How to Calculate Profit for a Dropshipping Business (Shopify based)
By trueprofit | Jan 10, 2019 | Business Finance
Selling online used to be a predicament. Until e-commerce platforms like Shopify jumped in and made everything easier. Everything, except one: Accurately calculate profit.
It’s easy to know your revenue, which was placed in the most noticeable spot on the Shopify dashboard. But revenue alone never reflects the big picture. In fact, solely focusing on revenue instead of profitability can potentially harm your business.
The bad news is: Shopify provides no automatic way for you to see your profit. It’s due to the fact that the calculation involves many factors; each keeps changing and has to be pulled from different sources.
So how can you calculate profit then? If your business model is based on Shopify and AliExpress, below is the simplest way:
Profit = Revenue – Costs
Profit = Revenue – Cost of goods sold – Shipping cost – Ad spend – Processing fees – Custom spend
Let’s dive into how to calculate dropshipping profit.
Revenue: First thing to track profit & loss
Definition: Revenue is the final money you receive from customers, also known as total sales.
Revenue = gross sales – discounts – returns + taxes + shipping charges
Note that taxes and shipping are the money you charge customers.
Costs: The most important factor in profit calculation.
1. Cost of goods sold (COGS) & Shipping cost
This is where it gets tricky. Currently, you can’t export past orders on AliExpress. You can only view the orders and manually sum them all. This method is only recommended for starters; otherwise, it would take you tons of time calculating (and you’ll mess up somewhere in the middle – I’ve been there before).
A better approach is to use Shopify’s built-in COGS field. All you need to do is enter the current COGS for each product and immediately can see your total cost. However, this is not a satisfying solution, as it doesn’t take into account price changes (which happens a lot with AliExpress suppliers) and the shipping cost (which is usually huge). Sure you can come up with an estimated shipping cost: if you only use an e-package to deliver to the US then it costs around $3 per order, but it’s almost impossible to get the real number if you’re selling worldwide.
Another way is working with your bank statement: Ask your bank for an Excel file and filter all payments that relate to AliExpress, then sum them all. That way, you’ll get a total of your COGS and shipping cost. The flip side is that it’s difficult to separate these two costs and may get too complicated unless you use one single credit card for one store.
This leads us to the final method: Shopify apps. There are lots of apps claiming to help you calculate COGS and such, but beware. There are many problems that most of those apps encounter, as discussed in this article. Ideally, try apps that can automatically sync COGS and shipping costs in real-time.
2. Ad spend
Ad spend is the money spent on ads to acquire customers. For dropshippers, the most popular ad spend is on Facebook and Google.
3. Processing fees
Any payment gateway you’re using comes with payment processing fees, whether it’s PayPal, Stripe, or Shopify Payments. Each gateway has a different rate. For example: with Stripe you pay 2.9% of each transaction plus a $0.30 surcharge.
Try to look around for ones that suit you best, based on the number of orders you’ll be processing, and where your customers are located. Note that international payments will cost you more.
Also keep in mind that unless you use Shopify Payments, Shopify will charge you an additional fee of 0.5% – 2% depending on your Shopify plan.
These fees can be found in the Report Section of every Payment gateway admin.
4. Custom spend
Custom spend includes other expenses, such as software/app, influencers, rents, salary, Shopify plan, taxes.
Now that you have every factor on the table, do the math and see your profit.
A better solution to profit
Above is a universal guide to accurately figure out your profitability. It’s the old-fashioned way, but it works better than most apps out there.
The only problem: you can’t do this every day. It’s acceptable on a monthly basis, but a true entrepreneur should spend time making more profit instead of doing math daily. But you also can’t wait until the end of the month to have enough data to make big decisions.
You need real-time data. What’s your profit today?
True Profit app was born to accomplish that mission. It automatically pulls and updates data from Shopify, AliExpress, Facebook Ads and Google AdWords to calculate profit & loss and give you the real picture of your profitability. You get to see Profit, COGS, Shipping cost, Processing fees, Conversion rate and other major metrics in real time.
Shift from asking “How to calculate dropshipping profit?” to “How to maximize my money?” today.
Try it free for 14 days.