The development of e-commerce is constantly giving rise to new concepts, such as dropshipping. This practice does not require any major investment. Moreover, it has the advantage of not requiring delivery, logistics and stock. With all these advantages, what margin can be made on each product?
Dropshipping: what margin?
As in all sectors of activity, it is essential to find out more about what a margin is. It is the only way to know the profitability of a given activity. It will allow you to quickly determine whether the activity is in deficit or profit. It is a key indicator, enabling the establishment of a business against that of competitors. If you are planning to launch a large-scale project, it is an essential element for carrying out a market study and a business plan. In principle, the trade margin is used in the buying and selling process.
In order to develop a business, knowing and anticipating the calculation of the margin is a crucial step. It allows you to determine the final price of all your dropshipping products. Calculating the margin helps you to :
- The definition of the resale price
- Adjusting the marketing and sales strategy
- Setting up a business in the market
- Making a profit on sales
- Knowledge of the break-even point
Calculating the dropshipping margin: elements to consider
When calculating your margin, you have to take into account the purchase price, the selling price and the advertising budget. In order to get online traffic, you need to put in extra effort. You need to budget for advertising and communication. This allows you to be successful in selling specific products. Usually this involves paid referrals or commissions on product placement in specific markets. These are real references for online sales.
Despite this, this calculation requires special precision, taking into account other elements.
The costs of the site
Without an e-commerce site, online sales or dropshipping is not feasible. First of all, you need to create your online shop in order to access dropshipping activities. You should not then take the investment in its design lightly. You can then make it profitable through sales. This should be part of your margin calculation.
As an online trader, the declaration of your income must be taken into account in your margin calculation.
When you succeed in selling, your bank will charge fees on the transactions. The rate varies from one organisation to another.
This depends on the business sector, such as office rental, electricity, communication and commissions from external service providers. Some dropshippers even prefer to stock up on certain products.
The method for calculating the dropshipping margin
The method used to calculate the margin is similar to that used in traditional e-commerce. The gross margin is obtained by deducting the purchase cost excluding VAT and the acquisition cost excluding VAT from the resale price excluding VAT. However, the purchase cost is the price of buying a product from suppliers such as Aliexpress. Acquisition costs, on the other hand, are the various costs involved in attracting customers to your dropshipping online store. This can include advertising, acquisition of beautiful photos, commissions from marketplaces, site management and external service providers.
It is essential to note that marketplaces are a real opportunity for dropshipping online shops. It allows you to benefit from great visibility on the web. In addition, you also need to implement an excellent commercial strategy. However, you have to be very careful about commissions. This is the main reason to calculate your margin according to the cost of acquisition.
The illustration and some tips for your dropshipping margins
You might want to start dropshipping and the margin on a product is calculated as follows. Your supplier offers you a product that costs €5, this is your purchase price. However, you want to set your selling price at €20. You have to spend €6 on the cost of acquiring the product. In this case, what is your margin in dropshipping?
20 € - 5 € - 6 € = 9 €
In this case, your margin on the product sold is €9. However, many dropshippers make the mistake of forgetting that there are other costs to deduct. These include initial investments, monthly and annual charges. Many people take lightly the tax charges to be paid from their annual turnover. The same applies to your micro-entrepreneur status, where you have to pay 13% of your monthly turnover.
In dropshipping there is no fixed rule for the mark-up. Often, the total charges vary between 40% and 50% of the purchase price. However, you should consider the above criteria. Alternatively, contact Minea if you are looking for professional assistance for better sustainability and profitability.