Since financial management is such an important part of running a successful dropshipping business, here’s some information on how to understand and plan for your pricing, costs, revenues, and profits.
Understanding Your Business Costs
Here are the main areas where you’re going to incur costs as a business owner.
Part 1 — Costs Per Item
These are the costs you incur for every product you sell.
- Product costs — the basic cost for purchasing the item from the manufacturer. This will be their “list price” but you should take into account any discounts or promotions you receive.
- Logistics costs — the cost for the supplier to send your product to your customer. This will likely vary depending on where they are sending to.
- Listing and commission costs — if you’re hosting a store on an ecommerce marketplace like Amazon or eBay, these are the costs they charge when you sell an item.
Part 2 — Costs Across Your Business
These are the costs incurred across your business as a whole.
- Hosting costs — the costs to host your website or store, either on a platform like Shopify or Squarespace, or on an ecommerce marketplace like Amazon or Rakuten.
- Software costs — the costs of the various software and services you use to run your business. This could be accountancy programs, customer relationship management, or other software. This will include subscriptions to “software as a service” packages.
- Technology costs — any costs associated with developing and managing your website or business processes. These may be charged by a developer or maintenance service.
- Marketing costs — the budget you’ve put aside to market your ecommerce store through various means. This includes SEO, PPC, social media marketing, paying content creators, etc.
- Insurance costs — any costs you’re paying for insurance for your business.
- Office costs — the prices of utilities, rental, and other costs associated with having an office. If you’re working from home, this would be the extra costs due to having a home office.
- Customer service costs — the costs of dealing with customer communications and complaints. This could be the costs of refunding or returning items.
- Operational costs — other costs associated with operating your business. These will vary from business to business.
- Salary costs — the money and benefits you’re paying to employees. This would include your payroll costs, health insurance, and any other benefits you’re providing.
- Your distributions — the money you want to pay yourself from the business. This would be the minimum you need to live an acceptable quality of life.
- Professional costs — the costs of accounting, attorneys, professional fees, tax filing services, licenses, permits, etc.
- Taxes — the money you need to put aside to cover taxes on your profits. This could be self-employment, payroll, sales, income, state, or other types of taxes.
- Duties and tariffs — any possible tariffs, duties, and fees you might be charged by customs or other agencies.
- Exchange rate costs — for transferring money between currencies.
- Payment processing costs — you will need to pay processing fees on your ecommerce transactions. These are typically between 2.5% and 3.5% of the sales price.
- Other costs — any costs not listed above.
You will want to work out all of these costs over a specific time period, e.g. per month, per quarter, or per year.
The best way of checking on these costs is to have a separate bank account where you pay for all business expenses. You can go through the bank account on a regular basis and reconcile it to ensure you’ve recorded exactly where you’re spending money.
Putting Together a Budget
When you know what your costs are likely to be, you will need to create a budget. Ideally, you should have around three months of costs put aside as it will take time for your business to get traction, and you don’t want to run out of cash! Keep a close eye on your income and expenditure so you understand exactly where your money is going and you don’t suffer from cost leakage.
Working Out Your Pricing Per Item
It’s vital to set the right margins and charge the correct amount per item. Margins in the world of dropshipping are notoriously tight — here’s to work out what your margins should be, and how to set the selling prices for your products.
- Add together the costs of part 1 — costs per item so you know exactly how much each item costs.
- Add together the costs of Part 2 — costs across your business so you understand all the costs of running your business.
- Divide the total you have in part 2 by the total number of items you expect to sell over that time period.
- Take that number and add it you the costs from part 1.
- This will give you a total cost per item.
- Your selling price must be higher than that total cost so you can make a profit.
Get a Financial Cushion in Place
Running out of money is both very bad for business and extremely stressful as a business owner. You can avoid that situation by getting a financial cushion in place. For the first few months, make sure you use any profits to build up a cash balance that can pay your costs if your business has any issues, emergencies, or unexpected expenditure.
We recommend an emergency budget of between three and six months. That should be long enough to deal with most issues.