In last article, we mentioned why dropshipping isn’t dead and is completely worth a shot even now. This week, we are going to touch on whether dropshipping is profitable.
We will show you whether people really are making money with dropshipping , or if it’s merely a myth.
If you’re interested in starting a dropshipping business, this will be an eye opener.
Stay with us.
Is Dropshipping Profitable in 2021?
Yes. Dropshipping is still profitable.
Had to clear that first before getting into meatier bits. Dropshipping is definitely a profitable business venture even in 2021.
To give you some perspective, here’s a client of mine who’s been dropshipping since 2020.
We handle sourcing as well as product fulfillment for him. Here’s a look at his annual sales volumes.
I shared this here because I believe in sharing facts and figures to back up my claims with. I can randomly tell you that dropshipping businesses generate a million dollars in sales on an average. But that’s information that hundreds of others are also parroting with no facts to back it up with.
So here are the numbers you probably wanted to see. Now, let’s get into more facts.
What is the Cost to Start a Dropshipping Business?
One of the first things that any dropshipper must be aware of is the cost to start a dropshipping business.
I am sure that you have heard that dropshipping is a zero-budget business model. You need very low investments and that in some cases, it can be as low as $1000.
That’s generally the standard dropshipping business model that’s being spoken about. It’s not the profitable business model that we just discussed. I will touch on this in detail.
For now, let’s take a look at some of the basic expenses associated with a dropshipping business.
1. An Ecommerce Platform
Your dropshipping store will be hosted on an ecommerce platform of your choosing. You have multiple choices and even the option of self-hosting and self-developing everything from scratch.
But most dropshippers will prefer something that’s simpler, more hands off and has a lot of inbuilt features. The most obvious choices are Shopify or Woocommerce.
The charges for these platforms are as below.
Shopify – Shopify offers five different types of plans. A Lite plan which is priced at $9/month. A Basic Shopify plan for $29/month, a Pro Shopify plan which is priced at $79/month along with Advanced Shopify plans that are aimed at more sophisticated customers and come with custom pricing options.
They even have an enterprise plan for large businesses that generate a lot of sales, but you’re unlikely to be using that unless your business is a multi-million dollar operation.
The monthly charge is not the only expense though. Shopify will also charge a percentage and a flat fee of 30 cents on every transaction. The percentage depends on the exact tier that you are subscribed on.
2. The Product Cost
The next expense obviously is the product cost. Now, there are millions and millions of products to choose from. So, there’s no way to predict how much the actual product will cost you.
What we can say though, is that product pricing depends largely on purchase volume and how skilled you are at finding quality suppliers. Aliexpress is one of the largest B2C marketplaces in the world.
But it is not the only choice. There are thousands of private suppliers who are not listed on Aliexpress. If you are looking to reduce your product cost, you either have to find a dropshipping supplier who can offer you the same products at a lower rate or you have to buy in bulk.
A sourcing agent can be an invaluable addition at this stage. They generally work with more suppliers than you can ever hope to find on your own. They will compare and shop and help you get multiple quotes, greatly increasing your chances of finding a low cost supplier.
On top of that, they can also negotiate prices for you and get even lower rates. Large dropshipping agencies often have access to hundreds of suppliers who are willing to offer exclusive discounts because they purchase in very high volumes. The sourcing agent will be able to help you unlock these savings as well.
3. The Shipping Cost
Shipping prices vary extensively too depending on different parameters like the shipping provider, method, destination, package dimensions and package weight. If you are dropshipping from Aliexpress for instance, then your shipping options are limited.
You do not have access to Yunexpress and other fast shipping providers that most successful dropshipping brands use.
Also, one thing that a lot of dropshipppers fail to account for, is multiple shipping charges in a single order. Let’s say you are listing products from different suppliers in your store.
A customer orders one product from one supplier and another product from a completely different supplier. In this scenario, you will have to pay two or even three shipping charges, increasing your cost per sale by a huge margin.
4. Advertising Budget
The final cog in the wheel is advertising costs. Now, advertising costs vary depending on the industry, the niche, the target country, the target audience, the keywords and so many other factors.
There’s no way to accurately predict what you will need to spend on advertising except testing. You have to constantly test different ads, creatives, and audiences to find the right profitable combination.
If you are not experienced, then you can quickly drain your advertising budget and not make any sales at all.
We spoke to some of our clients and asked them how they made it work at the beginning of their dropshipping journeys. Here’s what one of our clients shared with us.
“I’ve experimented a lot with different products and strategies for marketing. It’s all about finding the right market and ad strategy.
I’ve seen that when the right product hits the market at the right time, it only takes around 500 dollars in testing to really see if the product works.
You have to take your emotions out of the process and just see if the customers like the product.”
What is the Profit Margins for Dropshipping?
The profit margins that you can achieve with dropshipping depend on a large number of factors, especially the niche and the type of products that you are planning to sell, the number of sales you generate as well as your total procurement cost.
Generally speaking however, anything around 15-20% is a great margin if you’re dropshipping from Aliexpress to the US market.
There’s a caveat though. Most of the time you will rely heavily on paid traffic (Facebook, Google, etc). If you’re just getting started and there’s a (high) possibility that your profits are not predictable or consistent. You may make money on day 1, but lose money on day 2,3 & 4, only to make money again on Day 5, & 6.
Here are some ways in which you can calculate the estimated profit margin.
How to Calculate Dropshipping Profit?
Here’s a calculation that explains how dropshipping profits work.
Sales – Cost of goods sold (COGS)= Gross Profit
Sales – COGS – Advertising Cost – Fees = Net Profit
How Much Profit You can Make?
Now you know how to calculate the profit let’s take a look a real example from one of our client
As you can see in the above chart, the client did not make a profit every single day. There were good days, where he made a decent profit. But there were days when he didn’t. There were days when he was at a loss. Then, he recouped somewhat.
This is a situation that you will definitely experience while running paid advertisements. There’s absolutely no way in which you, or even a PPC ad expert can promise a 100% positive ROI on paid ads.
So rather than looking at say, everyday profit, look at the monthly average. In the early days, even breaking even is not bad. But as you keep testing ads and budgets, you should settle into around 15-20% profit at the end of the month.
There may be months where it’s lower. Some months might be much better.
What have Successful Dropshippers done Right
Now that you know some ballpark figures and are aware that you will not always make money everyday, but if you do things right then dropshipping will still be a profitable business.
We have been working with lots of successful dropshippers for many years and found there are few common characteristics from them which we want to share with you.
1. Selling Product to a Specific Audience
One of the golden rules of business is to be aware of your target audience. What is the target audience? In plain and simple terms, it is the group of people who are most interested in what you offer and hence, are most likely to convert into a customer.
So, rather than wasting money by testing out advertisements to a broad demographic, you will have much better success if you sell directly to your target audience.
Take, ‘Boom By Cindy Joseph’ as a case in point. This is a cosmetic brand that generates an 8-figure income consistently. Guess what they do right?
They are consistent with their target audience targeting, which happens to be women over 50. If you analyze the brand from head to toe, you will discover that all their branding, creatives and brand positioning is in-line with their target audience.
They do not reinvent the wheel or try anything fancy. Guess what? It works phenomenally well for them.
Similarly, you will have to narrow down on your target audience. It might take some work initially, but once you do, your ad budget will be put to much better use.
2. Have Multiple Traffic Sources
Where do you generate your traffic from? Not all traffic is cut from the same cloth. You need to identify where your target market hangs out on. Is it a young demographic that loves to watch Instagram videos?
Get on Instagram and start promoting. Are they on Facebook? That’s where you should be testing.
But most importantly, try and have multiple traffic sources. Even when you are able to find a great source of traffic, the market might change and they could stop working for you in the future. Ever heard the saying don’t put all your eggs in one basket?
A little spiel about target markets here.
By having multiple sources of traffic, you can stay lean even if one platform stops working for you. If your entire business rests on just one traffic source, it would be game over.
That said, if you are a beginner, you might be better off sticking to one traffic source and trying to make it work. Too many fingers in too many broths can be counterproductive too.
If you are experienced, spread out the traffic sources. Influencers, organic search, YouTube, paid advertising, go full steam.
3. Willing to Invest
Dropshipping is no longer the zero-dollar business model that it’s often touted to be. Sure, you may not have to invest thousands of dollars upfront, given that you won’t stock inventory, at least in the standard dropshipping model.
But, the inventory is not the sole investment in an ecommerce business. You must be willing to invest enough money to constantly try different things that offers your customers real value.
Be it tweaking the website to improve user experience, customizing the product to improve it and weed out flaws, or trying new marketing strategies, dropshipping is a dynamic and evolving business.
Sometimes, the trick may lie in domestic fulfillment, which in turn will require inventory management. Sometimes, you may need to switch to a more expensive shipping option so that the customers get the product faster.
All of these will require investment, or constant cash flow. If you are cash-strapped to the extent that you don’t have a budget for trying different advertising combinations, it may not yield the kind of results that you expect from it.
4. Taking Care of the Customers
Customer care is now more vital than it ever was for dropshipping businesses. Some dropshipper think that their job is over the moment they register a sale. But it’s not. The real job begins when you get a sale.
That’s when the customer expects accountability. What do you do if the package is lost? What do you do if the product is damaged?
Sure, you can refund depending on the store’s policy. But customer care is not merely about refunds. It’s about making the customer happy. It’s all about trust, and it’s difficult to build trust if your customer service is unreliable.
This holds especially true if you are running a dropshipping business through social media or Google ads. You don’t have any physical store where customers can go to complain in person, so it makes sense that they may be wary in spending their money on your product.
The only way to win them over and avoid a churn is to provide excellent customer care service. It doesn’t matter how good the product is if the customers are not satisfied with the end-to-end experience.
Hire a customer care team or do it yourself.
5. Constantly Testing and Iterating
When you look at successful ecommerce brands who started off with dropshipping, you’d think that they got everything dialed down right from day 1.
That’s not true. Success comes from repeated testing to find the best strategies that yield the maximum returns for your business. Test and evolve. That’s the only way to survive in today’s competitive market.
Every single dropshipping business has evolved into the current form by testing and iterating. Nothing might have worked initially. But they held on and tried to better their offering.
Make it better than what anyone else is offering and the customers will automatically gravitate towards you.
Time and again, we see dropshippers that give up too soon without really diving deep and trying to understand what’s limiting them.
Is it that the product quality is not good? Consider switching suppliers.
Maybe your profit margin is too low? Consider adding more products or different upsells to increase your average order value.
You lack experience in advertising? Hire an agency who can run paid advertising more efficiently. Look for multiple ways to acquire and retain customers for life.
There’s a way out as long as you are willing to invest the time and effort.
What are the Right Approaches to Dropshipping?
You might be wondering what the takeaway is. What is the best approach if you are looking to start a dropshipping business in 2021?
Here’s a set of best practices for your consideration.
Find Your First Winning Product
A dropshipping business is as successful as the winning product is. A winning product is one that does well in terms of clicks and conversions.
You can tell whether a product is a winner if it’s doing better than the others, and constantly outperforms them.
And that requires you to do some testing and experiment with different products.
You might want to start off with a small budget and see how well you can test and iterate. Try different products. There’s no dearth of options. You can also use paid services like E-com Hunt to get started.
One option that’s available now is to spy on your competition and hijack that idea. If someone has been running Facebook ads for a product since months, it means that the product is doing well. All you need to do is grab that niche and market it better than your competition.
Transit from Generic Dropshipping to Branded Dropshipping
If you have found a winning product that works well, then it’s time to transit into the next step up, which is branded dropshipping.
Remember the statistics from my client that I shared at the onset? He’s doing branded dropshipping as are most of the successful dropshipping businesses today.
Branded dropshipping is where you sell customized products in the market instead of generic ones. For example, let’s say that you are selling phone cases online that you source currently from Aliexpress.
The branded approach is where instead of selling generic, unbranded phone cases, you sell ‘branded’ ones. There’s a custom logo, packaging and colors, which either the manufacturer can do for you, or you hire a dropshipping agent who can.
Branding increases the perceived value of your product and makes it more attractive for customers. Suddenly, there’s a brand that backs up an unknown product. Brands build trust.
The branded approach offers even higher margins and the potential to sell products with a high price tag. But it’s also more investment-heavy than generic dropshipping, so you need to be prepared for it.
There are two ways to do branded drop shipping.
White Label Drop shipping
You pick a generic winning product and brand it with your logo, colors and packaging. This is called White labelling. You are selling a branded version of a generic. It is a brand, but it is not a custom or unique product.
For instance, you can sell a branded phone case. But you cannot specify the dimensions of the case. You just pick one that’s available.
Private Label Drop shipping
Private Label dropshipping goes one step further. In this business model, you create a unique product from scratch. It can be completely custom designed or just a few tweaks to an existing product.
For instance, you want the same phone case with an integrated range extender for areas with poor cellular coverage. Or a phone case that can expand in size and accommodate different phones.
Private Labelling gives you exclusivity. You are the only seller in the market for that product. It gives you more control over the branding and the pricing. But it’s also much more work and requires deep knowledge of manufacturing and design.
So, we generally recommend it only for experienced ecommerce businesses. If you are starting off, you can always scale to White label dropshipping though.
Related Reading: Private Label vs White Label
Conclusion: Is Dropshipping Profitable?
To sum up what we have said so far, dropshipping is profitable for sure. But there are several caveats.
One, you need to find a winning and profitable product. This process might take weeks or months. There’s only one way to find out, keep testing.
Two, create your own brand for the product if possible. It will give you much higher margins and control over how well your products sell in the market.
Third, be ready to struggle initially, but constantly evolve until you find a mass-market product and branding that works for you. That is the only way to do dropshipping profitably.
That’s it for today. We hope that this helps you make an objective decision while deciding whether or not to dropship in 2021.