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Calculate Profit Margins for Dropshipping

 

To calculate profit margins for dropshipping and print on demand e-commerce stores, you need to understand the difference between margin and markup and find reliable wholesale suppliers who are able to consistently offer goods. Margin is the cost of goods subtracted from the sale price divided by 1. Markup is the margin dollar value divided by the cost to make.

Making a mistake between margin vs markup could lead to incorrect price setting and negatively affect the overall profit margins of the e-commerce business. Take a few minutes to understand how each is calculated so you can run your business budget with the right information to strategize and plan.

How to Calculate Gross Margin

Margin, also known as gross margin, is the total sales revenue less the cost of goods sold (COGS). For example, if you sell a product for $100 and it cost $60 to make, the gross margin is $40. Gross margin is usually stated as a percentage, thus the gross margin on this product is 40%. 

Margin % = Margin Amount/Sales
For this example, this is: $40 / $100 = 40% gross margin.

Keep in mind that gross margin does not factor in shipping, administrative, marketing, and sales costs. It is the gross margin for goods sold and can be defined either as a per unit margin or an entire store margin. 

How to Calculate Markup 

Markup refers to the amount a product price is increased over the cost to define the sales price. When selling items, the gross margin percentage and the markup percentage are different. If you are mixing these up, you may be surprised with your eventual actual profits. 

Using the example of a product that costs $60 to make and is sold for $100. While the gross margin is 40%, the markup is 66.66%. 

Markup = Margin Dollar Amount / Cost to Make
In the example above, this means the markup is calculated: $40 /  $60 = 66.66%.

Markup Vs. Margin

Markup is the amount over the creation price of something while margin is the sales revenue percentage. Many new e-commerce business owners using drop shipping confused margin and markup. If a business owner uses markup as his percentage and makes decisions to determine other factors such as marketing and advertising, he might think he has a bigger amount to spend.

An entrepreneur needs to understand how much to sell each item for in his dropshipping business.  Markups are always higher than the corresponding margin

Markup Vs Margin Chart

Markup Margin
15% 13%
20% 16.7%
25% 20%
30% 23%
33.3% 25%
40% 28.6%
43% 30%
50% 33%
75% 42.9%
100% 50%

Setting Prices for Print on Demand

It doesn’t matter if you are a career entrepreneur or your e-commerce store is a side hustle as you build it, setting the right prices for your print on demand products helps drive traffic and sales. Pricing too high can reduce sales because competition usually means there are others willing to price things 

There are a couple of things to consider when setting pricing and gross margin on drop ship and print on demand products. Of course, you are not making the product, so there is usually no manufacturing cost. But, think about the graphic designs you may have paid for in creating your brand. 

Loss Leaders and Core Products

Your print on demand business may have printed hoodies, t-shirts, hats, and a variety of other apparel. As a business owner, you might make the decision to price everything with the same profit margin, say 40%. On the other hand, you might choose to have some items, such as hats, sell at a much lower margin to drive traffic in and cross-sell other products with higher margins.

This is the same theory that many major retailers operate on. You see the weekly advertisement for the sales, go to the store for the one product and pick up two or three other things you see. The retailer is banking on the fact that once you are in the store and ready to buy, you will find other things of use or need.

Understanding Other Costs

As a print on demand (POD) e-commerce store, the cost of goods sold (COGS) is the cost the wholesale supplier (printer) is selling you the product. You do not make t-shirts, but order them per sale. If you have specific artwork created, this could factor into the COGS and your overall margin. However, this is gross margin not net.

Your net margin needs to calculate all the other components involved in running your business. When you look at the overall financial model of your business, shipping, advertising, overhead, and taxes affect the net profit of the company. You could have a high gross margin but still be in the red if your other expenses eat up that margin.  

Strategic Pricing

Some business owners of e-commerce websites and drop ship stores feel they can keep margins lower because there is no inventory to hold. One thing many website owners do is to maintain standard pricing with a Manufacturer’s Suggested Retail Price (MSRP) and then have blow-out sales or specials to drive more sales of lower margin items. 

Evaluate who your target market is, what the competition is doing, and how you can properly price items for sale to maximize gross and net margins. Consider your marketing plan and any costs associated with advertising that will affect your net profits. As a business owner, understanding how you promote your website and where you make your money is fundamental in success. 

Branding and Pricing

How much products sell for often has more to do with branding than the product itself. Does an Apple iPhone cost that much more than a Samsung Galaxy? Building the right brand is where a general dropshipping e-commerce store moves from selling products for a small margin and starts really bringing in net revenues. 

Print on demand uses the same t-shirts and hoodies for all retailers seeking to sell products to consumers. If the-t-shirts all cost the same and are the same wholesale cost, how can one e-commerce store sell t-shirts for more than another? The better a business owner can position himself with 

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