For any dropshipping business to run smoothly, it is essential to determine the profitability of the revenues it generates. Among various methods to check the health of any business, one approach is to check the business's gross margin. The importance of gross margin or the gross profit margin percentage is insurmountable as the rule of thumb is the higher the gross profit margin is, the healthier your business will be. But what is gross margin? And how to calculate gross margin?
Understanding the Gross Margin
The company's net sales revenue minus the Cost of Goods Sold (COGS) is its gross margin. In other words, gross margin is sales revenue a company retains after it has done servicing all the incurring costs of products or services it sells. The higher the gross margin, the more capital company get on each dollar selling. In easy words, the gross margin is your net profit after the purchasing amount is subtracted from your products' sales income.
Calculating Your Own Gross Margin
The gross margin Formula is as follows:
Gross Profit = Net Revenue from Sales - Cost of Purchasing Goods
Gross Margin = (Total Revenue - Cost of Purchasing Goods)/ Total Revenue
Gross Margin Percentage = (Total Revenue - Cost of Purchasing Goods)/Total Revenue x 100%
To better understand, consider a dropshipping business that earns 10 million through sales, but it pays 5 million to its supplier for its products. Thus, the company's gross margin would be (10 Million - 5 Million) = 5 Million, while its gross profit margin, also known as the gross margin Ratio would be (10 Million – 5 Million)/10 Million= 0.5, and its gross profit Percentage would be 50 percent.
The gross profit margin serves as a metric for analysts to determine the company's financial health. gross margin Ratio is another name given to it. It is often shown as gross profit as a percentage of revenue or net sales of the company. The gross profit margin shows the company's amount of profit before calculation of net profit margin of the company. However, gross margin only takes into account net sales and the Cost of Goods Sold (COGS).
Many business-related websites provide gross margin Calculators. Such as Beprofit- the most accurate profit calculator & data analytics software. You can simply visit these websites and input all the details they ask. Using the formulas mentioned above, they calculate your correct gross margin for you.
Gross Profit vs. Gross Margin
In accounting, the terms gross profit and gross margin are used for each, which is not the correct thing because there is a slight difference between the two. gross profit is simply the difference between the selling and purchasing price of the goods. While the gross margin is the ratio of the gross profit and the total sales of a dropshipping company. Another difference between the two is that the gross profit is calculated in Dollars while the gross margin is calculated in percentage.
Best Ways to Improve Gross Margin in Dropshipping
Dropshipping is a type of business model in which the seller doesn't do much other than attracting the customers and contacting the right retailer with the quality goods to send the products directly to the customer. Hence, there are not many areas that are in the hands of the business owner to tweak. The supplier or the manufacturer stores, packs, and ships the goods. However, these steps lose much of the burden from the seller's shoulders, but in the business perspective, these are the areas where, through small changes, a bid profit can be earned. Now that these areas of out of your hands, what is he left with to improve your gross margin?
As it is mentioned in the above formula of gross profit margin, it is net sales revenue minus cost of goods sold divided by revenue. So, in total, it depends upon two factors. One is the amount at which the goods are purchased from the supplier or the Cost of Goods Sold (COGS), and the second is the price tag at which the dropshipping business owner is selling it to its customers or Net Sales. Hence, the increase or decrease in the gross margin depends upon these two variables. Any layman would know in which directions these to have to go so that the business earns more profit. The Cost of Goods Sold (COGS) must decrease, and the price of the dropshipping product must be increased to earn more profit.
Following are some of the suggestions that can help your dropshipping business improve its gross margin.
1. Find a dropshipping supplier who is providing the same quality goods at a lower price. It would be better if fast and free delivery is offered.
2. Try to contact the manufacturer. This will cut down the profit of the middle-man.
3. Try to source imported goods from a country that has lower duties.
4. Negotiate with the supplier in advance according to your weekly or monthly demands. This will help you get the best possible prices.
5. Try to target your exact audience on an online platform with the help of marketing and advertisement companies using modern algorithms. In this way, your business will have a greater reach, and your customers will exponentially increase.
6. Try to strike the right balance between the number of sales and the gross profit from each sale. You can get more gross profit if you sell more goods at a lower profit as well as if you sell fewer goods at a higher profit. But this has to be done by you because all types of industries differ in their working conditions.
7. Reduce the production cost of goods.
8. You can join an affiliate program. Affiliate marketers don't have much to do other than setting up a website. You have to research and market the goods you're offering, but the program can exponentially increase the incoming traffic. This will hopefully increase your sales, and your gross margin will be increased.
9. Customers are always the key to any successful business. The case is the same with dropshipping. You can always take feedback from customers and ask your suppliers to improve the goods accordingly. This would build up trust between you and your customers, and a good reputation will bring in more orders.
Wrapping up
Calculating the gross margin of any dropshipping business is essential for not only improving the business model but also to predict the growth of the project. To draw any scheme for the future, a company must know how well is it doing today. The gross margin does exactly that by making you understand, improve and earn more profit from a dropshipping business.
