Dropshipping is an order fulfillment method that does not require a business to hold things in stock. Instead, the business sells the product and passes on the sales order to a third-party supplier, who then ships the order to the consumer. However, contrary to common assumptions, the dropshipping business concept is not a get-rich-quick plan.
Sure, it appears like simple money – you sell other people’s stuff and take a cut for yourself — but when you consider all the downsides, difficulties, and day-to-day management, it’s far from easy and may be hard labor.
If you handle it the right way, though, dropshipping can still help you develop a successful business… perhaps not as swiftly as you’d anticipated.
From benefits and cons of dropshipping to the correct tactics, and from the finest dropshipping firms to FAQs, here’s everything you need to know before you start dropshipping on your e-commerce platform:
- 1 5 Hard Truths About Dropshipping
- 2 1. Low-profit margins.
- 3 2. Highly competitive.
- 4 3. No control over the supplier chain.
- 5 4. Legal liability problems.
- 6 5. Difficult to develop a brand.
- 7 1. Market research.
- 8 2. Protection from overselling.
- 9 3. Strategic shipping systems.
- 10 4. High-maintenance items.
- 11 How to Choose the Best Dropshipping Suppliers
- 12 What are the benefits of dropshipping?
- 13 The Final Word
5 Hard Truths About Dropshipping
If you’re a business owner looking to ship products for your online store (i.e. a traditional retail business selling t-shirts) without the hassle of having to stock the inventory yourself — or potentially add new products — the dropshipping model can be a solution and, most importantly, be beneficial to an e-commerce store.
After a customer orders something online, the dropshipping business then ships the product straight to the customer. It’s a method for major organizations and small companies alike to source things while making a little money and conserving some storage space at the same time.
This is easier said than done, of course, so before you throw all of your savings into a dropshipping company, here are some things you need to know about why it can be difficult:
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1. Low-profit margins.
Sure, since you don’t have to handle or maintain your own inventory, the overhead is low – but so are the returns.
You put less money in, but you receive less money out. That implies you have to do a lot of business just to stay alive, let alone earn a profit, especially when most of the money goes to the supplier.
These low margins are not enough to pay your expenses and operating costs for marketing/advertising, maintaining your site, including search engine optimization (SEO), managing sales orders, and covering your office hours.
You can anticipate your income using these characteristics (they’re averages, so they’ll differ depending on your industry and situation):
- 20 percent margin.
- 2 percent conversion rate.
You may then construct a working estimate using this equation:
(Traffic x 0.02) x (Avg order value x 0.2) = Profit
While this is excellent for a rapid starting estimate, there are a few problems you also have to consider:
Your discount on buying from manufacturers and distributors could be less than 20 percent.
This doesn’t account for any of the additional expenses indicated above that you have to pay from your end. It’s not the final profit.
For most products, you’ll have to eat into your profits to keep your sales pricing competitive. If you steadfastly hang on to your 20 percent margin, other companies can undercut you.
On top of that, you’ll find that your profit is also mainly decided by your traffic, so if you’re developing an e-commerce business from beginning on platforms like as BigCommerce and Shopify, you’ll be battling for a long time as you create a client base.
Although it sounds hands-off, drop shippers constantly have to deal with their wholesale suppliers, order processing, refunds, and customer support.
It’s far more sensible to tackle dropshipping when you already have a steady source of visitors.
2. Highly competitive.
There will always be excessively hopeful entrepreneurs who focus entirely on the “low overhead” portion and overlook the clear facts above.
Because very little capital is required to establish a dropshipping firm, that low barrier to entry means a lot of harsh competition, with the most popular markets suffering more than others.
Basically, the bigger a company is, the more they can cut their markups to give the lowest costs.
To make problems worse, chances are you don’t have an exclusive arrangement with your suppliers.
That means any number of competitors could be selling your exact same products. And if you’re just starting out as a small firm, your rivals with years of experience have the resources you don’t to undercut your costs.
That means potential clients can buy the exact same thing from someone else for cheaper — why would they buy from you?
3. No control over the supplier chain.
In normal e-commerce, if customers complain about product quality, fulfillment speed or return policies, you can address the concerns directly.
In dropshipping, store owners are more or less at the mercy of the supplier — but you’re the one who still has to talk to your customers personally.
Dropshippers are essentially trapped, doing little more than hoping the supplier addresses the problems while simultaneously comforting the consumer about something that’s out of their control.
On top of that, there’s also a delay in communication as the dropshipper goes back-and-forth between the customer and the supplier. If one answers slowly, all communication grinds to a standstill and the problems take longer to fix.
And if they’re loud about it, even on social media, those terrible reviews early on might ruin your business before it really starts.
4. Legal liability problems.
Although this isn’t a regular concern for dropshippers, it’s worth addressing. Some vendors aren’t as real as they claim, and you don’t always know where the stuff comes from.
Even more deceitful is when providers illegally use a trademarked logo or another company’s intellectual property, which happens more than average.
This possible problem can be rectified with a strong Dropshipping Agreement Contract, but not every dropshipping entrepreneur knows that.
It’s something you’ll want to keep in mind while choosing vendors.
5. Difficult to develop a brand.
Like ghostwriters or behind-the-scenes songwriters, dropshippers must recognize that the credit for their work goes to someone else.
If the thing you’re selling is so fantastic, your customers are going to focus largely on the product’s brand and forget about the buying experience entirely.
After all, it’s not your logo on the package.
Again, that’s just another reason why dropshipping makes more sense for already-established firms than new ones.
The Right Approaches to Dropshipping
Dropshipping makes a better sideshow than the main event. While its shortcomings make it hard to operate a firm on its own, it nonetheless offers enough benefits to assist e-commerce enterprises to enhance their business dramatically.
Consider these four techniques to employ drop shipping effectively:
1. Market research.
Dropshipping works best as a means to an end, not the end itself. Use dropshipping to lessen the risk in testing out new products and utilized for market research.
Rather than escalating your inventory costs by stuffing your warehouse with an unexpected product, test it out with a trial period via dropshipping.
More than just discovering if it sells or not, you’ll also have a better approximation of how much it sells for, giving you a more precise calculation of what quantity to buy for your initial stock.
This is extremely critical for trying out new product kinds, which always involve inherent risk.
For example, maybe you’ve been quite successful at marketing dog goods. Would that transfer well for cat goods, too?
That could be hit-or-miss, but you can always test the water by dropshipping a few things and see how it works.
2. Protection from overselling.
Experienced e-commerce brands know that market swings aren’t always predictable. Rather than raising inventory costs by overstocking to reach implausible maximums, having a dropshipping provider as a backup saves you money without losing those sales.
This is especially handy for seasonal overflow.
It’s a terrific defense against the uncertainty all retailers confront.
Having dropshipping options in place also gives wonderful protection against severe scenarios.
If anything like a natural disaster happens to your warehouse space, you can still fulfill pre-made orders by dropshipping the products from elsewhere.
The same holds true for side-stepping unforeseen shipping delays.
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3. Strategic shipping systems.
One negative effect of developing your organization is shipping issues. The farther out you are from your warehouse or fulfillment centers, the more shipping expenses and fees you’ll spend.
Dropshipping can be the perfect answer for some challenging areas that fall outside your profitable zones.
Maybe transporting that far costs too much, or maybe storage rates are too expensive to warrant setting up a new delivery hub.
Maybe it’s an issue of taxes or extra costs, such as when shipping out of the state or nation. Relying on dropshipping for these specific areas could be the determining factor in keeping you out of the red.
Moreover, much as dropshipping can be valuable in market research, you can also use it to test new localities.
Why not utilize dropshipping for a trial period in a new area to see if it’s worth opening a new facility there?
4. High-maintenance items.
Some products cost more to stock and ship than others.
In certain cases, it may be more advantageous for you to dropship them vs storing them yourself.
What do we mean by high-maintenance products?
- Any products that demand extra expenditures for storing or shipping, such as:
- Large items – Some products take up so much space, their sales don’t make up the price of the extra storage room.
- Heavy items – If a product’s weight makes it cost too much to ship, try dropshipping from a manufacturer or wholesaler.
- Fragile items — Fragile things demand special care when shipping. In certain circumstances, the supplier or manufacturer might be better suited to meet these needs than you.
- Valuables – High-value objects like fine jewelry, antiquities, etc., require additional security that not all warehouses can supply. Rather than risking theft, you could entrust the storage to someone who can appropriately protect them.
Special circumstances – Maybe you wish to offer things that need to be kept frozen, or materials sensitive to light. If your goods need particular conditions, you may be better off dropshipping than storing them yourself.
Unless your entire firm specialized in these types of products, it doesn’t make sense to pay additional storage and shipping rates for a small segment of your organization.
But you may still keep your consumers satisfied by supplying these products through dropshipping.
How to Choose the Best Dropshipping Suppliers
Whenever you add dropshipping into your sales plan — in whatever form — you are entering a business partnership with the supplier.
Like we noted above, as the seller, you are sometimes at the mercy of your drop shipper for product quality, timely shipping, and even legal compliance.
That implies you must choose them with the utmost care.
For one thing, you want to make sure that the products are as described, but you should also evaluate if their shipment matches your criterion.
Outside of the condition of the products, there are still lots of worries regarding how your supplier conducts business.
Here’s a quick-reference checklist of things to ask yourself before signing on to conduct business with someone:
How do they handle returns or damaged products?
- How long does it take them to fulfill an order, from sale to delivery?
- How is their customer support? (Feel free to test this yourself.)
- Do they ensure orders?
- Do they offer fraud protection?
- Can you locate reviews or references online?
- Also don’t forget the Dropshipping Agreement Contract, detailed above.
To help accelerate your research time, we’ve previously produced a list of the greatest dropshipping companies, including Spocket and AliExpress Dropshipping.
Dropshipping for Beginners: FAQs
Here are some easy solutions to frequently asked questions concerning dropshipping:
What is dropshipping and how does it work?
- Dropshipping is when a vendor fulfills orders from a third party and has them ship things straight to the customer.
- In other words, the vendor passes on the sales order to the supplier, who then fulfills the order.
- The vendor normally pays for the item at a discount by working directly with a manufacturer or wholesaler; their profit derives from the difference between the initial item cost and whatever price they offer it at.
The vendor does not store their own inventory or send things directly. Instead, they focus largely on marketing, advertising, and managing their web presence.
How do I incorporate dropshipping into my business?
Dropshipping can be a complement to a regular online business plan.
Assuming you already have an online presence in one or more stores (or at least know how to put that up), adding dropshipping is similar to launching any other new product, with a few distinctions.
Here’s a brief step-by-step guide:
- Research what items would match well with your strategy, market, and consumer base.
- Research how your competitors are selling the product, notably pricing.
- Find the best source (see our checklist above) (see our checklist above).
- Finalize a fulfillment method that works for both of you and includes it in your system. Depending on your sales management software, this could be easy or involve ironing out some creases.
List and advertise your new product. Be sure to indicate any exceptional conditions, such as changes in shipping timings or locations.
Is dropshipping legal?
Yes, dropshipping is legal.
You may run into other legal difficulties depending on who your supplier is, but dropshipping on its own is a totally valid way of order fulfillment.
Just remember to protect yourself with a Dropshipping Agreement Contract.
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What are the benefits of dropshipping?
There are at least five good reasons that practically any online retailer should consider dropshipping.
- Minimizes startup risks
- Lowers product costs
- Lower storage and logistics expenses
- A comprehensive product offering
- Is dropshipping profitable?
Yes, dropshipping can be profitable to merchants. Dropshipping is a low-risk business concept that allows you to sell products to your consumers without incurring enormous running costs as a wholesaler would have. Because of these decreased expenses, it is simpler to become profitable with dropshipping a lot faster than other business models.
Do I need to register a company entity to dropship?
Yes, you’ll need to register your business once you start to earn sales, but there is no need to do so until you start making them consistently. This is because the majority of payment providers demand you to confirm that your organization has such credentials.
- Is dropshipping allowed on eBay?
- Yes, dropshipping is allowed on eBay.
- Is dropshipping allowed on Amazon?
- Yes, dropshipping is allowed on Amazon.
What are some dropshipping product ideas?
If you’re interested in dropshipping but don’t know where to start, here’s a list of product ideas for inspiration. We tried to only identify supplementary goods that could fit the product range of any industry.
Tote bags supporting a cause or charity.
- Novelty t-shirts.
- Funny coffee mugs.
- Motivational bookmarks.
- Inexpensive watches or jewelry.
- Marketing items (shirts, bags, mugs, pens, etc., with your logo) (shirts, bags, mugs, pens, etc., with your logo).
- Do drop shippers ship internationally?
- This varies widely with each drop shipper, so you’ll need to check.
International shipments may rapidly get expensive, and receiving correct figures about shipping fees, customs, and tariffs for hundreds of countries is hard. It also takes a drop shipper much more time to process an overseas order as there is additional documentation needed. Some will charge an additional fee while others simply won’t bother.
The Final Word
Dropshipping can be a highly helpful approach when performed appropriately.
But the reasons it doesn’t work for young companies become less relevant the bigger a company gets.
For example, an established company already has a healthy flow of traffic and doesn’t need to worry as much about creating its brand.
That’s why dropshipping makes a wonderful supplement for most seasoned e-commerce organizations — just don’t rely on it for the heavy work.