How We Make Money in Dropshipping

Here is an illustration of how we make money in dropshipping. 

We don't receive a commission or fixed profit for selling a product. Also, suppliers won't guarantee a minimum profit since shipping is variable in most niches. 

When you partner with a supplier, they will give you access to purchase products at "cost" or what is considered "wholesale" price. 

Here is a typical spreadsheet I receive from suppliers. It has 744 SKUs, but I hid most to keep it simple. 

Column C - MSRP is a suggested price. This is a fictitious price no one uses. This is the value we populate in the "compare at" price in Shopify. I stopped adding this to Shopify recently, as some sales channels started to disapprove of showing all products as "on-sale."

Column D—Your cost is what you pay the supplier. Some suppliers tell you your cost is a percentage of the MSRP, so you will have to calculate it in those cases. 

Column E—Your MAP price is the price that matters. MAP is the minimum price you are allowed to advertise and usually the price you sell a product for. You will receive this amount, which is also the basis for calculating your profit. 

Column F - Your shipping cost is usually variable; you will pay for shipping even if you offer free shipping. As part of your margin calculation, we can offer free shipping as it has become what consumers are used to. 

Colum G - Your profit, or margin, is calculated by subtracting the product cost and shipping from MAP. So E-F-D=Margin. Most suppliers will not give you that number or guarantee it. Calculating your margin based on MAP, your COST, and expected shipping is up to you. 

To simplify this post, I did not factor in discounts, credit card processing fees, or tax. However, remember that those usually are part of the calculation. 

This screenshot is one example of a spreadsheet I received from a vanities supplier. Of course, the format and nomenclature might vary with each supplier, so I like to create pricing sheets for each supplier using a consistent format. I usually do this once during onboarding and update it whenever prices change. 

 

Please keep in mind that some suppliers won't send a spreadsheet. They might tell you to calculate a percentage of the MSRP they show on their website. Others might send you a PDF with images and other information mixed in. These are challenges we have to deal with. This is why having a system helps!