Understanding Your Dropshipping Finances
We all want to make money dropshipping right? How many know about the importance of understanding your dropshipping finances? Very few I’m willing to bet. Today we’re going to change that. Don’t worry, I won’t make this as boring as your accounting 101 class. I’m going to teach you exactly what you need to succeed with ecommerce.
The truth is there are a lot of dropshippers who think they are successful but they are really not. By successful I mean that you are profitable. If you are not profitable or at least breaking even, you are losing money to put it simply. Let’s go through some definitions which are essential to understand.
Understanding Your Dropshipping Finances to Find Success
Revenue – Your revenue is the overall money you make (otherwise known as income) from your sales of products. This is before we account for advertising and product costs. If you sold 10 $10 products, your revenue was $100.
Ad cost – This is the money you spend on advertising. Instagram shoutouts, Pinterest, Twitter, and Facebook advertising all fall under this category. If you spent $3 on advertising to sell a $10 product, your ad costs were $3. You cannot forget about ad costs if you want to truly master the art of understanding your dropshipping finances
Product costs – Your product costs are the price you pay for your products on Aliexpress/wholesalers. If you sell a $1 product on Aliexpress for $10, $1 is your product cost.
Apps and Services – This is where MyDrop.Shop and other apps including your website come into play. These will help you succeed at the highest level. Remember, you must spend money to make money. View these as an investment rather than an expense. If an $5/month app helps you make an extra $500/month do you think it’s worth it? You bet it is!
Cost of Goods Sold – This is our ad, product and other costs combined. This is all the money we spend to acquire our revenue. When this number is lower than our revue, we are making money! If you didn’t know already, this is great news. This also means we can scale and increase our profit.
Net Profit Margin – This is your revenue minus Ad, products, and other costs. Think of profit margin as how much money you are taking home at the end of the day. You can make $1 million in revenue but if your costs are $1 million you won’t be taking anything home. This means your bank account will not be growing. The average profit for most dropshipping stores is between 20-30%. This means if your revenue is $1 million a year, you can expect to take home 200-300k. Not bad at all if you ask me.
Why Knowing the Numbers is so Important
It is essential to know and understand these numbers. When you do, you can begin to plan for the future. If you don’t know these vital figures, you are essentially in the dark. All the professional dropshippers know their financial statistics. If you don’t, I think it’s safe to say you should.
To scale and take advantage of passive income, you need to know if you are profitable or not. If you do not have a healthy profit margin, there is no point in scaling. Generally scaling decreases your profit margin. If you are not profitable in the beginning, you won’t be when you scale.
Understanding your Dropshipping finances will take your business to a whole other level. Think like a true businessman and track your revenue and costs. Remember the importance of profit. If you are not making any money, you will find yourself out of luck sooner rather than later. You should treat dropshipping like a business if you want to be successful. Those who treat it like a hobby will find it difficult to find the success of others.