Data provided here comes from our team of experts who have been working on business plan for a dropshipping business. Furthermore, an industry specialist has reviewed and approved the final article.
How profitable is a dropshipping business, and what is the typical monthly income for dropshipping entrepreneurs?Let's check together.
Revenue metrics of a dropshipping business
How does a dropshipping business makes money?
A dropshipper makes money by selling products to customers and keeping the difference between the wholesale price and retail price.
What do dropshipping businesses sell, exactly?
Dropshipping businesses are online retail ventures that offer a wide range of products, which they don't physically stock themselves.
Instead, when a customer places an order on their website, the business purchases the product directly from a third-party supplier or wholesaler, who then ships the item directly to the customer.
This model eliminates the need for the business to invest in inventory or manage warehousing and shipping logistics.
Dropshipping stores can sell virtually anything, including clothing, electronics, beauty products, home decor, fitness equipment, and more.
This flexibility allows entrepreneurs to curate their product selection based on market trends and consumer demand, without the risk of being stuck with unsold inventory.
he main appeal of dropshipping lies in its low upfront costs and reduced operational complexities, making it an attractive option for individuals looking to enter the e-commerce space with minimal financial risk.
How does it work?
Let's walk through an example of how a dropshipping order works with a simple scenario involving a customer, a dropshipper (online store owner), and a supplier.
Imagine you're a customer who wants to buy a trendy phone case for your new smartphone. You find an online store called "CoolCases" that sells various phone accessories.
The online store "CoolCases" is a dropshipping business. They have a website where they display a variety of phone cases, from sleek designs to funky patterns. They have partnered with different suppliers who provide these phone cases.
You find a phone case you like on the CoolCases website and place an order by adding it to your cart and checking out. During the checkout process, you provide your shipping address and payment information.
Once you complete your order on CoolCases' website, CoolCases receives a notification about your purchase. They immediately forward your order details and payment to the supplier they are partnered with that holds the phone case you ordered.
The supplier receives the order details from CoolCases. They prepare the phone case for shipping, package it securely, and generate a shipping label with your provided address.
The supplier then ships the packaged phone case directly to your address. They handle the shipping logistics, such as choosing the shipping method and arranging for the package to be picked up by a delivery service.
As the package is on its way to you, CoolCases provides you with tracking information so you can keep an eye on the shipment's progress.
The delivery service brings the package to your doorstep, and you receive the phone case you ordered from "CoolCases."
In this example, the dropshipper, "CoolCases," acts as an intermediary between you (the customer) and the supplier. They curate the products, maintain the online store, and manage the customer orders, while the supplier takes care of stocking, packaging, and shipping the actual product.
he dropshipping model simplifies the process for the dropshipper, as they don't need to manage inventory or handle shipping, and it provides you with a convenient way to buy products without the dropshipper having to maintain physical stock.
Here is a summary table to help you understand
| Step | Description |
|---|---|
| 1 | Customer places an order on the dropshipper's website or platform. |
| 2 | Dropshipper receives the order and payment from the customer. |
| 3 | Dropshipper forwards the order details to the supplier or manufacturer. |
| 4 | Supplier prepares and packages the product. |
| 5 | Supplier ships the product directly to the customer's address. |
| 6 | Dropshipper provides the customer with tracking information. |
| 7 | Customer receives the product and order is fulfilled. |
| 8 | Customer may contact dropshipper for support, returns, or issues. |
| 9 | Dropshipper liaises with supplier for any returns or exchanges. |
| 10 | Dropshipper handles customer inquiries and resolves issues. |
| 11 | Dropshipper may manage marketing, customer acquisition, and website maintenance. |
Who are the customers of a dropshipping business?
Dropshipping businesses can cater to a variety of customer types, ranging from retail customers to bulk buyers.
Which segments?
We've prepared a lot of business plans for this type of project. Here are the common customer segments.
| Customer Segment | Description | Preferences | How to Find Them |
|---|---|---|---|
| Young Professionals | Busy, tech-savvy individuals aged 25-35 | Quality products, convenience, latest trends | Social media advertising, influencer collaborations |
| Home Decor Enthusiasts | Homeowners interested in interior decoration | Unique and stylish home decor items | Home decor forums, Pinterest, interior design blogs |
| Fitness Enthusiasts | People who prioritize fitness and healthy living | Activewear, fitness equipment, supplements | Fitness blogs, Instagram fitness influencers |
| Parents-to-Be | Expecting couples seeking baby products | Baby essentials, safety, affordability | Parenting forums, baby expos, mommy bloggers |
How much they spend?
In our detailed analysis of the dropshipping business model, we find that customers usually spend between $50 to $200 per order. These figures fluctuate based on various factors including the type of products purchased, seasonality, and marketing efforts.
Customer shopping patterns reveal that most customers make purchases from 1 to 4 times a year, heavily influenced by factors like promotional periods, need for the product, and changes in trends or personal income.
Consequently, the estimated lifetime value of an average customer in a dropshipping business spans from $50 (1x50) to $800 (4x200), assuming they stay loyal to your business for at least a year.
With these estimations, we can deduce that an average customer would generate approximately $425 in revenue for a dropshipping store on an annual basis, balancing out various customer spending behaviors.
(Disclaimer: the figures stated above serve as general estimates and may not precisely reflect your distinct business circumstances. Factors such as customer acquisition cost, returns, and operational expenses have not been considered in the calculations.)
Which type(s) of customer(s) to target?
It's something to have in mind when you're writing the business plan for your dropshipping business.
The most profitable customers for a dropshipping business are typically online shoppers who are passionate about niche products or have specific, hard-to-find interests.
They are the most profitable because they are willing to pay a premium for unique items that cater to their particular hobbies or needs, often resulting in higher average order values.
To target and attract them, conduct thorough market research to identify trending or underserved niches, then curate a product selection tailored to those niche. Create a user-friendly e-commerce website with clear product descriptions, high-quality images, and efficient navigation.
Invest in targeted digital marketing efforts, such as social media advertising and content marketing, to reach potential customers interested in those niche products. Providing exceptional customer service, including quick response times to inquiries, efficient order processing, and reliable shipping, will help retain these customers.
What is the average revenue of a dropshipping business?
The average monthly revenue for a dropshipping business can vary significantly, typically ranging between $1,000 and $50,000. This wide range is due to various factors including the types of products sold, marketing efforts, and the scalability of the business model. Below, we explore three hypothetical cases of dropshipping businesses, each at a different scale and operating level.
You can also estimate your potential revenue using different assumptions with our financial plan for a dropshipping business.
Case 1: A budding dropshipping entrepreneur
Average monthly revenue: $1,000
This business represents a dropshipping store that's just starting out, perhaps run by an individual or a small team. They are likely to be working with a limited budget, primarily relying on organic social media marketing and word-of-mouth to drive their sales.
The product niche is usually something simple and with less competition, meaning the markups aren't very high. The business might be handling around 50 orders per month, with an average profit of $20 per order.
With these estimates, the budding dropshipping business would be looking at an average monthly revenue of $1,000.
Case 2: An established dropshipping store
Average monthly revenue: $10,000
This scenario represents a dropshipping store that has successfully navigated the initial hurdles and built a steady flow of traffic and sales. This business typically invests in paid advertising and perhaps even content marketing, helping to attract a larger audience.
Moreover, the store likely has optimized its sales process and increased its average order value through upselling or cross-selling techniques. With a broader selection of products or a more profitable niche, this type of store could reasonably handle around 300 orders per month, earning an average profit of $33 per order.
Based on these numbers, an established dropshipping store could generate a monthly revenue of $10,000.
Case 3: A high-volume dropshipping enterprise
Average monthly revenue: $50,000
This type of business represents the pinnacle of dropshipping success. It's a full-scale operation, perhaps with a dedicated team, and commands a significant share of its market niche.
This enterprise invests heavily in all forms of digital marketing and brand development. It might also utilize advanced techniques like customer retention management (CRM) systems, email marketing, and loyalty programs to maintain customer interest and repeat purchases.
Due to its scale, this business could comfortably handle around 2,000 orders per month, with an average profit of $25 per order (the slightly lower profit margin per item can be attributed to increased marketing and overhead costs). This leads to the substantial monthly revenue of $50,000.
In conclusion, these scenarios demonstrate the scalability of dropshipping as a business model. From small startups to large-scale operations, dropshipping businesses can generate revenues that vary as widely as their business strategies and investment capabilities.
The profitability metrics of a dropshipping business
What are the expenses of a dropshipping business?
Dropshipping business expenses include website maintenance, marketing, supplier costs, and e-commerce platform fees.
| Category | Examples of Expenses | Average Monthly Cost (Range in $) | Tips to Reduce Expenses |
|---|---|---|---|
| Product Costs | Cost of goods sold (COGS), supplier fees | $1,000 - $5,000 | Find reliable suppliers, negotiate bulk discounts |
| Website Expenses | Domain registration, hosting, maintenance | $50 - $200 | Use affordable hosting, optimize website for speed |
| Marketing and Advertising | Google Ads, Facebook Ads, influencer marketing | $500 - $2,000 | Focus on cost-effective advertising strategies |
| Shipping and Fulfillment | Shipping fees, packaging materials | $300 - $1,000 | Negotiate shipping rates, use efficient packaging |
| Customer Support | Salaries, software, training | $500 - $1,500 | Implement chatbots, provide self-help resources |
| Transaction Fees | Payment processing fees | $100 - $500 | Choose payment processors with lower fees |
| Legal and Compliance | Business licenses, permits, legal advice | $100 - $300 | Research compliance requirements, minimize legal expenses |
| Software and Tools | eCommerce platform, email marketing software | $100 - $300 | Opt for free or low-cost software alternatives |
| Returns and Refunds | Refunds, return shipping costs | $200 - $500 | Have a clear return policy, reduce return rates |
| Miscellaneous | Office supplies, utilities | $100 - $300 | Minimize unnecessary expenses |
When is a a dropshipping business profitable?
The breakevenpoint
A dropshipping business becomes profitable when its total revenue exceeds its total fixed and variable costs.
In simpler terms, it starts making a profit when the money it earns from selling products exceeds the expenses it incurs for website maintenance, purchasing goods (after sales), payment gateway fees, marketing, and other operating costs. Unlike traditional retail businesses, dropshipping doesn't require holding large amounts of inventory, which changes the nature of the initial investment and costs.
This means that the dropshipping venture has reached a point where it covers all its expenses and starts generating income, we call it the breakeven point.
Consider an example of a dropshipping business where the monthly fixed costs, including website, subscription services, and online advertising, typically amount to approximately $5,000.
A rough estimate for the breakeven point of a dropshipping business would then be around $5,000 (since it's the total fixed cost to cover), which would require selling a variable amount of products depending on the price and profit margin. For instance, if the average net margin on products sold is $10, the business needs to make around 500 sales a month to break even.
It's important to understand that this indicator can vary widely depending on factors such as the niche, pricing strategy, operational costs, and competition. A dropshipping business with higher value products or better margins might have a different breakeven point compared to one dealing with lower-margin items.
Curious about the profitability of your dropshipping venture? Try out our user-friendly financial plan crafted for dropshipping businesses. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.
Biggest threats to profitability
The biggest threats to profitability for a dropshipping business include intense competition, fluctuating product costs, unreliable suppliers, shipping delays, and customer dissatisfaction.
Firstly, with numerous dropshipping stores in the market, competition can lead to price wars, reducing profit margins.
Secondly, product costs can vary due to factors like currency fluctuations and supplier price hikes, impacting profitability.
Unreliable suppliers may fail to deliver products on time or provide subpar quality, resulting in customer complaints and refunds.
Lastly, customer dissatisfaction caused by long shipping times, product quality issues, or poor customer service can harm the business's reputation and profitability by reducing repeat purchases and referrals.
These threats are often included in the SWOT analysis for a dropshipping business.
What are the margins of a dropshipping business?
Gross margins and net margins are critical financial metrics used to gauge the profitability of a dropshipping business.
The gross margin reflects the difference between the revenue earned from sales and the direct costs of goods sold (COGS). These costs typically include the price paid for products sold, shipping fees, and merchant transaction fees.
Essentially, it's the profit generated after deducting the costs directly tied to the products sold through the dropshipping business.
Net margin, however, accounts for all the expenses associated with the business, including indirect costs such as administrative expenses, platform fees (e.g., Shopify, Amazon), marketing, and customer service expenses.
Net margin offers a comprehensive view of the dropshipping business's profitability, encapsulating both direct and indirect costs.
Gross margins
Dropshipping businesses usually have an average gross margin between 10% and 30%.
For instance, if your dropshipping store is generating $10,000 per month, your gross profit might be around 20% x $10,000 = $2,000.
Here's an example for clarity.
Consider a dropshipping store that sells 100 units of a product, with each unit priced at $50, making the total revenue $5,000.
The costs involved, such as the price paid to suppliers, shipping, and transaction fees, might total $4,000. Therefore, the gross profit equates to $5,000 - $4,000 = $1,000.
In this scenario, the gross margin for the dropshipping business is $1,000 / $5,000 = 20%.
Net margins
Typically, dropshipping businesses might see an average net margin ranging from 2% to 10%.
Continuing with the simplicity, if your dropshipping business earns $10,000 per month, the net profit might be approximately $500, or 5% of the total revenue.
Using the same example above, the store generates $5,000 from selling 100 units of a product.
After deducting the direct costs of $4,000, you're left with a gross profit of $1,000.
Now, consider indirect expenses such as marketing, platform fees, customer service, and miscellaneous operational costs, which might total $600. After accounting for these, the net profit is $1,000 - $600 = $400.
Thus, the net margin for the dropshipping business would be $400 divided by $5,000, resulting in an 8% net margin.
As a dropshipping entrepreneur, understanding that the net margin (as opposed to the gross margin) offers a truer insight into your business's real profitability is crucial because it encompasses all operational costs.
So, what might your earnings look like as a dropshipping business owner?
It's clear that net margin is your go-to financial metric to understand if your dropshipping venture is truly profitable. Essentially, it reflects what remains after covering all operating expenses.
The actual profits vary significantly based on your business strategies, operational efficiency, and ability to manage both revenues and expenses.
Struggling dropshipper
Makes $500 per month
Imagine initiating a dropshipping business without proper market research, partnering with unreliable suppliers, limited understanding of e-commerce, and little to no advertising. Your total revenue might barely touch $5,000 in this case.
Moreover, if expenses aren’t kept in check — considering costs like fees, returns, and low-value products — your net margin could be as low as 10%.
Consequently, your monthly profit would only be around $500 (10% of $5,000). It's hardly an ideal outcome for any entrepreneur.
Typical dropshipper
Makes $4,500 per month
Now, consider a more engaged dropshipper. You conduct sound market analysis, choose reliable suppliers, optimize your online store, and invest in moderate advertising. Your total revenue could escalate to $30,000 with these strategies.
With prudent expense management, avoiding unnecessary costs, and improving your product offering, your net margin might improve to 15%.
Under these conditions, you'd be looking at healthier monthly profits of approximately $4,500 (15% of $30,000).
Outstanding dropshipper
Makes $30,000 per month
Here, you're not just running a business; you're spearheading a brand. You start with in-depth research, high-quality suppliers, perhaps even some unique product offerings. You understand SEO, engage with customers on social media, and your ads are compelling and well-targeted. Such dedication could push your total revenue to a stellar $200,000.
Effective negotiation with suppliers, streamlining operations, and scaling your advertising ROI can lead to an impressive net margin of 15% — a percentage that often diminishes as revenue grows, but you've masterfully maintained it through strategic planning.
This scenario sees you earning a remarkable $30,000 monthly (15% of $200,000). A dream scenario for any aspiring entrepreneur!
Whatever your dropshipping ambitions, remember, achieving 'outstanding' status begins with a comprehensive, well-thought-out business plan. Navigate the challenges, leverage your strengths, and you could see substantial financial success in the world of dropshipping.