So many dropshippers still think that the industry will always have low profit margins. Some of them spend months looking for ways to increase their margins and get the most out of their budgets, while others try to get better profits by buying in bulk from their suppliers.
Even though buying wholesale can get around some of the pricing problems caused by dropshipping, not every eCommerce business owner can afford to buy products in bulk, hire a warehouse or a fulfillment company, or pay high import duties and taxes.
There are, luckily, other effective ways to increase your dropshipping profit margins that don’t cost a lot of money. If you want to do it right, you need to know why dropshippers have such small profit margins to begin with.
The Reasons Behind Tight Dropshipping Margins
You may already know why dropshippers can’t always make as much money as they would like. Tight margins in this sector are most often caused by:
Your suppliers may raise the prices of the products they sell to cover the costs of fulfilling your orders, buying items from manufacturers, and paying the people who pack and ship your packages. The result is that you, as the owner of a dropshipping business, will have to pay your suppliers more, so your profit margins will be smaller.
Getting your products shipped from multiple places can be expensive. Many dropshippers get their products from more than one place, which can make shipping costs skyrocket. If your customers order multiple products from different suppliers in the same order, you’ll have to charge for shipping multiple packages, which means your operating costs will be much higher. Not only that, but if you make your customers pay for these costs, they may choose to buy from a competitor instead.
Using prices that are comparable to those of your competitors in the same industry. If you choose to compete with other dropshipping businesses by lowering your prices, your choice could also cause your profit margins to get smaller. Many stores that look the same sell the same things. Some will sell these products at lower prices to attract and keep customers, giving up short-term profits in exchange for what they hope will be long-term loyalty.
Handling refunds and returns. Refunds and returns are common in the dropshipping business, and every business owner has to deal with these requests from time to time. So, if you work with trustworthy suppliers, you’ll probably get fewer requests for returns and refunds than if you worked with a dishonest supplier.
Shipping delays, delivering the wrong item, delivering damaged items, delivering to the wrong address, losing packages, and failed deliveries are all common reasons why customers might ask for a refund or return.
How to Boost Your Profit Margins
We’ve talked about why dropshippers often make less money than traditional eCommerce businesses. Now, let’s look at how you can increase your dropshipping profit margins to counter these effects.
Focus on a niche
Popular things like game systems, smartphones, tablets, and fashion wear are always in high demand. This means that there will be a lot of competition if you try to fill these niches.
Instead of going after big, oversaturated niches, find a sub-niche where most of the customers’ needs aren’t being met. Focus on pleasing a small but clear group of customers to get ahead in your field. The less competition you have, the more money you can make.
Sell at higher volumes
You can make up for low profit margins by selling more of your products. To get more customers, you will need to spend money up front on promotions and smart marketing campaigns.
To attract and keep new customers, you will need to advertise, use smart marketing strategies, and provide the best customer service possible.
Choose your suppliers carefully
As the saying goes, some providers are better than others. Even more so if your business has a steady flow of orders, you need to make sure you choose a supplier who can help you as much as you need. You need a supplier who can sell you products at B2B prices and ship multiple products in the same package so you can save money on shipping costs.
Suppliers have a bigger impact on your dropshipping business than you might think, and they are often one of the “X” factors that will help your business grow.
Increase your prices
If you think your prices are too low, you can easily boost your margins by raising the prices of your products. The key is to figure out your markup without overcharging or undercharging. This will help you make as much money as possible.
If you set your prices based on market demand and the rules for dropshipping, your customers may think your products are more valuable, and many of them will be happy to pay more.
Upsell your products
To make more money, you can sell products with premium versions or add-ons that customers can choose to buy. You can upsell to your customers before they buy, while they’re buying, or even after they’ve bought.
To successfully upsell, you need to know what your customers want and make shopping with you a pleasant experience for them. You can do this by comparing products to show how valuable your best ones are, rewarding customers who spend more at your store, and showing your customers a wide range of similar products that is appealing but not too much.
Cross-sell your products
In addition to upselling, you should also subtly suggest related alternatives or complementary products that would meet the needs of each customer based on what they chose to buy in the first place.
This is called “cross-selling” in the business world, and research shows that it can increase your sales by about 10–30%. Also, you don’t have to find new customers to boost your margins.
Your business probably already has an online presence. But you can get more for your money and get more exposure if you market your products on more than one social media platform.
Sites like Instagram and Facebook are free or cheap to use for marketing, and they give your products great exposure to people all over the world.
Reshape your product portfolio
There are probably some products in your line that could be updated or swapped out for ones that are better in quality and price.
Remove any products that are hard to ship, cost a lot to ship, are often returned, refunded, or have a lot of bad reviews. Replace them with alternatives that have been carefully chosen to increase your profits and keep your customers coming back.
Final Considerations
Almost all dropshippers and people who run online stores have to deal with low profit margins at some point. Use the smart tips above to keep making money and get the most out of your limited budget.