As with any other e-commerce setup, it is essential for someone planning on to start a new dropshipping business to familiarize oneself with the margin of profit associated with it.
Unlike other e-commerce businesses where one has to worry about transport, inventory and storage which consume most of the income, dropshipping is free of such payments which allows individuals to maximize their profits. Therefore, a keen insight on the profitability of dropshipping beforehand guarantees one nothing but a quick success in this field of business.
In order to develop an understanding regarding the range of profitability of dropshipping, it is important to note that the profit margin is not the only factor that determines it. What also goes alongside it is the quantity of the product sold and its respective profit margin percentage.
To put the idea of how quantity is related the profit margin into context, an example is used in which two products having similar profit margins are sold at different prices and quantities. Selling 50 units a month of a $2 product results in a larger profit than selling mere 5 units of a $20 product, provided their profit margins are same.
There are various ways in which the dropshipping profits can be augmented which include optimizing the buying and selling prices in such a way that the total profit earned is enhanced. In addition to this, the back-end profit method and maintaining a healthy ratio between selling trend-oriented and “long-tail” further provide means of generating larger profits. This will be elaborated in the article later on.
Cheap Products with High Profit Margins
As an optimization process of the buying and selling prices of the dropshipping products, it is really vital to obtain a full knowledge of what people demand more. If the price of a product is low and its sales are trending, it looks really tempting to turn a blind-eye for that product and sell it at any wishful price. However, if one wants to ensure that the profit earned is the highest, he should approach it with a different mindset.
If a cheaply sold product is generally sourced for a much lower price suppliers (usually the Chinese dealers) it can result in high profitability in the dropshipping business. Since the products that are being sold in this case are not expensive, consumers buy it quite frequently, ranging from once every few hours to many times a day which means that such products are capable to be sold in a bulk amount.
The trick to maximize the profit from dropshipping such products is to discover the suppliers who are selling a similar product but at a much lower price. Once such a supplier is found, the product can be bought and sold at a higher price corresponding to the general trend of price rates of other alike products that fall in the same category.
A profit margin of 50% to 60% can be easily achieved in this manner which proves to be enough, given the fact the initial aim was always to sell that product in a large volume. Therefore, when the total surplus is evaluated after the sales, it leaves an individual with a plenty of profit to savor at the end of the day.
Expensive Products with Low Profit Margins
Majority of the times people tend to lose hope and motivation when working with businesses that promise very low profit margins which usually include dropshipping products that consumers do not often buy. Getting a 3-7% profit margin might sound tedious and dull especially after one puts in so much time and effort into managing the stores. However, there is a very simple solution to this problem which focuses on dropshipping products that have a relatively high cost price e.g. above 50$. This results in a handsome amount of total profit even with profit margins of as low as 3-5%.
The rest of the procedure is somewhat similar to the ones which deals with the cheap products as aforementioned. The quantity of product sold in this case is quite low for sure but the total surplus generated is good enough for someone looking to dropship expensive products.
Dropshipping Commission Rates
A helpful tip to note here would be to be aware of the ongoing dropshipping commission rates. They vary from time to time and they apply to every sale you make, hence contributing to your overall profit margin. Such commissions usually include the taxes, PayPal fees (if applicable) and taxes on the purchases.
“Long Tail” in Dropshipping
It might seem captivating in the beginning to look for products that have a higher chance of getting sold in a large volume over a time of one month or so. However, it is advised to keep a balance between selling such trend-oriented products and “long tail” products. “Long tail” products are the ones which are hard-to-find for the consumers and are, therefore, sold in a low volume to obtain significant profits.
A 1/4th ratio should be kept between the long tail products and the trend-oriented products to optimize profitability.
The Back-end Profits Method in Dropshipping
Unlike the aforementioned techniques which deal with optimizing the buying and selling prices of the dropshipping products, the back-end method focuses more on lowering the cost of the items that are to be purchased and dropshipped. This can be done by reducing the cost price of the product using techniques like gift cards, coupons and gift cards etc.