Many dropshippers complain that profit margins are so tight when dropshipping products. While some of them are trying to find ways to increase their margins some ended up buying wholesale from the suppliers to gain more profits. Although the latter can resolve the pricing limitation that dropshippers face, not all of them have the financial capacity to buy products in bulk, rent a warehouse, hire a fulfillment company, and pay import costs.
In this post, I’ll show you ways to increase dropshipping profit margins but first, you should understand the reasons behind the tight margins.
Why dropshipping profit margins are so tight?
You may already have an idea of why you cannot increase margins as much as you like on dropshipping products. Here’s a list of common reasons:
The suppliers store, fulfill, and ship the products you sell.
Suppliers are selling items based on your customer orders, they have to store the products themselves and pay for staff to do the retrieving, packaging, and shipping of purchases. To cover the additional costs, the suppliers have to increase the price of individual products. As a result, you’ll pay more to suppliers and get low-profit margins.
Shipping from different suppliers can be costly.
Dropshipping products from different suppliers can increase shipment costs. If the customer orders products from different suppliers, you’ll have to pay a shipping fee to each of them which means higher shipping costs for you. If you pass along to your customer the shipping expense, they are more likely to abandon their carts.
Competing with competitors in terms of product pricing.
Competing with other dropshipping stores based on prices can lower your profit margins. Because many stores are carrying the same product, all will be vying for customer attention, and offering the cheapest price is one way of doing that.
Dealing with returns and refunds.
Returns and refunds happen in dropshipping. However, if you have partnered with a reliable supplier, the rate is lower than untrustworthy suppliers. Factors that may lead to returns and refunds are:
Longer shipping time. Delayed delivery due to holidays, customs issues, and incomplete addresses are just some of the reasons why there are returns and refunds.
Wrong item/size/color. Shipped product is not what the customer ordered.
Damaged item. Improper handling or stacking of packages during transit.
Delivered to the wrong address. The shipping address in the package is different from what was provided by the customer.
Failed delivery. The customer had left the previous residence and did not provide a new address or there are package issues that caused the non-delivery.
Lost package. The package got lost in transit.
Now that you know the various reasons that reduce the dropshipping profit margins, let’s talk about the different ways you can increase profit margins in dropshipping products.
Pick a small niche to sell to.
Everyone wants to offer common products like clothing, gaming systems, and mobile phones. Instead of targeting big niches, find a sub-niche with unmet needs. For example, women’s clothing. It is a big and popular niche with a huge amount of competition. You can niche down further by selling clothes to plus size women, athletic women, petite women, tall women, or women who had a mastectomy due to breast cancer. Rather than trying to sell to everyone, meet the needs of a small to reduce competition. The less competition you have, the higher your profit margins can be.
Sell more products.
Offset the low-profit margins by increasing the volume of products that you sell. This means you’ll have to invest more in promotions to reach more consumers. You have to advertise, use marketing tactics, and provide great customer service to gain new customers and retain existing customers.
Negotiate with your supplier.
If you have a steady stream of orders receive each day, contact your supplier to negotiate for prices. Some suppliers would be willing to give you a discount if you keep ordering from them. If the price is non-negotiable, you can negotiate for faster shipping or payment term extension instead. Faster shipping can make you more appealing to customers while an extended payment term can give you more room in utilizing your funds.
Increase product prices.
If you feel that your price is a little less, go on and increase the price. This guide can help you set the price on dropshipping products the right way. It will also help to increase the customer’s perceived value of your products so they will not mind paying more. Perceived value is the amount that your customer is willing to pay for a particular product in your store. The higher the perceived value of the customer the higher the chance he or she will buy from you.
If there’s a premium version of your product or there are add-ons, offer them to your customer to get a higher profit. You can upsell before purchase, during purchase, and after purchase. The key to successful upselling is to understand your customers’ needs and make shopping more enjoyable for them. Some upselling ideas include:
Using side-by-side comparisons to show the value of the premium version.
Reward customers for spending more on your stores such as a discount for the next purchase or free shipping.
Display a good range of similar products but don’t offer too many choices to avoid overwhelming the customer.
Showcase product alternatives but don’t be pushy. Let the customers decide on their own.
Earn more sales by suggesting complementary or related products to customers. Suggest items that will help customers get more value from the product that they initially purchased. For example, you are selling t-shirts, you could cross-sell hoodies, baseball caps, or bags. Product bundling is a form of cross-selling. To get a good profit, bundle together a product with a low-profit margin and an item with a high-profit margin that complement each other.
Upselling and cross-selling according to a Forrester research analyst can drive 10-30 percent revenue. You can increase profits with these techniques without finding new customers.
A tight profit margin is common in dropshipping. Use any or a combination of the methods discussed in this article to increase your dropshipping profit margins.