"How does dropshipping work?"
Find the answer to 2021's most-asked eCommerce question here in...
Coach's Guide to Dropshipping
This year the question I get asked most frequently is "Coach, how does dropshipping work?". Or, similarly, "Coach, is dropshipping worth it still in 2021?", and my response is always the same... "Read my dropshipping guide to understand how dropshipping works, and heck yes dropshipping is still effective and worth doing!"
Our private portfolio consists of almost exclusively high ticket dropshipping stores at this point. Why? Well because they make more revenue and profits than the websites we've owned using other models!
Knowing we still believe in dropshipping, check out the FAQs I answer in detail here within this guide:
- What is dropshipping?
- How does dropshipping work?
- Is dropshipping dead?
- Is dropshipping legal?
- 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
Dropshipping is a particular method of product distribution where a retailer sells a product that they purchase at a wholesale price and then that product is shipped directly from the wholesale supplier to the end customer. This means that the the retailer never sees the physical product they’ve sold.
Contrary to what you may have read elsewhere, dropshipping IS NOT buying a product from eBay or Amazon or Walmart (or any other retail website) and then selling that product on another platform at an inflated price. That is called "retail arbitrage" and is not a very good business model for many reasons, which I will not get into here.
In the world of eCommerce, dropshipping is a model where retailers handle the marketing and customer service portion of sales while dropshipping wholesalers or manufacturers handle the shipping and handling. This process is generally invisible to the purchaser. On the package, the supplier includes the brand and information from the retailer rather than their own information. 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).
While this model used to be less common, it has taken off recently as online retail has become a major source of income for many companies. While the benefits of the dropshipping process 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.
Although it does mean more work for the supplier, they are already well equipped to handle storage and shipping whereas many people who wish to resell don’t have the space or ability to set up 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 - because many traditional retailers will tend to stick with big winners and avoid offering products that don’t move as quickly. That's not good for manufacturers!
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 that manufacturers have a better chance of moving their lower volume products if they dropship.
Certainly not. Although mainly lower ticket dropshipping niches have gotten insanely competitive and just plain over-saturated at this point, high ticket dropshipping works as well as ever.
Yes, 100%. As long as you are using your personal info (as a sole proprietor) or registering a business entity in order to work with true wholesale dropshippers it is completely legal to dropship in the USA. Each wholesale dropshipper will have their own requirements to work with them, but the practice of dropshipping is legal for both individuals and companies nonetheless.
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 and learn new things, 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. You have to have a solid plan and stick to it!
Because you have an understanding of inbound marketing.
When you dropship, you’ll be selling the same products as your competition. Trying to compete through the lowest prices is a recipe for failure. 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 that you can. Our Academy shows you all of the different ways to market your online business including paid and fee traffic sources.
Because you are patient and willing to wait for your business to grow over the course of months or years before seeing impressive profits.
Google has indexed approximately 130 trillion pages as of November, 2016, so it can take time to stand out among the massive amount of information available. If you are relying solely on search engines to list your pages organically, it’s entirely possible to not see any meaningful sales from your eCommerce business for quite some time. If you’re expecting immediate results with your first eCommerce business just from search engines, you may be setting yourself up for disappointment.
While it is true that it will take awhile to slowly climb the search engine rankings and that ranking well is the key to sustained growth, our Academy shows you how to make a profit while you wait for your new eCommerce business to slowly make its way up the search engine rankings. We show you how to select product niches that can be profitable immediately. From there, they just continue to get more profitable in the coming months and years."
Because you want to run your own business but don’t have a lot of money to invest.
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. You can set up a new eCommerce website for just $75-$100 - something that no stock and ship website and certainly no "brick and mortar" business can say!
Because you can’t wait to see major profits.
Margins are generally lower 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. That said, we have launched many extremely successful websites that were generating very impressive profits the very first month. It all comes down to selecting the right product niche and then marketing your website correctly.
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 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.
If this is all just too much to handle, you can always just buy an already profitable website. Our Website Marketplace almost always has quite a few extremely profitable websites for sale!
With dropshipping there are few costs that you don’t have to consider with other fulfillment models. Many suppliers will charge a $5-$10 dropshipping fee for each item shipped. This is basically a handling fee for them 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 or "free shipping" which is built into their wholesale price).
Other than that, the other costs of a dropshipping business are the same as any eCommerce store - domain name, hosting, licenses, marketing, etc. The HUGE difference is that you don't have the massive inventory purchase and storage costs, the risk of being stuck with merchandise that never sells and that you can list any product that you want on your site - not just the stuff that you could afford to purchase in bulk.
Because of the slightly lower margins, you’ll need have higher sales than standard stock and ship businesses to achieve the same amount of profit. Your money will be much more liquid and not tied up in inventory, however.
Just like with the stock and ship model, you will face shipping issues (not might - will) such as 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; though, 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 the 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. It is, by far, the best model for a nice balance of risk and investment vs. profit potential.
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, dropshipping very well may be the perfect path for you!
If you want true, step-by-step instructions on how to enter the world of eCommerce and dropshipping, our Academy will show you everything you need to know from figuring out what to sell and lining up dropship suppliers for those products to getting your store to show up well in search engines. We also thoroughly cover paid advertising as well as how to get traffic for free. We even show you how to sell your successful website for a nice lump sum if you want to!
If you don't have the time to learn everything but would like a dropship website built for you in a profitable niche, complete with suppliers, you can always just buy an already profitable website if you want to!