Maximizing Dropshipping Profit Margins

It’s an excellent question, but it cannot be answered in a sentence or two. There are many things to consider. Now, I do not claim to know everything about making money dropshipping, but I can tell you quite a few things that have helped me achieve moderate success.

I’ll answer this complex question in three sections:

1) Necessary assumptions about the dropshipping business
2) Enhancing your listing
3) Best practices

Necessary assumptions

• Dropshipping margins are tight. This is because wholesalers have more expenses when providing dropshipping. They are responsible for storage, shipping, insurance, and other costs like staffing and processing.

• Even though you are dropshipping, you may be competing with wholesalers. Your prices have to be in the wholesale range. You can’t charge more than the wholesaler just because you are dropshipping. There is no added value to the buyer for dropshipping.

• Dropshipping is a smaller margin than physically stocking. But physically stocking may require minimum quantity purchases meaning more capital outlay. It depends then, on how much money you have to invest.

• Profit margins are generally small in this business. If you want to get a 200% profit, then you are in the wrong business. From wholesaler to end-user the margin is around 10%. If you can buy the best iphone for $500 and sell it for $550, you are doing well.

• Money is made by buying in volume. A wholesaler can’t give you a good price if you only buy 10 units. Bulk orders generally start at 100 units. Wholesalers are not making 10% profit margins so don’t ever assume that. More realistically it’s a 1%-3% profit margin and that’s before he has to pack ship and insure the goods to the retailer. It’s a real struggle for a wholesaler to make any profit on small orders. Be prepared to make bigger orders. That’s just the way it is.

• Authentic, quality, branded goods will never be cheap. You should not spend your time trying to find 50% - 100% or greater profit margins on items like branded cell phones. Only scammers sell these for cheap. Quality goods cost a lot to manufacture.

• Branded electronics products do not come from Asia (except maybe Hong Kong). Asia is a minefield of opportunistic knockoff artists. It is probably best not to spend your time searching for suppliers from Asia for consumer electronics like cell phones. Let’s just say that if you follow this advice you will be better off.

• Starting on ebay is your best bet. Ebay has millions of active users who can potentially view your listings. Where else can you get such a vast and active market for no to low cost?

Enhancing your listing

• Remember “featured first” on ebay? You used to be able to buy the top one or two spots in the Best Match search results. Well it was nice, but it’s gone. Ebay retired it as of summer 2010. Now, you have to perform to earn those spots.

• Here is how you do it:

1) Achieve Top-rated Seller status by providing great service to your buyers
2) Offer good prices and reasonable shipping
3) List in the right format and in the right category
4) Write accurate and relevant titles
5) Write clear item descriptions
6) Include great photos
7) State your terms clearly

• Differentiate your ebay sale when there are a lot of similar or identical products for sale.

1) Offering bundled products is a great dropshipping strategy. It sets you apart from the competition. Find two or more products from the same supplier that complement each other and list them together as one sale. This allows you to make your margin on one or two items while dropping the margin on another. This provides fantastic value for ebay buyers. The challenge is to bundle products that truly complement one another.

2) Even the packaging of similar items or the story behind the item can differentiate your product

Best Practices

• Choose your dropshipper wisely. You do not have control over inventory and shipping if you choose to use a dropshipper. To avoid backorders, it is important you choose a dropshipper who:

1) Has a large inventory of in-stock items
2) Ships quickly

• Focus on profit margins in dollars not percentages. If you buy an item for $ 7.50 and sell it for $15.00 you have a 100% return on your money but you only made $7.50. If you have a $500 product and sell it for $550 you have a 10% return but you made $50. You made 6.5 times more on the 10% return than the 100% return. Consider the fact that the risk is no greater for dropshipping higher-priced goods.

• Research could be the most important way to maximize profits. Many dropshipping directories will have data files for their products where you can search for the largest profit margins. Look at amazon and ebay for the highest selling items. These are great indicators of what is trending upward.

• Consider these four factors when researching products to dropship.

1) Compare cost with MSRP. Request an exportable data file from your dropship candidate. Calculate the profit margin (the difference between cost and MSRP) then sort the data by highest to lowest profit margin.
2) Compare your cost to the sales price of those items on ebay and amazon. Be sure you are looking at auctions that have ended on ebay. These prices will confirm whether the marketplace supports the MSRP. In the best case, this data will be above the MSRP.
3) Both ebay and amazon have “hot” lists. Try to find products available from a dropshipper that have a good profit margin and are on these “hot” lists.
4) You are going to be able to spot better deals on items you know a lot about. What are your interests? What is your background? What do you know a lot about? It’s easier to deal with customer queries if you know what you are talking about.

• To keep your profits intact calculate your PayPal (or other payment processor) fees at the time of purchase of your goods. I have seen it way too often that the processing fees are the last thing considered and they eat into the profit margin unexpectedly. There is an excellent free PayPal processing fee calculator here. When you are doing your research for products to purchase and you are analyzing the difference between wholesale purchase price and MSRP, use the calculator to see how much you should deduct from the MSRP for processing fees.

• Avoid backorders. It’s the most dreaded, costly, and stressful part of dropshipping.

• Choose a niche within a niche. Everyone sells ipods. Why not sell ipod skins for young girls or cute ipod cases. Or heavy duty ones for contractors etc. Just identify a small group, target them and meet their needs. It really doesn’t get more simple than that.

• Take advantage of all your ecommerce options. Amazon, ebay, craigslist, bonanzle. Don’t just limit it to one outlet. Sure it’s more work, but if you’re serious about this business then spend the time.