What is Dropshipping? The Definition and Best Practices
Nowadays, we have witnessed a dramatic growth in online marketplaces and eCommerce platforms. Everyone can start an online business. And when you decide to launch an online store, the very first element you have to look into is about your products. What will you sell? Where can you get them? How can you sell them?
Dropshipping seems to be the most appealing answer for all of your above questions. Getting started with dropshipping is the easiest, quickest, and most low-risk way to do business.
Table of contents
- What is dropshipping?
- How does dropshipping work?
- Benefits of dropshipping
- Pitfalls of dropshipping
- 6 Steps to start a dropshipping business
- Final words
What is dropshipping?
Anyone interested in eCommerce probably comes across the term dropshipping. Dropshipping is considered as one of the most feasible ways to make money online. You can even start your own business with dropshipping for as little as $20 by utilizing a free eCommerce platform.
- More than 27% of online store owners have adopted drop shipping as their business model.
- Over 23% of online sales came from dropshipping in 2017. This figure has increased continuously recently.
- Suppliers who sell to dropshippers can earn 18.33% more profit than those who rely only on traditional channels.
- Retailers can gain 50% more profit if they adopt drop shipping compared to keeping their own stock inventory.
These statistics prove that dropshipping is a lucrative medium for conducting business. And we believe you would be excited about the definition of dropshipping.
Dropshipping is basically a supply chain model in which retailers do not involve in inventory and delivery management. The product is shipped directly from the manufacturers or wholesalers’ warehouse to the end customers.
Dropshipping is also referred to as one of the most popular eCommerce business modules where online store owners can sell physical products without owning a warehouse to store products.
How does dropshipping work?
After having a brief overview of dropshipping, we would like to dig deeper into how this model works.
There are three primary parties involved in dropshipping: the suppliers, the dropshipping-based stores, and the customers.
- The suppliers can be manufacturers or wholesalers. They do not sell products to the public. Instead, they sell products in bulk to retailers.
- The customers are the end-user. The customers visit a dropshipping store and purchase their desired item.
- The dropshippers (dropshipping store owners) work as intermediaries between the initial suppliers and the end consumers.
These dropshippers do not purchase a bulk of products, and keep them in stock like traditional retailers. They list the merchandise of the manufacturers on their website.
When the customers place orders at retail price, dropshippers will purchase the identical items at the wholesale price, and forward order details to suppliers for fulfillment.
The suppliers are now in charge of packaging and shipping products to the customers under the business name of dropshippers.
The dropshipping store owners keep the markup amount (the difference in prices) as profit for themselves.
As a dropshipper, you do not have to worry about inventory or logistics management. You can focus your effort and resources on marketing, promoting, and selling products. Besides, you can still track the shipment and handle customer support.
Dropshipping can be considered as a zero upfront cost approach to start an online business. It does not require an investment in a physical location. Everyone can sell with a laptop and an internet connection. Moreover, you do not have to pay for the products until your customers make payment. Therefore, you do not bear the risk of keeping unsalable goods.
Benefits of dropshipping
Dropshipping is a highly profitable business model for anyone to start with. Here are some benefits that make dropshipping become such a popular approach.
1. Less capital is required
A conventional retail business requires a significant amount of money to set up physical stores, warehouses, running retail operations as well as purchasing inventory. Even if you run a regular eCommerce store, you still have to deal with up-front inventory investments. On the other hand, in the dropshipping model, all of the initial costs of starting a business are related to running your website. You only have to pay for the domain, hosting, theme, app, etc. These expenses are relatively small. You can even utilize some free options available.
2. Easy to get started
Running a dropshipping-based eCommerce store does not require much business expertise and experience. It typically involves three main steps: finding the suppliers, setting up an online store, and selling the products. This type of business is relatively easy to learn and adopt. If you are a newbie in the eCommerce industry, then you need to learn some fundamental knowledge, and you can continue to learn more along the way.
With dropshipping, there is no need to worry about:
- Setting up or paying for a warehouse
- Tracking inventory for accounting reasons
- Dealing with a stock shortage or excess inventory
- Packing and shipping your orders
- Handling returns and inbound shipments
3. Low overhead costs
Overhead costs refer to indirect expenses of operating a business such as rent, utilities, insurance, etc. Overheads costs can be fixed, variable, or semi-variable costs. These costs are not directly linked to revenue generation. They are still essential factors when determining favorable prices. In this competitive market, it is critical to monitor and minimize overhead costs.
Thanks to the simple structure, the dropshipping business allows you to eliminate these overhead costs. Because you are not responsible for inventory and logistics activities, you do not have to deal with the related expenses.
4. Flexible location
A dropshipping business does not require a physical office, a store, or a warehouse. This business model is location independent. You can run your business anywhere as long as you have a good internet connection to contact your suppliers and customers quickly.
5. Easy to test
Dropshipping is an excellent method to test out new products or ideas. Dropshipping enables you to list and sell goods even before paying for it. Therefore, you are free to do market-testing in real-time without intensive investment. If the products are not salable, you can easily switch your offerings. You can also add new and trendy products to your store quickly.
6. Easy to scale
In other traditional business structures, if you want to scale up, you have to invest equivalent resources. When your number of orders increases three times, your work typically increases three times too.
By contrast, dropshipping allows you to expand with less effort and resources as most of the additional work has been done by dropshipping suppliers. As the workload and expenses do not add up quickly, you can grow faster.
Besides, dealing with packing, shipping, and fulfillment is one of the toughest tasks of doing business. As you can outsource that part to others, you have more time to develop your business strategies and plans to grow your business.
7. Lower risk
Dropshipping reduces most risks of a retail business.
Firstly, without investing thousands in inventory, the risk of starting an eCommerce business is significantly reduced. You do not have to pay the suppliers until your customers pay you. As a result, if you cannot sell the products, you still do not lose anything.
Secondly, if you operate a dropshipping-based business, you also do not have to handle returns. Your suppliers are responsible for this. You need to track the process and support your customers. Ideally, if you cooperate with suppliers with low return rates, then you will not even handle emails related to returns.
Thirdly, you can easily collaborate with multiple manufacturers, wholesalers, and distributors. Therefore, you can add diversity to your business. All of us know that diversity decreases the risks.
Fourthly, dropshipping also minimizes the losses from damaged items, since the shipments go directly from suppliers’ warehouses to customers’ homes.
Finally, as a dropshipping store is digital, it does not bear the risk of the damage to physical properties by fires, bad weather, or other factors.
Pitfalls of dropshipping
All advantages mentioned above make dropshipping an attractive model for anyone getting started with eCommerce business. However, like any other approach, dropshipping has its drawbacks. Dropshippers should be aware of these challenges before they jump into it.
1. High competition
Dropshipping has a low barrier to entry since there is no requirement for capital or expertise. This seems to be both a positive and negative factor.
As you can easily enter the market, anyone can do it. New dropshipping stores open every day. Many people sell the same products. They can easily copy and duplicate your store.
The suppliers tend to expand their businesses by partnering with as many drop shipping retailers as possible. If suppliers drop ship to you, they are likely to drop ship to anyone.
This high competition forces any business to build and implement changing strategies that keep above the trends to stand out.
2. Lower profit margins
Dropshipping-based businesses usually have lower profit margins compared to those who create their products. Due to the nature of dropshipping, you are selling similar products to others. When it is easy to enter, and the operating costs are minimal, many stores are likely to goods at rock-bottom prices. To compete, you have to cut your rates off too.
It is hard for new and small businesses to compete on price. Many dropshippers have given up because the profit generated cannot cover the advertising expenses.
What you should do is try to sell as many as possible, and gain profit from quantity. Also, it is critical to differentiate your store by creating strong copywriting and educational resources.
3. Inventory issues
As you get products from multiple suppliers instead of having your inventory, it is relatively hard to keep track of stock levels. Your suppliers also work with many other retailers that make it even more challenging to make sure the items you need are in stock.
When your products are out of stock, but you cannot control this, you still list these products on your website. Your customers place orders, but you are not able to fulfill these orders. Your customers will be unsatisfied and lose trust in you.
These days, various helpful apps support synchronizing data between suppliers and dropshippers. So store owners can check in real-time the inventory of suppliers. Some apps also take automated actions on your site when the product is out of stock.
Learn more about Top 11+ best dropshipping apps to handle inventory issues.
4. Shipping complexities
To drive more sales, generate more revenue and make a substantial profit, dropshippers have to sell multiple products from multiple suppliers. Different suppliers usually charge different shipping costs. As a result, your shipping costs become complicated.
For instance, if a customer buys three items from three suppliers, you have to pay the shipping cost separately. You cannot pass all of these costs along to the customer. You need to calculate the shipping costs carefully so that your customer does not feel overcharged.
Besides, if you do not have proper logistics management, you may sacrifice your user experience due to incorrect order details and shipping delays.
5. Lack of control over the customer experience
Customer experience is usually created from minor elements. In the dropshipping business model, you are not responsible for packaging or delivering. You have your partners handle the entire process. Then you cannot add your personalized brand to shipped items.
Also, if the items are broken or late delivered, you will receive bad reviews and lose your customer trust. Your customer service reputation will be negatively impacted.
It is crucial to partner with professional and reliable suppliers and manage these relationships.
6 Steps to start a dropshipping business
Step 1: Select profitable products
To establish a successful dropshipping business, you have to look for products that have high demand. Products that are in demand typically come with these following characteristics:
- Have an upward trend in Google Trends
- Have high search volume on Ubersuggest’s Keyword Tool
- Have a large order volume on popular marketplaces like Amazon, eBay, AliExpress.
Besides, here is some advice from experts to select profitable products to dropshipping.
- You should start with products that have ambiguous inherent value. As people cannot compare these products easily, you can claim premium pricing.
- You should avoid seasonal goods or items that go outdated within a short period.
- You should choose consumable products which lead to repeat purchases.
- You should select a niche with various related products to obtain the cross-sell opportunities.
- A great dropshipping product should not be dominated by major brands.
- The price range should be between $15 and $200. If items are less than $15, then you are not likely to make a profit margin. On the other hand, people tend not to purchase items over $200 online.
- The products should include a personalization option.
Step 2: Perform competition research
Dropshipping has relatively intensive competition, to stay ahead from others, you should carry out proper market research and competitor analysis. Valuable insights gained from research enable you to develop effective strategies and tactics.
First, you have to identify your competitors. How many sellers are selling products similar to yours? Who are the top sellers? What are their marketing and promotional strategies?
From information gathered, you can find ways to differentiate and make your offerings better. Don’t try to avoid products that have high competition. This is an indicator of high demand and sustainable business.
Step 3: Find suppliers
Dropshipping has become so popular that there are many fake suppliers these days. You must make sure to partner with real wholesalers.
- A real supplier never charges a monthly fee for accessing their catalog of products.
- Authentic suppliers never sell their merchandise to the end consumers at wholesale prices.
You can make use of the following strategies to start relationships with potential partners.
- The easiest way is to contact the distributors directly and ask them whether they offer a dropshipping option. If you build a partnership with a big distributor, you can obtain instant access to a large catalog of items. You should carefully prepare before contacting them to show your seriousness.
- You can also order from your competitors. When you receive the order, you can look at the return address. Then you can easily find the name of the supplier on Google.
- Attending a tradeshow is another efficient way to find your desired suppliers.
- You can also make use of drop shipping directories, which provide a database of suppliers categorized by niche.
Successful dropshipping requires a truthful partnership between you and your suppliers. When you evaluate a distributor, you should especially investigate the following attributes.
- The time to make an order delivered
- The packaging of items
- The activeness of customer service
- The customization option
- The pricing terms, quantity discounts, dropshipping fee
- The return policy
- The automated data interchange option
Step 4: Build an online store
In this digital age, anyone can open an online store easily. You can take advantage of a large online marketplace like eBay or Amazon. You can also run your own store on a popular eCommerce CMS like Shopify, Magento, or WooCommerce, etc.
Many retailers start their dropshipping business on a well-established online marketplace because of the following reasons:
- It’s easy to set up an account and start selling
- They already attract vast amounts of traffic (potential customers)
- Consumers trust these platforms
However, you should also look at some cons as:
- You will be charged fees for every sale you make
- You have limited control over branding, customer service, product photography
- You’re in direct competition with sellers on the same platform
- Consumers have a vast amount of choice in one place
By contrast, create your own online store, you will:
- Have complete control over branding, design, layout
- Have no fees and higher profit margins
- Have no direct competition from other sellers on the same platform
However, running your own website, you will probably:
- Spend more money and effort on setting up and designing
- Miss out on the guaranteed traffic (customers) from established platforms
- Invest more time in SEO and marketing
Shopify is well-known as the most comprehensive shopping cart platform for dropshipping. Shopify includes a wide range of features, plugins, themes, etc. which enable you to customize and optimize your store freely. Also, the platform offers professional customer service to help you whenever you get stuck.
Read more: 10 Steps to Start a Small Business Online .
Step 5: Promote products
Your great products and website mean nothing if you do not have a strategic plan to acquire potential customers.
First and foremost, you should implement SEO tactics to increase the visibility of your online store.
Then you can promote your products on various channels such as:
- Content marketing
- Email marketing
- Social media
- Google ads
- Facebook ads
Step 6: Analyze and optimize
All in all, the most critical task of a successful eCommerce store is to analyze and optimize to ensure sustainable growth.
You may realize that certain marketing activities are relatively successful; meanwhile, others are not. You can compare your offerings and pricing with your competitors and do something to create a competitive edge.
If you are using some tools for email marketing, then you should set up automatics reports to analyze the information regularly.
The dropshipping business model is a cost-effective approach to enter the eCommerce world. We hope that you have got some helpful insight from this article. And you are ready to discover ahead opportunities.
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