What are the margins of dropshipping and how big are the risks?

What are the margins of dropshipping and how big are the risks min

Dropshipping is inherently the cheapest option for entrepreneurs to start with. It is a great option for those who want to minimize initial costs and worry less about stocking and managing the assortment. Therefore, many of them are looking for information on how dropshipping works.

Dropshipping is also recommended for those who want to verify the demand for new product categories or to reach a larger audience by increasing the assortment. For example, if part of the assortment is made up of in-stock items and part is new items that are needed to attract new customers.

Dropshipping margins and pricing

Your margin is the difference between your price and the dropshipper’s price. Dropshipping usually yields 20% – and that’s the smallest margin of all the options.

The margins in dropshipping are affected by the arrangements with the counterparty. The only way to make money here is to increase the selling price yourself, but that can be difficult in competitive niches.

Pricing is also affected by the fact that many suppliers put a recommended retail price at which they have to trade (not always, however). If there is no fixed cost of sale, you can work on the next algorithm:

  • Price testing
  • Demand estimating
  • Final profit checking

In financial planning, it is important to consider that small margins severely limit promotional activities. It is very difficult to compete in paid traffic with products that have high margins. Therefore, you need organic traffic from social networks, search engines, and other sources.

Risks of dropshipping

Dropshipping for business is a fairly low-risk model. You don’t invest capital in a warehouse and don’t have to deal with part of the operational tasks – that’s a plus. However, you will have to work with very low margins and a high level of competition – that’s a minus. 

Because of the small margin, you will have to increase the number of sales and turnover to get a decent profit. Plus, the lower the margin, the less you have finances for marketing. It is recommended to run contextual advertising for 500 clicks to test in the store: if the campaign does not give a profit – turn off advertising, the test will not pass. There is no point in bringing traffic to the dropshipping goods that do not produce profit – and this is important to remember when planning marketing.

How to further reduce the risks?

Even experienced dropshippers don’t know how to make risks associated with drop shipping lower. Here is an algorithm that will help you reduce risks in dropshipping business:

  1. Look for interesting products on Instagram/Facebook/Google. Evaluate the reaction of the marketplace: likes, shares, comments. If the store has a lot of good reviews, you can work with these products.
  2. Check if the brand has its website. If not – great.
  3. Contact the manager and offer to place the goods on your website.
  4. Launch ads in Google Ads (AdWords) and possibly Facebook. Collect 500 clicks – this is a test sample that can make the right decision based on the data.
  5. Count the profit. If it matches acceptable financial projections, the product passes the test. If there is no profit, turn off the ads and look for a new partner.

You can use our Ali2Woo plugin to reduce risks too. With it, you can filter products with ePacket and import only products with the fastest delivery time. Also, you can automatically synchronize your store with your supplier’s inventory and keep your prices updated. With our plugin, you can initially find prospective products that will bring you great revenue.

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