fitness Equipment
Since the pandemic, more people have prioritized their health and well-being. Therefore, the fitness industry is a profitable one that you can take advantage of when choosing high-profit products for your dropshipping business.
4. Baby Products
The baby products niche is another consistent performer in major online marketplaces, like Amazon. Parents like to buy the highest quality products for their babies so you can maximize your profit potential when you sell products from this niche.
5. Kids’ Toys
The kid’s toys niche is another profitable one for dropshippers. It is a lucrative opportunity because there is always a demand for it regardless of the season. Plus, these products are easy to sell since some toys are quite affordable.
6. Beauty Products
The benefit of choosing beauty products for your dropshipping store is that these products are consumable. Therefore, you can expect a steady flow of demand for beauty products from your loyal customers, allowing you to earn profits from each sale.
7. Pet Supplies
Pet grooming and supplies are another booming industry. Dropshipping business owners must take advantage of this demand to generate sustainable profits to keep their business growing.
8. Car Accessories
Car accessories experience a consistent demand in the market. In addition, many car owners like to invest in top-quality car accessories to keep their vehicles in good running condition. These are higher priced items so you can make high profits from each sale.
9. Kitchen Products
Kitchen products are another category that can bring in high profits for dropshippers. These are necessary items used on a daily basis. You can choose from various kitchen products, with some fetching a higher price with a high markup potential.
10. Phone Accessories
With people’s increased reliance on smartphones, it’s no wonder why phone accessories are among the top-selling products online for a good profit. You can choose from a diverse range of accessories to sell and some have a low upfront cost.
Guide to Developing a Dropshipping Pricing Strategy
Pricing your dropshipping products is no easy feat. As you will learn below, several factors could affect the product’s sales price and that will impact the profit margin for dropshipping businesses.
If you’re not sure of the best pricing strategies to use, here are some guidelines to help with your dropshipping pricing strategy.
1. Each product will have a different dropship markup.
It’s a bad pricing strategy to pick a percentage and then use it to determine the sales price for all of your products. Expect lower-cost products to bring a higher profit margin than higher-priced ones. But here’s the catch: you need to sell more of the lower-priced items to hit your profit margin.
With that said, take a product-specific approach when determining your product price so you can maximize each potential profit
2. Use a long-term approach when you price products.
Wouldn’t it make more sense to markup your products higher to gain profits faster? That would be ideal, but it is not practical or sustainable. Some dropshippers might be able to make quick money using this price strategy but it’s not good if you can’t keep your business running for long.
Focus on a pricing strategy that you can sustain for a long time while bringing in a steady stream of income to your business.
3. Think about promotional costs.
One aspect of product price that you should not overlook is the cost of promoting them. Advertising plays a crucial role in dropshipping products because they help boost traffic and generate more sales (if done right). Therefore, you must strike a balance in adjusting your product price to cover the promotional costs but don’t make it too high that your customers won’t be able to afford them.
4. Consider the dropshipping commissions and fees.
When you set up your online store for dropshipping, you must pay certain commissions and fees to the platform. Consider these fees when pricing your products to ensure you can meet your target profit margin.
E-commerce platforms utilize these commissions and fees to cover costs that enable you to run your dropshipping business or online store. It’s a small price to pay than creating and hosting your own website. Some of these commissions are fee-based while others are percentage-based.
5. Know your target audience.
Pricing should not be solely based on the cost of the actual product. Ensure you consider the perceived value of the product, which is something you will determine if you know your target audience.
Research your target audience, such as their age, geographic location, income range, interests, and more. These factors will help inform you on how to price products in your online store. Based on the researched data, you can assess how much your target audience is willing to pay for certain products in your store and how often they would be buying those items (weekly, monthly, or seasonally). You can conduct a thorough assessment of the buyer’s purchasing behavior by creating a buyer’s persona.
How to Calculate Your Dropshipping Profit Margins
You can use two formulas to calculate dropshipping profit margins: one is for the net profit margins, and the other is for the gross profit margin. It’s crucial to employ the correct formula to ensure you can monitor the growth and efficiency of your business.
Gross Profit Margin Formula
Gross profit refers to the amount of money you make by subtracting an item’s production cost from the total sales price. It’s an easy and straightforward formula.
For this formula, you need the following variables: the selling price of the item and the wholesale buying price (also known as the costs of goods sold). The formula will look like this:
Selling Price – Cost of Goods Sold = Gross Profit
Once you have the gross profit, you must divide it by the total revenue.
Gross Profit / Total Revenue = Gross Profit Margin
Now, let’s take a look at it using actual sales numbers. For example, your dropshipping business makes $60,000 in sales per month and the cost of goods sold is $20,000.
Using the first formula, your gross profit is $40,000 ($60,000 – $20,000). If you use the second formula, it brings the gross profit margin to 0.66 or 66%.
Net Profit Margin Formula
The net profit margin is more challenging to calculate since it includes several other dropshipping costs, such as shipping costs, website hosting, transaction fees, operational costs, and taxes. To calculate the net profit margin, the formula looks like this:
Total Revenue – Cost of Goods Sold and Other Expenses = Total Net Profit
Now, take the total revenue and divide it by the net profit so you can determine the net profit margin.
Since every cost counts, it is important to keep track of your outgoing expenses to easily calculate your net profit and ensure you are making money (not losing money) from your dropshipping stores.
Different Pricing Strategies for Dropshippers
Here are the best pricing strategies that you can capitalize on for maximum profit margin.
1. Penetration
This strategy involves lowering your price to establish a foothold in your niche. It also helps to attract the attention of your target audience and boost sales. Use this strategy when introducing new products or if you’re new to dropshipping.
2. Milking
This strategy involves setting a higher price on a product to capitalize on higher market demand. It is suitable for trending products or those cutting-edge products that are not available elsewhere. While you start your product at a higher price point, you gradually lower the pricing once it expands its reach.
3. Competitive
This strategy involves matching the price of your competitors. It’s a good approach when experimenting with different strategies. It is suitable for most industries and niches.
4. Product line
This strategy involves using different price points on various products within a similar product line. Each product has a different target audience so use a specific approach for each to maximize variability.
5. Psychological
This strategy involves encouraging customers to purchase an item by setting prices lower than their average order value. For example, a product that is normally sold for $15 can be listed for $14.90.
6. Premium
This strategy involves setting a higher price to create the illusion of exclusivity or the product being a ‘premium.’ This pricing strategy targets customers who can afford to pay more for a higher-quality product.
How to Increase Profit Margins
If you ask any dropshipper, they would want to know the secret to increase dropshipping profit margins. While these tips won’t guarantee anything, using the correct price strategy can boost your ability to make more profits.
Develop a Solid Pricing Strategy
As mentioned, several factors determine whether or not your online store becomes a profitable venture. But there is one aspect you can control: the product’s price.
A good pricing strategy ensures you have a competitive price strategy, which is neither too high nor too low. If your product prices are too high, they might be too expensive for your target market to afford. If your product prices are too low, you could lose potential revenue.
You can employ different pricing strategies but make sure to account for all your business expenses and customer preferences. Ideally, you must conduct target audience research and fully understand the perceived value of your products, which can affect your pricing approach.
The good rule of thumb for beginning dropshippers is to keep your prices low at the start. Use this opportunity to generate sales and build up your reputation until you can expand your product range and increase your prices accordingly.
Negotiate With Your Supplier
Due to the costs related to the acquisition of your products and other business expenses, there is only so much wiggle room to work with as far as your sales price and dropshipping profits are concerned. But there is another way you can take control of your pricing strategy: negotiate with your supplier.
Discuss the possibility of acquiring your products in wholesale prices instead of a lower price. Some suppliers are willing to negotiate, especially if you’ve been long-term partners in your dropshipping business. Some suppliers would be willing to offer a lower price in exchange for a higher order volume. Whatever decision you make regarding the pricing strategy for your dropshipping store, make sure to calculate them to ensure you are not losing money.
Boost Order Volume
The most proven strategy to boost your dropshipping profits is to increase your order volume. The only way you can make more money (and profit!) is by selling more products. The order volume is directly proportional to your profit margin.
Therefore, you must invest more time and effort to promote your products to gain higher visibility. You do not need to spend more on promoting your products through paid ads. There are several free ways to promote your dropshipping products, such as using SEO strategies and incorporating target keywords, sharing your listings on social media, and offering discount codes to loyal customers to ensure repeat orders.
You should also take advantage of psychological pricing strategies to maximize order volume. For example, instead of setting your product’s price at $10, the price shown should be $9.99 instead. There is a psychological impact of this pricing strategy that would make consumers feel like they are paying less for an item.
Lower Your Expenses
When you build your online stores and you want to achieve good profit margins, you should also adjust your expenses. Make sure to keep all your expenses that are necessary for your business, but omit unnecessary services that add up to a significant expense in your operating cost.
Conduct regular audits on your business expenses to ensure you are not paying for services you don’t need. Specifically, compute each expense to ensure they are not going to cost you more than the sales they generate for your business.
How to Increase Profit Margins
Dropshipping is a lucrative business venture, but several factors can impact how much you make from it. A well-planned pricing strategy is the secret to achieving a suitable profit margin that would sustain your business and ensure you make money from it. But remember to keep it flexible and be open to adapting to your changing needs and prevailing market conditions.
Use the tips above to help you come up with the best strategy that is unique to your business goals, products, and target audience. You can test out the product pricing schemes and see which one delivers the best results. Use data analytics to gain a data-driving insight into your sales performance so you can pin down the most profitable pricing strategy for your business.
