How to estimate the selling price and the profit?
The margins in dropshipping can vary from 10% to several thousand percent depending on the perceived value of the product by the customer. To calculate and define this relationship, you must of course take into account the purchase price, the sale price, but also other factors related to marketing (the management of your online store CMS for example), delivery (e.g. delays), and the time invested. Here is how to calculate your margins in dropshipping in order to have the dropshipping profitability.
Dropshipping Profit Margin: What is a margin in dropshipping?
The margin is a very simple concept that allows you to know very quickly if you have a profitable operation or not (loss-making). Let’s say you buy from a supplier like Aliexpress a product at 10$ HT and you sell it at 50$ HT.
Your product costs 10$ before tax, so you have a margin of 40$ before tax.
You have to spend for example 10$ more to advertise and sell this product. So you reduce your margin by 10$. It becomes 30$.
Some will stop there. This margin is called the gross margin. It is the selling price minus the purchase price and advertising costs. However, there are other factors that can affect the margin:
- The rental of a space to store your products if you evolve your dropshipping to e-commerce.
- The time you spend depending on your salary or if you outsource.
- The maintenance of your website, the subscription for Shopify or the price of other plugins.
- Electricity, Internet, your rent if you work in an office in France.
- Without forgetting your charges, taxes etc. which are not in the domain of pure margin, but which must be considered if you are an auto-entrepreneur or in micro-business.
- Take into account the packages lost or destroyed by the customs without forgetting the customs fees.
- The commission fees of your bank (try N26 which allows you to save money in dropshipping), other commissions and transaction fees.
Let’s say you sell 100 products per month and each one has a margin of 30$ HT. You pay each month 100$ to have shopify and some applications. Then, you rent an office at 250$ per month and you have 50$ for electricity. So you spend 400$ in additional expenses.
If you sell 100 products per month with these 400$ of expenses at 30$ of margin, you can say that each sale of product covers 4$ of additional expenses which allow you to support your site and your activity (400 divided by 100). Thus, your margin per product taking into account these data is no longer 30$ HT but 26$.
Dropshipping Profit Margin: What is the average margin to have?
On average, a product is sold at 4 to 100 times the price. Here are some examples:
I bought scratch cards of the world in dropshipping at the price of 1$ to sell them at 24,90$. So I almost made a X25.
Some people buy watches for a few Dollars and multiply the price by 100…
A bamboo mug is an expensive product, around 12$. You can resell it for 24 or 39$, allowing you to make a X2 or X3 on the price.
This part allows us to define a psychological price for the customer. An acceptable price that he will spend to acquire the object. However, here, the most important thing is not taken into account. It is the margin that will allow you to make your project live. To give you an average margin range in dropshipping, it will be between 35 and 60%. This is only an average and I will explain why you should not rely on it.
I invite you to go back to the previous example of the 50$ product with a 40$ margin which is bought at 10$.
- You need to make a forecast of your expenses and test to see if this forecast is realistic.
- Let’s say you tell yourself that a customer will cost you $10 in advertising costs to make a sale. You say to yourself “I have to raise the price by $10 to cover these advertising costs.
- Then you say to yourself “I’m going to sell 100 products a month and I want to pay myself minimum wage”. So, you have to add 15$ more which will allow you to generate 1500$ of salary during the 100 sales. By adding the charges, we will approach a minimum wage. The product is therefore currently at 35$.
- Then, we can take the 4$ of operating costs of your dropshipping company per product. The price goes up to 39$.
- Finally, nothing ever goes as planned. You then add a 30% margin, which gives you 11.7$, or approximately 50$.
This exercise allows you to obtain a viable margin if the cost is acceptable for the customer. For this, there is nothing like testing your ads and making your first dropshipping sales. You could very well remove the salary part or reduce it to consider it as a margin allowing you to live without necessarily aiming at a salary. The salary you get will depend on your results and you will have to boost your sales.
So there is no real range to apply to find the margins of your dropshipping products. The real margins that you should apply must take into account the criteria that I have indicated to you to succeed in obtaining a viable business. For the rest, I invite you to follow my great dropshipping training to avoid making mistakes!
Profitability dropshipping: How to calculate the margin in dropshipping?
Margin is a very important information to have in any business. Indeed, it represents an indicator of comparison between your business and the business of your competitors. So, if you are engaged in a project requiring a large investment, you can use the margin to make a market study. Moreover, it can help you to realize your business plan. However, you need to master the method of calculating the margin and, above all, be able to anticipate it at the same time. To this end, the calculation of the margin allows you to choose a selling price and to adjust your commercial strategy. In addition, it allows you to do marketing, to position your business on the market, to make a profit on your sales and finally to know the break-even point of your business.
Profitability dropshipping: What elements to take into account?
To calculate the margin in dropshipping, dropshippers usually take into account three main elements. These are the purchase price of the product from the supplier, the resale price of the product and the budget needed for advertising. Indeed, to have traffic on the Internet requires a budget for communication and advertising. Thus, you can sell your different products. Nevertheless, to be more precise in the calculation of the margin in dropshipping, there are other very important elements to take into account as well.
Profitability dropshipping: Fees for the creation of the site
To engage in online sales you must necessarily have an online sales site. Indeed, to do dropshipping the first step is to create your online store. However, the creation of an online sales platform requires a significant investment. You make this investment profitable thanks to your sales. It is then necessary to take into account these expenses of creation of site to calculate your profitability dropshipping. There are solutions that allow you to know the cost of such an investment. For example, for platforms like dr.Tech, the creation of a site costs 50$ per month.
When you make sales, you use banks to make your various financial transactions. So, during these different transactions, the bank charges fees. However, the rate of these fees varies depending on the bank.
In carrying out the activity These may include office rent, electricity and internet charges, telephone costs for calls to your suppliers or possible service providers. It is very important to list your different expenses. Thus, in the calculation of your dropshipping profitability, you must be as precise as possible.
Calculation of the margin
Whether you are in the online business or in dropshipping, the formula for calculating the margin is always the same. It is :
Sales price before tax – purchase cost before tax – acquisition cost
Here, the purchase cost of the product represents the price at which you buy the product from your wholesaler or supplier. On the other hand, the acquisition cost represents the various expenses incurred to be able to attract the customer to your dropshipping platform. However, you can put in all the following expenses: the commissions of the marketplaces, the different external providers, the costs for the management of your platform and the advertising costs.
Example of margin calculation
We will take as an example an individual who decides to start dropshipping and wants to calculate his dropshipping profitability. The purchase price of the product from his supplier is 6 Dollars. Thus, he sets his resale price at 23 Dollars. During the same time, the acquisition cost is 5.1 Dollars. In this case, the margin calculation will be :
23 – 6 – 5.1 = 11.9.
In this case, the person’s margin for the sale of a single product will be 11.9 Dollars. We will now proceed to add the other additional costs. Let’s assume that our shopkeeper sells 30 products in a month. With a margin of 11.9 Dollars per product sold, he ends up selling 30 products at 357 Dollars.
30 x 11.9 = 357
If our individual uses for example Dropizi for the creation of his online sales platform which costs him 27 Dollars per month then :
357 – 27 = 330
Moreover, the status of micro entrepreneur obliges him to pay about 13% of his turnover. So, with a product that costs 23 Dollars, he makes a monthly turnover of 690 Dollars.
690 x 13 % = 89.7
From this 330 Dollars, he will have to subtract 89.7 Dollars
330 – 89.7 = 240.3
Thus, the final result is 240.3. This means that at the end of the month the seller will make a profit of 240 Dollars. Just like a classic online sales platform, the calculation of the margin is essential in dropshipping. So, when you set your prices, I advise you to double the purchase price, because in most cases the sales margin varies between 40% and 50%. In this case, you will be able to cover all the costs related to marketing and at the same time make big profits.
From all the above, we retain that the development and the rise of the online business has allowed the birth of a new method of online sales. It is dropshipping. Indeed, to start dropshipping, you don’t need a high budget. This is possible because dropshipping does not require to have a stock or any delivery and logistics management. However, many merchants wonder how to calculate their dropshipping profitability. So, to allow them to know the profitability of their business we have presented through this article the method to calculate this margin. All entrepreneurs are now equipped to know the profitability of their online business and at the same time know what to do to increase their profits.