Dropshipping profit margins: Calculation, key metrics & more

Cost of goods sold (COGS)

The cost of goods sold (COGS) is a significant expense for dropshipping stores and crucial for any profit margin calculation. Shopify and other eCommerce website hosts have built-in cost-per-product sections that you can use to track your COGS automatically.

The cost of goods sold is based on how much it costs to manufacture the products before an order is delivered. This can include material costs, production expenses, fulfillment costs, and other services that enable manufacturing.

COGS in dropshipping can differ if you’re selling ready-made wholesale products or applying prints on custom product blanks.

With Printify white-label blanks, for instance, the COGS is automatically calculated for every product you create and sell, and subtracted after a sale is made.

Shipping costs

After manufacturing, shipping costs are the next necessary expense. These can be highly variable and depend on the supplier you’ve paid to ship your orders at any given time.

The costs for shipping are based on multiple crucial steps in dropshipping, which rise in expense depending on your level of customization and branding. This includes custom labels, packaging, and the delivery estimates made by the shipping provider.

With Printify, shipping costs are calculated separately for all dropshipping products and subtracted from the total revenue after a sale. You can lower shipping costs by choosing Print Providers locally or as close to your customer’s location as possible.

Average order value (AOV)

One way to increase your average dropshipping profit margin is by raising your average order value (AOV), another formula-based metric that calculates each customer’s average spending on your store.

To calculate AOV, divide the number of orders made at your store by the total revenue of all sales, usually counted in monthly intervals.

The average order value will depend on the types of products you sell. For example, a store that sells stickers will have a much lower AOV than a store that sells custom sneakers.

Conversion rate

eCommerce conversion rates show the percentage of people who, having visited your store, actually end up buying something. Your conversion rate likely rests at a single-digit percentage point since a good eCommerce conversion rate stands between 2.5% and 3%.

To calculate the conversion rate of your dropshipping store, simply divide the number of orders by the number of unique store visitors.

Conversion rates can increase your profit margin for dropshipping, but some products simply do not have the same rate as others. However, you can increase the number of unique user sessions by improving click-through rate through search engine optimization (SEO) and dynamic content marketing – as well as maintaining frequent advertising and outreach campaigns.

Customer lifetime value (CLV)

After AOV, we can move on to more long-term metrics to help you predict future revenue. Customer lifetime value measures the average revenue each customer generates throughout their lifetime shopping in your store.

Because of the long-term nature, customer lifetime value is highly unpredictable, so you’ll have to make some informed guesses about the likelihood that your buyers will shop again.

To calculate your dropshipping store CLV, multiply your previously calculated average order value by the number of individual customer transactions per month – then multiply by a retention period. The latter variable refers to the time period you predict a customer will revisit your store.

There are ways to predict customer retention, for instance, by seeing how many previous buyers have subscribed to your newsletter, participated in social media posts, or used previous coupon codes or deals.

Note, however, that depending on the goods you sell, CLV can decrease or increase whether or not a single product from your store fulfills their needs. This is why product diversity is crucial.

Customer acquisition cost (CAC)

Naturally, attracting new customers should be a prime focus if you want to increase market demand. Customer acquisition costs are the money you spend to attract more buyers, usually through advertising, marketing, or content-related efforts.

To calculate your CAC, you need to sum up all your marketing/advertising expenses and divide that by the number of new customers acquired in that marketing cycle.

If your customer lifetime value is higher than the cost of gaining more customers, then your average net profit will likely increase throughout your marketing efforts.

Refund rate

Finally, we can’t forget about that often teeth-grinding process of handing out refunds to unhappy customers. Whether it’s a supply chain issue, product quality, or customer-related problem, decentralized dropshipping can invariably cause you to send items back.

To calculate your refund rate – the percentage of orders that are sent back – you simply divide the number of refunds by the total number of orders made during a certain time period.

High refund rates will likely result in a much lower profit margin, especially in dropshipping. It’s crucial to vet your suppliers and critique the product you’re selling personally, ensuring that the item quality fits the standards of your store and customers.

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Gross profit margin formula

The gross profit margin shows the income you receive when subtracting production costs from the product’s total revenue or sales price. The profit you make from a single sold product is surprisingly easy to calculate.

First, you need to calculate your gross profit. Take the selling price (total revenue) and subtract the wholesale buying price, also known as the costs of goods sold (COGS) – your full production expenses.

To calculate the gross profit margin, simply divide the gross profit by total revenue.

For example, let’s say your dropshipping store earns $60,000 in monthly sales. The dropshipping supplier you work with requires $25,000 as COGS, which covers expenses for all products sold.

Using the first formula, we calculate your gross profit of $35,000. That makes your gross profit margin the difference between gross profit and total revenue, or 0.42 using the second formula. Turning that into a percentage, your gross profit margin would be 42%. That’s all there is to it.

Net profit margin formula

Net profit margins consider the product’s price and all other dropshipping costs that come with running your business. This is a more holistic way of reviewing your sales expenses and is good practice to take all your gains and losses into account.

Expenses outside of production costs may include

• Advertising expenses
• Taxes and sales policies
• Website hosting costs
• Account subscriptions
• Transaction fees
• Shipping fees
• Electricity, internet, etc.

To begin the calculation, take your total revenue from sales minus the cost of goods sold and all other expenses, like the ones listed above. This will equal a net profit, or how much money you get after all other expenses are paid – your true profit.

Now that you have the net profit, you can divide it by the total sales revenue and get a net profit margin that shows how well your store is turning sales into tangible income.

Let’s use the previous example with the same supplier, the only difference being that you add all your other expenses on top of the gross profit margin calculation.

With $60,000 in monthly sales minus the $25,000 in COGS and $15,000 in business expenses, your net profit would be $20,000.

Finally, divide the net profit of $20,000 by the total revenue of $60,000, and you would get a net profit margin of 0.33. In percentage terms, that would be a net end profit of 33%.

The important thing for an accurate net profit margin calculation is keeping all your business fees and expenses in check, at least monthly.

Have a pricing strategy in place

A pricing strategy will ensure that you’re not setting product prices too high, where no one wants to buy them, or too low, so that you’re missing out on potential revenue.

Pricing strategies should take all your business expenses and customer preferences into account. It’s important to conduct target audience research to fully understand your niche and the perceived value of your products. These variables may include:

• Production costs
• Price elasticity
• Marketing expenses
• Business expenses
• Audience and perceived value
• Taxes and eCommerce fees

A good rule of thumb for beginner dropshippers that might be struggling with making enough sales and have few returning customers is to set a lower price to introduce your product to more people.

Price your products more efficiently with Printify’s guide on how to price a product for ultimate success.

Negotiate a lower price with your supplier

eCommerce stores are not in the dropshipping business alone – suppliers rely on the number of goods sold and customer demand. Your aim should be to negotiate wholesale prices instead of consumer prices.

Your value as a partner increases as your business grows, and it’s not a taboo topic to ask your supplier for a personal contract that can benefit both your profit margins and the number of orders the supplier receives.

You should also pay attention to shipping, ensuring that both packaging and supply routes are optimized to decrease costs and delivery times.

Minimize expenses

Avoid any unnecessary expenses. One of the pitfalls of dropshipping is paying for services you don’t really need.

Subscription costs, finance trackers, and analytic tools can be beneficial to negate low dropshipping margins. If they cost more money than they make, you’re better off without them.

Similarly, you may try selling lighter products that reduce shipping costs, or, like any other business, reducing redundancies and pulling unsuccessful campaigns can make all the difference.

Try to increase order volume

If you want to make more money, increase the number of products you sell and diversify your potential audience. Two methods usually increase order volume: paying for product promotion through marketing and SEO, and increasing your product line-up to attract more buyers.

Either way, targeting the right customer will involve significant research into marketing and user psychology, so consider it a long-term effort to increase your dropshipping profit margin.

Sell using multiple channels

Multi-channel selling is the process of listing the same goods on separate sales channels, like selling through both your Shopify store and the Facebook marketplace.

Using multiple channels lets you target different buyer behaviors, including pandering to those who browse on larger eCommerce marketplaces and those looking for specific web stores.

The more frequently a customer is exposed to your products, the more likely they are to make a purchase.

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