eCommerce Lifestyle
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Dropshipping Profit Margins and How To Increase Them

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Episode 315

Podcast Description

In today’s episode of the podcast, Anton shares dropshipping profit margins and how to increase them.

 

On Monday we released an episode called “$50K Dropshipping In 1 Month! What Is The Ad Budget?”

 

That episode is getting great feedback so thank you for that!

 

But it also had some comments from people saying “it’s a lot easier to do $50,000 in sales than $50,000 in take home profit”, which is obviously true.

 

That’s why in today’s episode we’re going to be talking about dropshipping profit margins and how to increase them.

 

In this episode Anton shares a profit margin calculator that you can use for yourself here:

 

It’s very important to use this calculator before you start generating a lot of revenue because you need to know your numbers

 

That’s why in this episode Anton breaks down your expenses, and how to find averages before you even get your first sale.

 

Using this calculator properly, and making decisions based on the data, will help to ensure maximum profitability for your dropshipping store.

 

If you’d like a more advanced training you can register for my upcoming webinar here: http://www.dropshipwebinar.com

If you liked today’s show, please subscribe on iTunes to The eCommerce Lifestyle Podcast! The podcast is also available on all major podcast players including, Stitcher and Spotify.
Transcripts

What's up, everybody. Anton Kraly here from dropshiplifestyle.com. And on Monday of this week, I had posted a video sharing what it takes in ad costs to generate $50,000 a month in sales. Now, that video is doing very well on the channel, has a lot of likes, a lot of great comments. So first of all, thank you for that. But it also had a few people that said it's a lot easier to do $50,000 in sales than $50,000 in take home profit, which obviously is true. So what we're going to talk about in this video is drop shipping profit margins, and more importantly, how to increase them. So with the goal of making this as simple as possible, I actually made a profit calculator template that you can use on your own computer. All you need to do is click the link below this video to open it in Google Drive, then click file, and then it will say, make a copy. And if you click that, it'll copy this into your own Google Drive account, and you can follow along, and do the same thing yourself.

So for everybody watching this on YouTube or as a Spotify video podcast, which are now available, I think, thanks to Joe Rogan, you'll be able to see me going through this. If you're just listening to the audio, though, on Apple podcasts or anywhere else, again, if you want to follow along, click the link in the description.

So what I'm going to do is take you through the profit calculator and show you different examples that you should do yourself before you even make your first sale because this is a big problem, not with drop shipping but with business in general, for new entrepreneurs. I'm guilty of it myself when I first started. You get into business and you just think, "I want to do more sales. I want to do more sales. I want to do more sales." And then maybe a week goes by or a month or a year, and you realize that either you are operating at break even, maybe you're operating at a loss even and going into debt. And the reason this happens is completely avoidable. It's simply because people don't pay attention to this stuff. They don't know their numbers, and they let this happen time and time again, and it compounds on itself until people are in trouble. So what you want to do is do this, again, before you even get a sale to know how much money you can be making and where your numbers need be for you to make that money.

So the way this works is very simple. Starting at the top is sale price. Now, this would be the price that you sold a product for on your store, what your customer pays you. So let's just say we were selling a standup desk because I'm at one right now, and the price for it was, we'll call it, $1,200. So your customer goes to your store. The price for this product is $1,200. Boom, customer pays that with their credit card, their debit card, whatever.

Now, you'll see the second row in this calculator are merchant fees. Now, these are calculated automatically here because for most new store owners, these are fixed. It's a variable cost in the sense that it'll change because it's percentage of the sale, but the percentage rate is pretty much fixed for new store owners that go with a standard Shopify plan. And this expense is 2.9% of the transaction plus 30 cents. So flat fee of 30 cents, then 2.9% of the transaction for a $1,200 sale. If we use Shopify payments on a standard plan, we didn't have history to negotiate this price, then we would pay $35.10 in merchant fees. So first thing comes off top line right away.

Now, the next thing, and this should be, by far, the biggest thing expense for every order that comes in is product cost. This is what are you paying your supplier for this specific product. What is your cost of good sold? Now, probably know this if you're a member of Drop Ship Lifestyle or if you've watched any of my videos on pricing, but you want your product cost to be no more than half of what you sell it for. So in this scenario, we sell the product for $1,200. That would mean the most we want our product cost to be is $600. Now, I'm going to take you through these numbers just stock, then we're going to talk about how, even though that might seem like a fixed expense, because that's what your supplier gives you on the price list when you get approved to sell for them, all of these things can be negotiated. And that's why knowing your numbers is so important. But again, we'll get to that.

So next cost is shipping. We offer free shipping on all of our stores because pretty much the entire industry does and has for the past decade. And that's free standard shipping. There's upgraded shipping options that can cost more, but for standard free shipping, that means the customer pays zero and we pay for that. So how do you know what shipping costs are? Because again, this is a variable expense. Let's say the warehouse that stores these standup desks is in New York. Well, if it ships from New York to New Jersey, it's going to be a lot less money than if it goes from New York to California. Now, from New York to California, we might get one quote for that shipment and it might be $300. Well, with freight shipments, shipments for large and heavy objects, you should actually get quotes from different shipping carriers and from different brokers because what I found and learned this the hard way again, is that freight shipping costs vary greatly. And this is one of the easiest places to save money and to tech and increase your profit margin.

So, one quick way you could do that is go to a website called freightcenter.com. And when you go there, you'll see it says calculate freight rates. If you click that, you can enter the pickup information, which would be your supplier's warehouse, wherever that may be. Then, you can enter the shipment information, how big is the package? Your supplier provides you with this information. And then for delivery information, you would enter different addresses, maybe one, again, in California, one in New York, one in Florida, one in Texas, and you can get an average cost. So in the beginning, when you're trying to figure out your potential margin, you can at least have the average to stick in to this calculator.

So let's just say we did the math and the average we found was $150. Okay, boom, we'll put that there. Now, our next cost, and this one, again, people overlook it. I don't know why. And this is one where people can really run away with their spending as well. But this is your ad costs. Your ad cost for a order. Another way to refer to this is CAC, C-A-C, stands for customer acquisition cost. So for this hypothetical $1,200 standup desk, what do we pay to get that sale?

Now, you might know this as well. If you're a member of the Drop Ship Blueprint, you know all of this plus a whole lot more, so speaking to the choir here. But for everybody that's watching that for some reason isn't a member of Drop Ship Lifestyle yet, I still have no idea why you wouldn't be, but if you're not, just know that the most we're willing to spend in ads is up to 10% of the sale price because we want a 10x return on ad spend at a minimum. What does that mean? It means to sell a $1,200 item, I would be willing to spend up to $120 to get that sale, 10% of the sale price.

Now, you'll see that I entered all these numbers in, it added up my total expenses in this hypothetical. My total expenses for this $1,200 sale were $905.10. That left me with a dollar profit amount of $295, and a net profit expressed as a percentage of 24.58%. So basically, 25% net margin and $295, again, that we get to keep for selling this $1,200 product. Now, the reason I'm giving you this calculator, again, make a copy of it in your own Google Drive account with the link below this video, is so you can plug in, first of all, your actual numbers and then also your potential numbers because what you might find is sometimes your potential profit margins or actual profit margins are way higher than this. And sometimes, you're going to find out they're way lower. So if they're way higher, then good for you, all as well, keep running business as per usual, keep making more money.

But if you're especially just getting into this business model, you're doing your research, and let's just change the numbers here a bit, and we see we have a, again, $1,200 standup desk, but let's say the supplier tells us the wholesale cost for that desk is $800. Well, all of a sudden now, our total expenses are $1,105.10, our potential profit margin is only $95, and that is expressed as a percentage of less than 8%. That is not something I would be willing to do. I would not be offering this product because it's simply not enough money. There's not enough upside and there's better opportunities from other suppliers or possibly from other products in the same supplier's collections.

So what would I do in this situation? Again, I would look at my expenses and I would see what can I change. Now, it is possible. We'll start at the bottom here with ad costs, to sell products like this and not pay to advertise them, to rely on free traffic, such as Google product listings, not the ads, but the free ones, organic traffic, emails to your list. And let's just say we removed our added cost here and we got that to $0, well, even then, best case scenario would be $215 profit on that sale and a net profit expressed as a percentage of about 18%. Again, I still want it to be higher than that. And I don't want to rely on free traffic if I don't have to. You probably know I am a huge fan of paid ads. So what I'm going to do here is put that ad cost back in and then look at where else can I possibly save money.

Well, you see on shipping for the $150, that is, again, if we used a brokerage like freightcenter.com that got us quotes from different carriers. So that probably doesn't have much room because we already started to do research there to find the best rates. So that cost is pretty much going to stay where it is. Now, the next thing, product costs, this is where we would need to make something work if we found that the margins simply weren't big enough. So what I would do if this was what I found as I was doing research with a new supplier's price list is I would simply reach out to the supplier and I would say, "Listen, we would still love to sell your products because of X, Y, and Z."

Obviously, we know why we want to sell their stuff. We do our research first. But I would say after reviewing the numbers, there simply isn't enough room for profit between our product cost, our wholesale cost, and minimum advertised price, the sale price we would sell to our customers for. Is there anything we can do as far as pricing incentives? Is there any way we can lower our product cost so we can make this work so our company can spend money and invest into selling four year brand? What can we do to get that cost down so we can make this relationship work? So it's a good faith, honest negotiation. We're not saying give us the product for free. We're simply explaining, "Hey, we need more margin if we're going to promote this thing." And that is what you should do as well because the last thing you want to do is find yourself in a situation like this.

Or let's take it to another extreme. Let's say the shipping costs, the best you could find, maybe your items were not just, this is probably like a 16-inch standup desk. Let's say it was a huge, L-shape one. And let's say the best shipping costs you could find for that one were $200. And let's say all the other costs for me in the same. Well, now you only could make $45 per sale. And instead of just going out there, building a store, getting sales, and thinking, "Wow, look at all these $1,200 sales coming in," you want to know these numbers first. And again, we ballpark them, as I just explained, especially with the shipping cost, but after that, once you have these ballparks and order start coming in, then you get the real numbers, and then you can determine where the real money is being made, where you want to invest more into ads, how you want to make real money.

So let's revert this to the beginning with where we started, where our product cost was $600 and our shipping cost was $150. Guess this was a smaller item. And even here, the 25% margin, listen, I'll take that all day. I would still look for opportunity because that's what I do. That's how you make more money. So what the next step of this process could look like is you determining how much money you want to earn per month net profit.

And let's just use a hypothetical here. Let's say it was $10,000. So I'm going to do this on my calculator. If you want to make $10,000 a month net profit, you run your numbers, again, based off everything I just showed you, based off using the calculator below. And you know your actual net profit per order on average is $295. We're going to do 10,000 divided by 295. And that comes out to, I don't know if you could see this, but 33.89 orders. So basically, 34 orders a month that we would need to reach that number. If we got 34 orders a month, we would do enough to make $10,000 net profit a month, every single month in and out.

Next thing I would look at, and this is going a little bit further than I was planning on in this episode, but hopefully, this will help people, again, in terms of what costs could look like because the ad costs here are what I would ask you to consider if you wanted to sell, in this case, 34 units per month. So what I would do here is take that 34, how many units I want to sell. I would multiply that times the 120 customer acquisition cost, and that equals 4,080. So for me, if I had a new store, this was my average sale price. These were my average expenses. I knew on average, I would make $295 per sale. I wanted to make $10,000 a month net profit from that store. Then what I would be looking to spend in ads is $4,080.

That's how this works, guys. That is the math. These are how we calculate margins when it comes to drop shipping. And again, even though some of them seem like fixed expenses, everything is negotiable. There's always ways to move the numbers as you need to and make changes in your business to adjust. That might mean cutting off some suppliers completely and not selling for them because the margins aren't there. That might mean only relying on free traffic for certain suppliers you have because the margin's not big enough. And it might mean negotiating with the suppliers to find some type of pricing incentive so you have more of a spread between your wholesale cost and your sale price, what you sell to your customer for.

All right, guys, so that it's going to do it for this episode. As always, I hope you got a ton of value. If you did, hit the life button, click subscribe. We have two new episodes every single week. And if you are not yet a member of my coaching program but you still want a more advanced training to tell you exactly what it's all about, be sure to go to dropshipwebinar.com. Link will be in the description. I will see you there.
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