Dropshipping is a great business idea for aspiring entrepreneurs, newcomers, and beginners to the business world. The reason for that is that it is accessible. You can test various business ideas with a decent profit and limited downsides with dropshipping. It is a good investment for your new e-commerce business model.
Definition of Dropshipping
Dropshipping is an order fulfillment method. The business does not keep the products it sells in stock. Instead, the store buys the items from a third party. Most likely a supplier, distributor, or another retailer. This middleman delivers the items directly to the shopper.
If you are looking to adopt a dropshipping method, you will serve as a shopfront for the customers who visit your store and purchase items directly from you. You are not in charge of handling any products. Once a customer orders a particular product, your job is to charge the customer. On the other hand, you will be billed for the order fulfillment, including the cost of the item and any shipping charges.
Let’s try to break it down and answer the question: What is Dropshipping?
What Is the Process of Dropshipping?
Dropshipping is a type of supply network management method of doing business. A supply network is a chain of manufacturers, retailers, suppliers, and materials involved in creating and distributing a specific item, from production to shipping.
This can be done with one or with multiple suppliers depending on the dropshipping model you choose to work with.
Who Are Involved in Dropshipping?
They design the products and, in most cases, do not sell them to the general public. Instead, retail companies buy them in quantity from them.
They buy products from manufacturers and resell them to retailers at a higher price. They typically carry a wide range of products from many different suppliers.
They sell products directly to the general public.
How Does It Work?
- A customer makes a purchase from your company – the retailer.
- You then alert your shipping partner- distributor or supplier.
- The manufacturer or the wholesaler packs and delivers the items directly to the shopper.
- Your drop shipping supplier bills you a fee for the product and, sometimes, shipping.
- You bill the shopper.
Benefits of Dropshipping
A dropshipping business has numerous advantages. It can help minimize business costs because it has a retail inventory controlling approach. This method is very popular in the e-commerce community or other businesses wishing to reduce inventory risk. And most importantly, it increases business flexibility.
Easy to Get Started
With dropshipping, you are never in direct contact with the physical product. That is why it is straightforward to run this kind of e-commerce business. You also don’t have to worry about:
- Maintaining or paying for warehouse space.
- Packing or shipping your orders.
- Tracking physical inventory.
- Handling returns or inbound shipments.
- Ordering new products.
- Managing the stock levels.
Less Capital Is Required
The most significant benefit of starting your own dropshipping business is that you don’t have to spend thousands of dollars in inventory to launch it. Traditionally, retailers had to invest a lot of money in purchasing inventory. Yet with a drop shipping arrangement, you order individually per customer and your wholesaler ships these products directly to the customer.
It is more feasible to start a dropshipping store because it requires very little capital investment than bricks-and-mortar stores. In addition, it is a low-risk business opportunity since you are not committed to selling through the inventory.
You don’t need to worry about additional costs in purchasing inventory or warehouse space. Your overhead costs will be relatively low compared to having a traditional retail store. Note that many successful dropshipping stores are home-based businesses. In that case, it requires a laptop and a few other recurring expenses to operate. As you grow, these costs will likely increase with your business but will still be low compared to other businesses.
Dropshipping businesses can be pretty flexible, much more than businesses with a traditional structure. This means that you don’t need an office to run dropshipping services − you can efficiently run your store from home or anywhere with an internet connection.
Wide Selection of Products to Purchase
Since you are not investing in building your own inventory, you can be on top of trends and very quickly add new products to your site or store. And if you need to change or remove some products from your site, you can also do that fairly quickly without ordering new items first.
Much Easier to Test
Dropshipping is suitable for starting a new business and testing new quality products. The main idea is that you are not required to buy a bulk of inventory; you can test product quality and sell them according to customers’ orders.
It’s Easier to Scale
If you receive three times the number of orders with a traditional retail business, you will probably need to do three times the usual work. With that in mind, if you leverage potential suppliers for your dropshipping business, they will be in charge of the additional work. This would allow you to expand with much less stress and incremental work.
Scaling a business can be work-intensive. Typically, you have to evaluate and plan on how you will grow. At some point, you will have to invest more into technology. But scaling a dropshipping business is a bit different as it is not your job to handle, pack, and ship the products. Instead, your time is free to plan everything out logistically and make sure that your business grows smoothly.
However, as you grow your business, you will still have additional website maintenance or customer support work.
Challenges of Dropshipping
There are a lot of advantages to dropshipping, especially for newcomers to the business world. But like all business ideas, there are some downsides and challenges that you will encounter beginning this kind of online business.
Reduced Profit Margin
Low margins are the most significant disadvantage to operating a dropshipping niche. Since it is easy to set up and get started, and the overhead costs are minimal, many stores will sell products below market value.
Naturally, this increases the competition in the sector. So to please more customers, some businesses choose to sell at the same low price to make it up in quantity. Unfortunately, that is not always the case, and sometimes this way of running your store can ultimately hurt your business.
If you’re in the business of stocking your own inventory, it can be relatively easy to keep track of everything. However, it can get hectic if you are sourcing from different warehouses that fulfill orders for other merchants. In addition, your inventory can change without warning.
Fortunately, there are many inventory management software programs that you can use. With them, you will see how much inventory your supplier has in real-time if they use the same software.
If you work with many different suppliers, your shipping costs can be hard to control. For example, if a customer orders three items from other suppliers. You will have to pay three separate shipping fees, and it’s not wise to include these additional shipping costs in the customer bill since the customer can feel overcharged.
It is essential to manage your dropshipping suppliers effectively to make the dropshipping process as smooth as possible to build a good partnership. You have to have a solid relationship with your supplier based on mutual trust and respect.
In that aspect, you have to choose your partner carefully. Otherwise, you can end up with a supplier who loses items, sends botched shipments, does low-quality packing, and so on.
Furthermore, since you are the one who is in contact with the customers, you will have to apologize to them for the supplier’s mistakes. A situation that can get very awkward, and by choosing a better partner, you may avoid these situations.
Very Limited Customization
As a dropshipping retailer, you won’t be working with custom-made products. So, your customization will be minimal. Usually, suppliers design the products and leave little to no room for your own branding and customization.
Some suppliers let you brand the products, such as a few suppliers from Alibaba, yet not many agree to those terms.
Lack of Control Over Customer Experience
You have to select the right dropshipping partner to build a reputation for reliability. Since you promise your customers a timely shipment with the items intact, you risk bad reviews if something goes wrong and the shipment is lost or broken. Ultimately an unreliable shipper can be bad for business.
How to Select a Dropshipping Supplier
The selection of a third-party supplier for your dropshipping platforms is essential.
Typically it is best to have your manufacturer as your supplier to have fewer intermediaries that the products have to go through. In addition, your profits will be more significant.
Each additional fee from your supply chain affects you directly, so it is wise to keep it simple by ensuring that your manufacturer is your supplier.
Many drop shippers buy from the supplier directly since some manufacturers don’t want to deal with smaller orders; this depends on the product you are ordering and selling.
As for newcomers, it’s a good idea to make sure you are asking the right questions about your potential suppliers. Here are some you should consider:
How Much Do You Charge?
Make sure to calculate the numbers correctly, and if the wholesale price is not enough for you to make a decent profit, look elsewhere. This is very important before selecting the right partner.
What Is the Billing Process?
Some suppliers charge your credit card right after a purchase, while others use a monthly billing method according to the product’s cost. Make sure to choose a partner that fits your cash flow and whose billing method is the right fit for you.
Is There a Handling Fee?
If the answer to this question is yes, make sure that you will still have profit, and it won’t affect your profit margin. Remember that every intermediary will cut a bit off your profit. So it is always better to choose a manufacturer as a supplier.
How Are the Products Shipped?
It would be best to choose a supplier that ships the products to the customers via a service that provides tracking numbers. This means that you can access those numbers at any time and track the delivery to the customer. It’s essential if the customer wants information on their package location.
Is There a Return Policy?
Make sure to ask about return and warranty policies. If the suppliers don’t offer a chance to return an item or guarantee the product, it’s a good idea to steer clear of them and find a new partner.
Tips and Tricks for Dropshipping Businesses
You can use a few tricks and tips to ensure that your dropshipping business is successful.
Design a User-Friendly Online Store
As a business owner, your job is to make ordering and delivery seamless. That starts with a user-friendly online store. You will want to make sure to create a stylish and attention-grabbing site. This website should also be easy to use and understand.
You can use one of the popular ecommerce platforms on the market today.
Choose Your Products Wisely
Dropshipping allows you to sell a variety of products. However, that does not mean you should sell everything. Make sure to do market research and be upfront with the popular trends. Know what is marketable, easy to ship, and what customers are looking to order online that they can’t find locally.
Even if you find a trustworthy supplier, you should still thoroughly vet them. If there are incidents of lost products, damaged items, or problems with the shipping times, cut ties and find a better supplier that suits your needs. This is very important because you risk losing customers over unreliable business practices.
Boost Your Online Credibility
It is essential to find the right partner, make a great website, and uphold your promises. This means that you need to have a good reputation, including building a social media profile and creating successful email marketing campaigns. With that, you can ensure your social credibility and build up your brand since many customers feel safer buying from an already established brand rather than an unknown one.
Most Common Questions Asked About Dropshipping
Is Dropshipping Legal?
Dropshipping is legal. Yet that does not mean that you shouldn’t be very careful. Make sure that your suppliers are trustworthy before going into business with them.
How Do Dropshippers Make Money?
If you started a dropshipping business, you must balance your cost and revenue. First, make sure to think about the wholesale prices of the products you want to sell and your marketing. Then, price your products and make sure that you earn more than you spend.
The best way to maintain a high-profit margin is to remain competitive. To determine a suitable pricing range, conduct extensive research on your competitors’, suppliers’, or manufacturers’ prices. Then, you can choose a profit margin balance that will surely win over your competition.
How Can I Create a Dropshipping Website?
Dropshipping platforms work the same way as online stores on an ecommerce platform. The only difference will be that there will be a third party that supplies you with the products. These platforms usually offer a tutorial for you to make your store.
What Is the Cost of Dropshipping?
Depending on the platform you use, make sure to research before jumping into anything. There are three expenses to think about:
- Your platform plan. Websites like Wix offer plans around $17-$35 monthly fees.
- Your online domain. It usually goes from $5-$20 or so on Wix. Others offer free membership, such as Square.
- Your marketing. Some e-commerce platforms offer marketing tools with the right business plan. This means that you will start your social media marketing right on that platform. But if you are looking to market your product on Facebook Ads, for example, it charges about $76.
Is Dropshipping Worth It in 2022?
Whether or not dropshipping is right for you depends on many factors. Before selecting the correct drop shipping partner and e-commerce platform, you must conduct thorough research. Sales can be tricky, so make sure to market and brand your products according to the customers’ needs and the new trends. And while you do all that, you should learn about the advantages and disadvantages of the dropshipping business model.
Since it requires only a small investment, you are not taking as much risk as you would with other business opportunities. You are not obligated to buy inventory upfront. Instead, you can test out the waters by starting small, with only a few orders, and add more when you feel more confident. At the very least, you dip your toes into something new and exciting.