Dropshipping Profit Margins: 9 Tips to Maximise Profits in 2024

Running a successful online store is easy with dropshipping, one of the most popular and profitable side hustles in 2024. It is a unique business model where retailers don't own inventory - instead, they order their products directly from a dropshipping supplier, who then ships the product to the end consumer. This reduction of overhead costs allows dropshipping businesses to achieve good profit margins. But what is a good profit margin for dropshipping, and how can you use it to assess your online business?

Profit margin represents a business’s take-home revenue after expenses. It can assess how effectively a business is operating and how well it controls its costs. High profit margins indicate a business is effectively pricing its products, while lower profit margins can indicate weak pricing strategies, poor management, or high expenses. In this blog, we’ll discuss the importance of managing your dropshipping profit margin, the exact metrics you’ll need to examine, and how to optimise your online selling strategies for high dropshipping profit margins in 2024. 

Why do dropshipping profit margins need to be constantly managed?

Profit margin management is crucial for dropshipping retailers. The average dropshipping profit margin is between 15-20 per cent, compared to the average margin for traditional retail, which sits around 30-50 per cent. To maintain a profitable dropshipping business, dropshipping stores need to sell more products to more customers than their brick-and-mortar competitors. Various aspects of the dropshipping model can cause profits to fluctuate, so monitoring your dropshipping profit margin is crucial to track your business's financial health. Let's explore how your profit margin calculation can help inform product pricing strategy, reduce shipping costs and increase your dropshipping profits.

Maintain competitive prices

The dropshipping industry is very competitive, with new dropshipping suppliers and retailers entering every year. As a result, your business will need to carefully monitor your margins to ensure your selling price remains competitive in the market while allowing for reasonable profit.

Manage fluctuating costs

Many costs associated with dropshipping will fluctuate due to changes in supplier pricing, shipping fees, currency exchange rates, and other operational expenses. A good dropshipping profit margin allows you to adapt to these changes and ensure your pricing remains profitable.

Adjust marketing expenses

Dropshipping retailers rely heavily on digital marketing to attract customers to their online stores. Managing profit margins is crucial to ensure your business can cover these expenses while also making a good profit margin. These expenses can be offset by using low-cost marketing strategies such as SEO, growth hacking and viral marketing.

Improve customer satisfaction

Maintaining a healthy profit margin allows businesses to invest in strategies that attract and retain customers, such as improved quality control, fast and effective customer service, or other investment opportunities. 

Capitalise on seasonal trends and market demand

Demand for certain products or categories can vary throughout the year due to seasonal trends, holidays, temperature fluctuations, or other factors. By monitoring profit margins, you can adjust your pricing strategy accordingly to capitalise on peak market conditions and remain competitive when the business is slow.

Dropshipping profit margin metrics to analyse and manage

Cost of goods sold (COGS)

COGS refers to the costs and expenses directly incurred by producing goods. For companies that manufacture their products, this includes the cost of materials, labour and manufacturing overheads. For dropshipping retailers, this typically includes the cost of purchasing these goods from suppliers. COGS does not include shipping costs, marketing costs, overhead costs that cannot be tied directly to a specific product, and other operating expenses. 

COGS is calculated using the following formula: 

COGS = Starting inventory + Purchases made during a specific period - Ending inventory.

COGS is considered a business expense, making it an essential metric for businesses to track for accounting purposes. It is subtracted from a company’s revenue to calculate its gross profit. 

Understanding COGS is crucial for businesses as it helps them assess the profitability of their core operations and make informed decisions about their pricing strategy, inventory management, and production efficiency.

Shipping costs

In conventional retail, retailers take on the costs of shipping and logistics. In the dropshipping business, these costs are incurred by suppliers (as they ship directly to customers) and passed onto retailers. Shipping costs may be affected by packing type, package weights, preferred courier, and the type of shipping. They can also be affected by factors such as fuel costs, extreme weather conditions, global conflicts and other disasters. High shipping fees can eat into your ecommerce business’s profitability in various ways. Not only do shipping fees directly reduce your dropshipping profit margin, but passing these costs onto customers can lead to cart abandonment, which will have further detrimental effects on your revenue. High shipping costs also put you at a competitive disadvantage, particularly compared to companies that offer free or affordable express shipping. By regularly monitoring and managing shipping costs, you can adjust your pricing strategy accordingly to help improve profitability.

Average order value (AOV)

The average order value refers to the average amount spent by customers in each transaction. It is a commonly used key performance indicator (KPI) in ecommerce.

AOV is calculated using the following formula: 

AOV = Total revenue/Total number of orders placed. 

AOV can help businesses monitor their general sales performance over time and identify seasonal trends, fluctuations in customer spending habits, marketing campaign success, and upselling or cross-selling opportunities. 

By increasing your AOV, you should also increase your profit margin. A low AOV may indicate that customers favour your smaller or least expensive products, that your target audience lacks discretionary income, or that there is low awareness of your products and/or features. 

Conversion rate

Conversion rate refers to the percentage of website visitors who visit your website and complete a desired action, such as making a purchase, signing up for a newsletter, or filling out a contact form.

Your conversion rate is typically calculated using the following formula: 

Conversion rate = Number of conversions/Number of website visitors x 100.

Conversion rate is a critical metric for e-commerce businesses because it directly reflects the effectiveness of their website and marketing efforts in turning visitors into customers. They can help businesses identify the most effective distribution channels, measure marketing campaign’s success, analyse the effectiveness of your copy, and identify your most valuable customers.

Customer Lifetime Value (CLV/CLTV)

Customer Lifetime Value (CLV or CLTV) is a metric used to estimate the total value that a customer is expected to generate for a business throughout their relationship. It represents the net profit attributed to a customer's transactions with a company over their lifetime as a customer. 

The exact calculation for CLV differs between businesses, but a common formula is: 

CLV = Average purchase value x Average Purchase Frequency x Customer Lifespan.

CLV can identify which customers contribute the most to your profits, helping you to create targeted marketing strategies that resonate with your most profitable customers.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is a metric that measures the average cost a business incurs to acquire a new customer. It represents the total amount of money spent on marketing, sales, and other activities aimed at acquiring customers, divided by the number of customers acquired within a specific period.

CAC is calculated using the following formula: 

CAC = Total marketing and sales expenses/number of new customers acquired.

By comparing the CAC to the CLV, businesses can determine whether their customer acquisition efforts are profitable and sustainable. Ideally, the CAC should be lower than the CLV to ensure that the company is generating positive returns from acquiring new customers. If the CAC exceeds the CLV, it may indicate the need to optimise marketing and sales processes or reassess the target customer segment.

Customer Retention Cost (CRC)

Customer retention cost (CRC) is a metric that measures the average expenses a business incurs to retain existing customers. This may include investments in customer service, loyalty programs, relationship management initiatives, and other activities aimed at building long-term relationships with customers.

CRC is calculated using the following formula: 

CRC = Total retention expenses of all customers/number of active customers.

Lifetime CRC =  Average CRC per customer/average customer lifetime. 

Customer retention cost is an important metric for businesses because retention strategies can be more cost-effective and have greater returns than acquisitions. As with CAC, CRC can be compared to CLV to determine whether customer retention strategies are profitable, or whether they need to be assessed and reformed. 

Refund Rates

Refund rates refer to the percentage of sales that are refunded to customers due to product returns, cancellations, or dissatisfaction with the purchased goods or services. Refund rates can have a negative domino effect on your profit margins for many reasons:

• In addition to the initial transaction cost, the returns process can incur many extra costs including return shipping fees, restocking fees, and even the cost of a new product for replacement.

• High return rates can harm your brand’s reputation, turning away potential customers and deterring existing customers from making future purchases. A negative returns experience can cause 57 per cent of consumers to abandon a retailer entirely.

• Returns have a direct effect on other metrics such as ROI, CAC and conversion rates, making it difficult to accurately assess marketing strategies.

The average return rate for an ecommerce store is between 20-30 per cent, nearly double the rate for brick-and-mortar stores. These rates are highest across apparel and accessories, and the most common reasons for returns are sizing issues, unwanted gifts, shipping delays, and discrepancies between a product’s online appearance or description and the delivered product. If your refund rate is high, this can indicate issues with your product descriptions or quality, slow or difficult shipping processes, or issues with your returns policy itself. Fraud is also driving up return rates in ecommerce - it’s estimated that 13.7 per cent of retail returns last year were fraudulent (up from 10.4 per cent the year before) costing retailers roughly $101.91 billion.

How to maximise your dropshipping profit margins in 2024

Focus on customer retention

Customer retention strategies can be 6-7 times more cost-effective than customer acquisition strategies. This means it’s often easier (and cheaper) for businesses to keep existing customers than to attract new ones. This is especially true in 2024. Due to increased living costs, most consumers have shifted their spending habits. While for many customers this means developing deal-seeking behaviours and switching to private labels, other consumers are doubling down on brands they are familiar with and loyal to. Focusing on customer retention strategies can both increase sales and maintain them during economic strain. 

Some customer retention strategies, such as loyalty programs, offer unique rewards or services to customers who shop repeatedly with your business. Other strategies highlight your unique selling proposition and competitive advantages, such as offering a fast, friendly and effective customer service experience, using multiple distribution channels, and allowing multiple payment methods. Personalised marketing is another highly effective method, with 99 per cent of marketers claiming personalisation helps to advance customer relationships. 

Increase average order value (AOV)

Increasing your average order value has a direct impact on not only profit margins but many other financial metrics, particularly when these efforts focus on cost management and providing more customer value. By increasing the average amount customers spend per transaction, retailers can generate more income from existing customers instead of spending more on customer acquisition. There are many simple strategies businesses can implement to increase AOV. Upselling and cross-selling are two common and effective strategies where customers are encouraged to purchase premium versions of their desired product or purchase complementary products in the same transaction. Other methods include bundling products, investing in loyalty programs, offering volume discounts, creating limited-time offers or discounts, and optimising your product descriptions and images. 

Identify high-margin products

Some products have higher profit margins than others due to various factors related to their production, demand, competition, and market dynamics. Some common reasons a product may have higher profit margins include:

• Trends and seasonality: Products that capitalise on seasonal trends, fads or peak market conditions may experience temporary increases in profit margins.

• Low competition: Products with little or no competition, such as niche market products, allow for more flexible pricing and higher profit margins than high-competition products.

• Low production cost: Products that are inexpensive to manufacture or source tend to have higher profit margins. 

• Additional services: Products that come with value-added services such as customisation or warranties can justify higher prices and profit margins. 

Specialised goods, luxury goods and trending products are all high-margin opportunities for your dropshipping business. For tips on how to find trending and profitable products, check out our blog “Our Top Tips to Find Trending Dropshipping Products in 2024”. 

Sell through multiple channels

From digital marketplaces to social commerce, there are many ways for consumers to shop online. To maximise reach, you should consider an omnichannel retail strategy. These strategies involve creating a consistent, seamless shopping experience for customers across multiple media channels. Modern consumers are more often than not multi-channel users - the average internet user is active on at least two social media platforms and 3 in 4 consumers browse multiple marketplaces pre-purchase. An omnichannel strategy allows you to meet your customers wherever they are, whenever they shop. 

An omnichannel marketing strategy requires a seamless and consistent customer experience across all channels and touchpoints, from physical stores to online platforms, social media, and mobile apps. This may mean optimising your website for both mobile and desktop use, or you may need an updated content management system (CMS) that can integrate and synchronise marketing, sales and customer service in a single platform. Additionally, it necessitates a deep understanding of the customer journey to optimise every point of interaction and deliver a unified brand experience that drives engagement and loyalty.

Find the right suppliers

Suppliers hold a lot of power over your profit margin. That is why finding quality, reliable suppliers is such an important part of the dropshipping journey. Dropshippers must rely on their suppliers to maintain product quality, use accurate and fast shipping and couriers, and provide fair terms and conditions. Many suppliers will work with multiple dropshippers who sell the same product, which can make it harder to compete in the market. Retailers also have to choose between sourcing products locally or using overseas suppliers. Foreign suppliers can have lower manufacturing costs, but this often comes at the expense of convenient communication (due to time zone differences or language barriers), longer shipping times, and other additional costs (such as import duties). 

Here is how finding the right supplier can help increase your profit margins:

• Flexible shipping: Suppliers that offer multiple shipping options can not only help you save money, but can increase customer satisfaction through fast shipping, accurate tracking and priority shipping options. Many suppliers will use their own courier partners, while others will work with your chosen partners, allowing for even more flexibility.

• Local benefits: Suppliers with local warehouses or distribution centres can cut last-mile delivery costs and deliver goods to your customers faster.

• International benefits: Reduced manufacturing costs are a common benefit of overseas suppliers, but they can also make it easier to enter new international markets. 

• Opportunities to scale: As your business grows, your operations will need to scale. This requires finding suppliers with flexible infrastructure that can scale with you. 

• Competitive pricing: Finding suppliers that offer products at a competitive wholesale price can help reduce your COGS, giving you a higher profit margin.

Once you’ve found the right supplier, you’ll want to develop your supplier relationships. Building a strong professional relationship with your suppliers has a myriad of benefits including more efficient communication, less price fluctuations, ongoing improvements, and reduced costs over time. 

Offer free shipping

Free shipping continues to have a significant impact on consumer spending. According to Shippo’s 2023 State of Shipping Report, 62 per cent of consumers won’t purchase from a retailer that doesn’t offer free shipping, and 47 per cent of consumers will spend a minimum amount to get free shipping. When given the option between fast or free shipping, 75 per cent of consumers preferred free shipping, while only 25 per cent preferred fast shipping. 

While many sellers provide free shipping and simply eat the cost, there are plenty of other ways to offer free shipping without losing money.

• Pass the cost on to the consumer by increasing your product price.

• Implement a minimum free shipping threshold for your store.

• Restrict free shipping to certain sales events, products or categories.

• Offer free shipping in exchange for referrals or as part of a loyalty program.

• Lower shipping costs by changing couriers or negotiating contracts with suppliers.

Have a clear returns policy

Your return policy might be affecting your profit margins, but not for the reasons you may think. If your returns processes or policies are unclear, hard to find or complex, you may be turning away customers. 68 per cent of consumers consider returns policies to be extremely or very important when it comes to shopping, and it’s estimated that 16 per cent of cart abandonment is due to unsatisfactory return policies. A clear and simple returns policy lets customers know they can return unsatisfactory products, increasing confidence in your business and increasing the likelihood of completing a purchase. 92 per cent of customers say they will buy from businesses again if the returns process is easy - that’s a lot of repeat purchases to boost your profit margin.

Invest in AI

It’s clear that AI will play a crucial role in ecommerce in 2024. While generative AI, such as ChatGPT and Midjourney, has captured public interest, many other applications are already revolutionising how we shop. AI can help businesses to increase efficiency by automating routine tasks that would otherwise take up time and resources. It can also identify weaknesses or inefficiencies in your existing processes and suggest improvements. It can analyse large amounts of data in a short period, which can then be used to drive improvements, predict trends, reduce customer acquisition costs or identify new market opportunities. AI makes personalisation easy, allowing businesses to deliver tailored product recommendations and discount codes at any point in the customer journey. AI systems can even monitor transactions in real time to detect and prevent fraud, significantly reducing losses.

By increasing efficiency, reducing costs, enhancing decision-making, and creating new opportunities, AI can lead the way to excellent profit margins. To make the most of these tools, companies need to invest in the right technologies, ensure they have the talent to leverage AI tools, and foster a culture of innovation and continuous improvement.

Growth hacking techniques

Growth hacking is focused on achieving exponential growth through low-cost, innovative and unconventional strategies. Coined by entrepreneur Sean Ellis in 2010 in a blog post titled “Find a Growth Hacker for Your Startup”, these techniques have captured the imagination of marketers and entrepreneurs looking for high-growth opportunities. Growth hackers use data analysis and extensive iterative testing to inform their campaigns, ensuring only the best ideas stay on the table. They are designed to be flexible, relevant and cost-effective. Many growth hacking techniques focus on retention, UX design and data collection, while others focus on viral marketing, social media management, and strategic retargeting. Despite its experimental nature, growth hacking has been highly successful for many well-known brands.

Final tips on calculating profit

Gross profit margin calculation

Gross profit margin shows what percentage of revenue is left over after accounting for the direct costs of producing the goods or services sold. It is calculated by subtracting the cost of goods sold (COGS) from revenue (sales) and then dividing that number by revenue. A typical gross profit margin formula is:

Gross Profit Margin = (Revenue − Cost of Goods Sold (COGS)/Revenue)×100

This margin highlights the core profitability of a company's products or services before overhead costs, taxes, interest, and other expenses are considered.

Net profit margin calculation

Net profit margin indicates how much profit a company makes for every dollar of revenue, after all costs and expenses, including taxes and interest, have been accounted for. It is calculated by dividing total revenue minus expenses (net profit) by the total revenue generated. A typical net profit margin formula is:

Net Profit Margin = (Net Profit/Revenue)×100

This metric provides a more comprehensive view of a company's financial health and efficiency in managing all its business expenses.

Should I calculate my net profit margin or gross profit margin?

Whether you use gross profit margin or net profit margin, calculations will depend on the specific financial aspect you want to analyse. While gross profit margin focuses on the cost efficiency of production, net profit margin provides an overall assessment of the company's profitability, making it an important metric for investors and stakeholders. Use gross profit margin when focusing on production or service delivery efficiency, direct cost management, or when comparing companies within the same industry. Use net profit margin when making investment decisions, evaluating overall management efficiency, or comparing companies across different industries.

Understanding both gross and net profit margins is crucial to monitor a company's financial health and operational efficiency.

How can Dropshipzone help to increase profit margins?

If you’re in the business of dropshipping, you’ll love Dropshipzone. Built by entrepreneurs, for entrepreneurs, our B2B2C marketplace has everything you need to help increase profitability and build a successful dropshipping store. 

• An easy-to-use platform: We make it simple for our Suppliers and Retailers to connect in one place. 

• Reliable and safe: Our suppliers come pre-vetted and adhere to strict quality standards, so you can simply add their products to your store without worry.

• Wholesale prices: Our products are competitively priced, and our promotional services make it even easier to find products at the right market price.

• Expert advice: Our customer service representatives are ready to help at any stage, and our regular blogs cover a wide range of topics to help ecommerce beginners and experts alike.

• Wide range: We’re always adding new products and categories to our catalogue, making it easy for brands to find high-profit margin products to sell online.

• Low cost: With no inventory fees, minimum order quantities or subscription fees, our platform is a low-cost, low-risk solution for businesses looking to increase their profit margins.

See the potential growth opportunities for yourself. Sign up for Dropshipzone and start dropshipping products today.

Summary

Maintaining healthy profit margins is an essential part of online retail. Many different factors can affect your profitability, each requiring different monitoring and maintenance strategies. By keeping track of your net and gross profit margins, you can protect your business's health and ensure you’re performing at maximum efficiency.