How to calculate dropshipping profit (with refunds and ad spend)

Dropshipping profit is the sale price minus landed cost, payment processing fees, a refund and chargeback allowance, and ad spend. That is how to calculate dropshipping profit for a single order, and it is a different number from the gross margin most spreadsheets track. This guide walks through each line, then runs one order through the full formula.

This is for a Shopify dropshipper running paid ads. It answers one question: does an order that looks profitable on paper still make money once every real cost lands.

How to calculate dropshipping profit: the formula, line by line

Net profit per order is the sale price minus five things. Miss any one of them and the number you get is not profit, it is a guess.

• Sale price: what the customer paid, before any discount code is subtracted.
• Landed cost: the product cost plus shipping to the customer, plus duty where it applies.
• Payment processing fee: the percentage and fixed fee your payment provider takes per transaction.
• Refund and chargeback allowance: the share of orders that come back as a refund or a dispute, turned into a cost per order.
• Ad spend per order: total ad spend for the period divided by orders in that period.

Net profit = Price minus Landed cost minus Payment fee minus Refund allowance minus Ad spend.

Many dropshipping calculators stop after landed cost and call the result profit. That number is gross margin. It tells you how much room a sale has before payment fees, returns and ads take their share, not what you actually keep.

Landed cost: product, shipping and duty

Landed cost is the product cost plus the shipping cost to reach the customer, added together as one number. A supplier quote that only shows the product price is not a landed cost. You need a quote that includes shipping to the country you sell in, since shipping often moves more than the product cost does.

Duty adds a third line for some orders. Every country sets a value threshold under which a parcel enters without duty. In the United States, that threshold is 800 dollars per person, per day. In the European Union, general goods enter duty free under 150 euros, but import VAT applies to a commercial shipment from the first cent. Most dropshipping orders fall under these duty thresholds, so duty is usually zero. Check the rule anyway for a country where your average order value is high or your product is heavy.

The fastest way to get an accurate landed cost is a quote, not a guess. ShipBee's landed cost and margin calculator returns one number per product per destination country, covering product, shipping and handling together. For an exact per order price on a specific product, request a quote. An account manager replies with the landed price for the countries you sell in.

Refunds, chargebacks and payment fees

Payment processing fees apply to every order, whether it ships or not. Providers charge a percentage of the sale plus a small fixed fee per transaction. Check your own processor's published rate, since it varies by plan, card type and country, and use that exact number instead of a rounded guess.

A refund in dropshipping usually costs more than the margin on the order. Returning a low-cost item to a warehouse in China rarely makes financial sense. Most stores refund the customer in full instead and do not get the product back. That means a refunded order loses the full sale price, not only its margin.

A chargeback costs more than a refund. The customer disputes the charge with their bank instead of asking you directly, and the payment provider holds the funds during the dispute. Most providers also add a dispute fee on top, whether you win the case or not.

Turn both into a cost per order instead of treating them as occasional bad luck. Take your refund rate and multiply it by the price to get a refund reserve per order. Take your chargeback rate and multiply it by the price plus the dispute fee to get a chargeback reserve. Add both reserves to the formula alongside the payment fee.

Ad spend and break-even ROAS

Ad spend per order is your blended cost to acquire an order, calculated as total ad spend divided by orders in the same period. It moves with your targeting, your creative and your competition, so track it weekly rather than assuming last month's number still holds.

Break-even ROAS is the return on ad spend at which net profit is exactly zero. Below it, you are paying more to acquire an order than the order returns. Above it, every additional dollar of return past that point is profit.

The formula is Break-even ROAS equals Price divided by Contribution margin. Contribution margin is price minus landed cost, payment fee, and the refund and chargeback reserve, calculated before ad spend is subtracted. This is not the same as dividing price by cost alone. A calculation that skips the payment fee and refund reserve understates the break-even point and can make a losing ad account look fine.

A worked example: a phone accessory store at 40 orders a day

The numbers below are an example. Replace them with your own product cost, landed cost quote, and refund and chargeback rates before you use this formula on a real budget.

A store sells a phone accessory case at 29.99 dollars and runs paid social ads to US customers.

• Sale price: 29.99 dollars
• Landed cost (product plus shipping): 9.50 dollars
• Payment fee (2.9 percent plus 0.30 dollars): 1.17 dollars
• Refund reserve (4 percent of orders, refunded in full): 1.20 dollars
• Chargeback reserve (1 percent of orders, price plus a 15 dollar dispute fee): 0.45 dollars
• Contribution margin before ad spend: 17.67 dollars
• Break-even ROAS: 1.70

At a blended ad cost of 13.50 dollars per order, actual ROAS on this product is 2.22, above the 1.70 break-even point.

Net profit per order = 17.67 minus 13.50 = 4.17 dollars.

At 40 orders a day, that is 166.80 dollars a day, or roughly 5,004 dollars over a 30 day month. Judged only on the gross margin of 20.49 dollars, the same store would look almost five times more profitable than it actually is.

Common mistakes that turn profit into a loss

Confusing markup with margin. Pricing a 9.50 dollar landed cost item at 20 dollars and calling that a 52 percent margin ignores payment fees, refunds and ads. Margin is calculated against price, and only after every real cost is subtracted.

Guessing at a refund rate. A refund allowance pulled from memory instead of your own order data is not a real number. Pull your actual refund and chargeback rate from the last 60 to 90 days of orders before you plug it into the formula.

Comparing ROAS to price instead of to contribution margin. Break-even ROAS divides price by contribution margin, not by landed cost alone. Leaving out the payment fee and refund reserve makes the break-even point look lower than it is. A campaign that looks profitable on that number can be quietly losing money.

Pricing for one country and shipping to all of them. A landed cost and duty threshold calculated for one destination does not automatically hold in another. A heavier or higher value order into a different country can carry a different landed cost and a different duty outcome.

Not repricing after a cost change. Supplier prices, shipping rates and ad costs all move. A margin that worked three months ago can be gone today if none of the five formula inputs have been checked since.

Frequently asked questions

What counts as landed cost in dropshipping?

Landed cost is the product cost plus the cost to ship it to the customer, combined into one number. Duty is added on top for orders above a country's value threshold. A supplier's product price alone is not a landed cost.

What is a good profit margin for a dropshipping store?

There is no single number that fits every product, price point and ad cost. A more useful question is your break-even ROAS. If your actual ROAS sits comfortably above that number across a real sample of orders, the margin is working for your store.

How do I calculate break-even ROAS?

Divide price by contribution margin, where contribution margin is price minus landed cost, the payment processing fee, and your refund and chargeback reserve. That gives the ROAS at which net profit is zero. Actual ROAS above that number is profit, below it is a loss.

Do refunds count against profit even if I do not get the product back?

Yes. In most dropshipping orders, the customer keeps the product or discards it because return shipping from a low-cost item is not worth it. The refund still returns the full sale price to the customer, so it costs more than the margin on that order.

Does ad spend belong in the profit formula or somewhere else?

It belongs in the formula, calculated per order as total spend divided by orders in the period. Leaving it out is why a store can show a healthy gross margin and still lose money every month it runs ads.

Know your numbers before you scale

The five-line formula above turns a rough estimate into a number you can check against your bank balance. Pull your own refund and chargeback rate from the last two or three months of orders. Get a real landed cost quote instead of a supplier price alone, then calculate your break-even ROAS before you raise a daily ad budget.

Run your own product and destination country through ShipBee's landed cost and margin calculator for the exact landed cost line in this formula. It is free and needs no account.