One of the most frequent questions I get when speaking to potential store owners is "what is dropshipping?" It's a question I'm always happy to answer because I believe that the answer is one of the best ways to run your own ecommerce business. With that in mind I decided to put together some answers to the most common questions I get about dropshipping. Check them out below and let me know if you have any other questions that I didn't cover here.
- What is dropshipping?
- How does dropshipping work?
- Why should you start a dropshipping business
- Why shouldn't you start a dropshipping business
- What costs are involved?
- What are some hurdles you have to overcome to achieve success?
- Final thoughts? (Okay - this one's not actually a question, but I'm still leaving the question mark)
Dropshipping is a particular method of product distribution where a retailer sells a product that is then shipped directly from the supplier to the purchaser. This means the retailers never sees the physical product they’ve sold.
Basically in the world of ecommerce, dropshipping is a model where a retailer handles the marketing and customer service portion of sales while a wholesaler or manufacturer handles the shipping and handling. This process is generally invisible to the purchaser. The supplier includes the brand and information from the retailer rather than their own information. While this model used to be less common it has taken off as online retail has become a major source of income for many companies.
While the benefits of the dropshipping model for retailers are clear, the benefits to the suppliers shouldn’t be overlooked. Nearly all wholesalers and many manufacturers have begun to offer dropshipping fulfillment because it increases their profits considerably. While it does mean more work, these business are already well equipped to handle storage and shipping whereas many people who wish to resell don’t have the setup or ability to setup a standard stock & ship model of distribution (primarily due to the high initial investment). This limits the potential retailers for products, especially in the case of less frequently purchased items. Many traditional retailers will tend to stick with big winners and avoid offering products that don’t move as quickly. In the case of dropshipping though, ecommerce sites can list products that don’t have a high volume because it doesn’t cost them anything to do so. This means manufactures have a better chance of moving their lower volume products.
Since the suppliers handle all of the shipping and handling in the dropship model, the store owner can work from practically anywhere (as long as there is a connection to the internet).
Because you have an entrepreneurial mindset.
- This doesn’t mean you need to have run successful businesses already, but if you’re not willing to dedicate yourself to your business you won’t be successful. It is easier to get into ecommerce through dropshipping because of the low initial investment, but this doesn’t mean it is easy to run, and it certainly isn’t a get rich quick scheme.
Because you have an understanding of inbound marketing.
- Dropshipping means you’ll be selling the same products as your competition. Trying to compete through the lowest prices is a recipe for disaster. Instead successful ecommerce businesses rely on inbound marketing and SEO to drive a majority of their traffic. The basics of inbound marketing are easy enough to learn and apply, but as any business owner will tell you - the more you put into something the more you get out. If you really want to compete in the ecommerce industry you need to learn everything about inbound marketing you can.
Because you are patient and willing to wait for your business to grow over the course of months and years before seeing livable profits.
- Google has indexed approximately 45 billion pages as of 2015. There is a lot of internet out there to be seen and it can take time to stand out among the mass amount of information available. There are strategies that can increase the rate at which you’ll be found - the right marketing and selecting the right niche but it’s entirely possible to not see any meaningful number of sales from your ecommerce business for some time. If you’re expecting immediate results with your first ecommerce business you may be setting yourself up for disappointment.
- There are many people who would make highly successful business owners but never get the opportunity because of startup costs. If you’re one of these people dropshipping may be a great way to get started on the path of working for yourself.
Because you can’t wait to see major profits.
- Margins are generally low in businesses that rely on dropshipping and building a loyal customer base takes time, which means you shouldn’t expect to make a killing early on. It’s not unheard of to achieve great success even in the first month, but this tends to be a rare occurrence with ecommerce businesses.
Because you make and sell your own products.
- There are ways to setup fulfillment processes even with your own products that are similar to the dropship model so that you don’t have to concern yourself with shipping each item to purchasers, but the main benefits of dropshipping just don’t apply to someone who already has a product established and ready to sell.
Because you want more control over the process of shipping to your customers.
- If you have the space and funds to handle a stock & ship model business you’ll want to consider your options carefully. While dropshipping may still benefit you, margins tend to be considerably better with the stock & ship model. Additionally the stock & ship model allows you to control the shipping side of your business, which might include faster or more careful shipping, or personalizing packaging for your customers.
Because you don’t know or want to learn anything about inbound marketing.
- If you don’t know and have no interest in understanding inbound marketing you likely won’t find much success with a dropshipping business where marketing is the primary method of standing out among your competitors.In reality starting an ecommerce business without any current following or knowledge of inbound marketing is likely to end in disaster with so much competition out there.
With dropshipping there are a few costs that you don’t have to consider with other fulfillment models. Most suppliers will charge a dropshipping fee for each item shipped between $5-$10. This is basically a handling fee for their having to do the shipping for you.
You will generally be required to pay all shipping costs (though some wholesalers do offer flat fee shipping).
Additionally since you are not buying in bulk, your discount from the supplier is likely to be considerably less than those buyers who do purchase in bulk.
The other costs of this business are the same for any ecommerce store - domain name, hosting, licenses, marketing, etc.
Because of the lower margins, you’ll need have much higher sales than standard businesses to achieve the same amount of profit.
You will face shipping issues (not might - will). Broken or defective equipment, customers changing their mind and wanting to return an item, delays, packages that were never delivered, or items that are out of stock. If you’re working with an ethical supplier they will cover any costs associated with shipping mistakes on their end but that leaves many other problems for you to resolve. Your customers don’t know the items they’ve purchased are coming from a third party so you are responsible for any mistakes. If you want to build loyalty among your customers you’ll find yourself losing money at times to right an issue that wasn’t your fault at all - this does tend to pay off in the end.
Working with multiple suppliers can reduce some of these risks. If they carry some of the same products suppliers in different locations can speed up your shipping, provide cover in case of out of stock items, and sometimes allow you to negotiate for better margins (after you’ve established relationships with both). This can be difficult to set up initially, but the benefits in the long run are well worth the extra logistics.
The dropship model can be a great way to enter into the world of ecommerce, especially if startup costs have been what has held you back. But make no mistake - the ease of entry doesn’t mean this type of business is easier to run than others. It requires a lot of time, research, and effort to achieve success in ecommerce. If you’re willing to put in that effort to start the business you’ve always wanted to this may be the path for you.