The net profit margin is a common term in the business world. Whenever somebody opens a business, at the end of the day, they would like to increase this profit margin since that is their earning. In a nonprofessional's language, the profit margin remains in your pocket or the actual profit you remain from all the revenues you have collected. While calculating the profit margin, one can know the areas that are making more money to adjust accordingly to favor them. This article will define the profit margin, ways of calculating it and offer tips on how to increase your dropshipping business net profit margin.
What does net profit margin mean, and how do we calculate it?
The net profit margin includes your net profits as a percentage of your total revenue but excludes all the expenses from the total revenue you have generated. This figure appears at the end of the income statement after removing all the running expenses from your total income. Also called the net profit margin ratio indicates the amount you spend on your business and represents what you will have in your pocket.
Below is the formula for calculating the net profit margin:
To start with;
Net profit = Revenue – (Operational Cost + Purchasing Cost + Taxes + Interests)
Net Profit Margin = (Revenue – Operational Cost – Purchasing Cost – Taxes – Interests)x 100% Revenue
Reasons for low-profit margins
At the time, many wonder why they make low profits when dropshipping. To explain this below is the rationale behind it.
Sometimes your suppliers may hike the product prices to cater to the packaging and shipping cost (including the shipping staff). When this happens, you will pay the suppliers more, resulting to lower net profit margins.
Having many suppliers also leads to lean net profit margins. There is a disadvantage when a buyer orders different products from multiple suppliers since it will increase the packaging and shipping costs. You will be forced to foot these costs or charge the customers higher prices that may scare them and opt to purchase the identical product from your competitors.
When you have fierce competitors selling the products at lower prices, the situation will pressure you to adjust your product prices downwards. In the process of making the product cheaper, you will realize minimal net profit margins. Some competitors may decide to lower product prices to enhance customer loyalty, which significantly affects your business profits if you follow blindly.
If you face so many refunds and returns, your net profit margins will likely go down. Refunds and returns are expected in the dropshipping business due to the following reasons, delayed deliveries, wrong product delivery, damaged product delivery, having a wrong address when making a delivery, if you fail to make a delivery, and having a lost package. When working with unscrupulous suppliers, such cases will be rampant.
Ways to increase your dropshipping business net profit margin
1. Minimize the operational costs
One of the quick and reliable ways to increase your net profit margins is minimizing your business operational costs. The process may be cumbersome since identifying what to reduce is a great challenge. Furthermore, the operation costs differ from one business to the other, which complicates this matter. But with close examination and auditing all the running costs, you will succeed. Some of the business running costs include:
The labor costs
Equipment purchase and their maintenance costs
Office space and utilities
Assess the overhead cost and decide on the one you will remove. Try to use premium software to cut costs. Before removing a cost, evaluate the possible impact on the business. Remove those costs that will not jeopardize your business and profit-making endeavors.
2. Enhance your store trustworthiness for more sales
Trust is an essential spice in any business. When you gain the trust of your customers, you are bound to make more sales and increase your net profit margins. On the other hand, low trust scares away the potential customers affecting your business profitability. When sellers come to your store, they should have a confident and relaxed feeling to purchase an item. Do not portray some elements that will make the shopper question your business quality and make them mistrust while making a purchase.
To conquer the confidence and trust of the shoppers, ensure you do the following things.
Let your homepage be welcoming to create an excellent first impression for any new customers.
Enhance the authenticity of your business by sharing your brand story with the buyers.
Ensure that the buyers get the product information quickly. Make all the product description information readily available through precise product search results.
Make your product pricing and transaction costs transparent.
Give the customers social proof to show them customer satisfaction.
Once the new buyer builds trust and confidence in you, they will make purchases from your store, increasing your net profit margins.
3. Never employ the penny-wise approach in your business.
Most business people will always do anything, even destroying their relationship with a dissatisfied or unhappy customer, to prevent losing money on order. Apart from being the worst way of doing business, the method puts off many of your clients. If you cannot lose some money to speedily clear a mess you caused to the customer, then there are pretty more chances that you will not increase your net profit margins in the long run.
Several customers are not used to poor service delivery. If you do not expedite their compensations, they will cancel your business with them and never refer or recommend other customers for you. Below are some short-term remedies that will have a rich long-term effect on the business's net profit margins.
If an inexpensive item breaks during the shipping process, send a replacement to the customer in question immediately for free and without asking them to make a return.
Send a replacement instantly to a customer who wants to return an expensive product once you receive their tracking confirmation information: do not wait until the product reaches the warehouse to process the return.
Whenever a long-time customer demands an item as soon as possible, make the delivery overnight without any charges.
When the customer shows dissatisfaction with a purchase, quickly do partial refunding to compensate for their disappointment.
Although doing the above things will cost you somehow, it will build a long-lasting relationship with your customers and cultivate loyalty that will, in return, command a considerable customer base for your business.
4. Concentrate on a niche
Before settling on a specific niche, assess the competition. Niches that ate saturated will have high competition that will result to lower net profit margins. Avoid such niches and select a sub-niche with few customers but showing potential in growing. Meet the needs of those few customers as you scale up to significant performance and leadership in the sub-niche. Remember, when the competition is low, one is bound to make high profits.
5. Mark-up your prices
Making the product prices high is an intimidating idea that should come as the final resort. Business people believe that when they mark up their products' prices, buyers will leave them, the sales will reduce, and their business will collapse. For your information, raising the product prices may be a blessing in disguise since it will result in higher net profit margins. If you settle on this method, ensure that you test the price levels. Though the method is effective, one will require a unique selling proposition that will value their customers. So, if you lack one, strive to acquire one.
6. Enhance your marketing
You may have had a healthy business presence, but that should not be the end of marketing your business. Open up your marketing strategy to social media platforms, of course at a budget, to expose your products on different social media platforms. With the presence of numerous social media sites like Instagram, Facebook, Twitter, and others, you will spend so little or nothing to reach a massive global audience.
At least all the drop shippers or online store owners will face the challenge of tight profit margins at a given point in their business, but with the above tips, one can quickly increase their lean net profit margins to create a strong business. Besides, the magic behind knowing the concept of net profit margin will assist you to adjust various services and processes in your business to make it grow in your favor as you make good net profit margins.
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