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As eCommerce grows and more customers than ever turn to online shopping, one type of business that’s exploding in popularity is dropshipping. Dropshipping is a business model in which eCommerce entrepreneurs sell products without needing to keep any inventory. As the seller, you never touch the product itself since it ships directly from the wholesaler or manufacturer to your customer’s door. This business model has many benefits such as low costs, scalability, and ease of starting. Dropshipping can be an excellent way for people with little capital to start their own eCommerce business because there are no upfront investments required. All you need is a computer/laptop and Internet access which means that anyone could run this type of operation from anywhere! The best part about dropshipping is that it doesn’t require much time commitment on your end either. Read on for the ultimate guide to dropshipping. Think of it as dropshipping 101.
What is Drop Shipping?
Drop shipping is a way to run an eCommerce business without having to worry about stocking and shipping products. The customer buys the product from you and pays for it. Then, instead of sending the order directly to you, the wholesaler or manufacturer will ship the goods directly to your customer’s door. When this happens, you receive a notification, and you can go online to mark the sale on your store as completed.
Technically, dropshippers don’t actually purchase inventory until it’s sold. That way, you’re not sitting on expenses or paying to store inventory without knowing whether it will sell.
Drop Shipping Meaning and Definition
Formally, the dropshipping definition is a method of running a virtual business where the retailer (you) does not keep any stock or inventory. Instead, you transfer orders and shipment details to either the manufacturer, another wholesaler, or general merchant who fulfills and/or ships directly to your customer. You also price your own products and spearhead any pricing strategy.
Let’s break this down using an example.
Let’s say you sell clothing. Since you are selling t-shirts online, let’s say that the wholesaler has a minimum order quantity for each product that you decide to sell. You will need to order this many units of that particular product before the wholesaler will ship it to your customer.
When you sell a shirt to a customer, let’s say that the wholesaler has a different price depending on how many shirts you want to purchase at once. Say 1-4 shirts cost $5 but if you buy 5 or more then the price drops down to $4 per shirt. When this happens, you can click on an order and choose to buy either 1 or 5 shirts. When you click on the order it will automatically update the price of each shirt for that particular order.
How Does Dropshipping Work?
Drop shipping is a process that allows you to expand your business without any initial investment. There are three main players in the dropshipping business model. The first is the online retailer (you), then there’s the wholesaler or manufacturer, and finally, the customer who buys directly from your store. Here’s how it works:
Step 1: You sell products on your online store. This could be your own website or an online marketplace like Facebook, Amazon, or Etsy.
Step 2: When you make a sale, you send the order details to either the manufacturer or wholesaler. This means that instead of having to buy and stock inventory, often at high costs, you just have to order the product from someone else who already stocks it.
Step 3: Once they receive your order, they will then ship the product directly to your customer’s door.
Step 4: You are paid for this sale by the manufacturer or wholesaler once the customer receives their order.
Accept payments for dropshipping
In order to accept payments for dropshipping, the customer will simply check out through the shopping cart software connected to your site. Then, the funds will appear in your business checking account.
The Supplier’s Role in Drop Shipping
When you sell products, your customers are paying for a product that they expect to arrive at their door, usually within a few days. Since you never actually have the product in hand, how does this happen? This is where your wholesaler or manufacturer comes into play. They are basically fulfilling orders for you at the same time they do with their other customers. This means that you can make sales without worrying about keeping any products in stock.
Finding a wholesaler, however, is not always as easy as it seems. When it comes to securing a supplier, it’s critical to find a reliable, trustworthy company to work with. Many dropshippers have bad experiences when they find a wholesaler that claims to have the lowest price for a particular product but then raises it without notice once you order from them.
While this doesn’t happen often, it’s important that you do your research before committing any money. If someone is offering the lowest price by far for a particular product, then they may have some tricky business practices. Spend a little time researching online and you’ll soon find that there are many drop shipping wholesalers that have exceptional products at competitive prices. Before you commit, however, it’s important to do your research and learn about the company before placing any orders with them
Dropship automation software
When it comes to drop shipping, you need access to product data so that you can easily import the products into your store. If you find a great wholesaler but they don’t provide product information in the way that works for your online store, then this doesn’t work out well. Luckily, there are many companies that offer dropship automation software that you can connect to your online store.
What is dropship automation software? Basically, it’s a way for you to easily import product information into your online store in a reliable manner. This allows you to have access to all of your products in one place so they are easy to manage and update when necessary. Many suppliers provide these feeds at no cost, as it is a great way to expand their sales team.
What products can you offer?
There are countless products that you can sell in your online store. Thanks to dropship automation software, you can create a custom storefront with all of your favorite products in one place. Whether it’s apparel, home decor, art, or anything else, you can easily import the products into your online store and start selling them within minutes. This way, you don’t have to worry about researching thousands of different products–just search for what you are interested in selling, and quickly get started!
Wholesalers are crucial to any drop shipping business. Whether it’s finding a supplier or data feed, it’s important to do your research so you know exactly who you are working with. This ensures that every product is delivered on time and profitably.
What Happens if You Need More Products?
Since you don’t have any products in stock, what happens when your customers want something else? This is where your relationship with your wholesaler or manufacturer comes into play. You can order more products directly from your supplier, and rest assured that the product will be shipped to your customer’s door within a few days. Remember, you only pay for the wholesale price of these products plus shipping costs, not retail prices.
Is Dropshipping Dead?
What started out as a major trend in the early 2000s has died down significantly over the past several years. Many people believed that eCommerce would die without Amazon because Amazon was practically giving away everything for free. People thought if you can order products online at a cheaper price with free shipping, why would you go out to shop? However, this has proven to be false. Thousands of businesses are still thriving online because they use dropshipping as their business model.
The Dropshipping Industry
While not particularly new, the drop shipping industry has grown rapidly in recent years. This is unsurprising, as the number of digital buyers is predicted to grow from 1.32 billion in 2014 to 2.14 billion in 2021. This is an unprecedented increase and is likely to bring more interaction and sales online. The customer influence is not the only driver for the growth of drop shipping, the sellers also play a part.
Drop shipping as a business is becoming a popular way to start bringing in extra cash. It can be done part-time or as a full-time job. It can also be added to an existing fulfillment website, even if not all of the products are drop shipped. In fact, 27% of online retailers transitioned to drop shipping as their primary order fulfillment method in 2019. Drop shipping is a customizable business for your personal needs and restrictions which is what makes this industry so advantageous.
Ideal Candidates for Dropshipping
- Small to mid-size store owners
- New entrepreneurs
- Business owners wanting to test new products
- Stores wanting to add products in different segments without investing capital
Pros: Why Dropshipping is Good for Business
There are several benefits to starting a dropshipping company.
Easy to set up and get started
Drop shipping is ideal for entrepreneurs who don’t want to worry about keeping inventory or managing day-to-day operations. This is often the biggest hurdle for entrepreneurs who want to start an online business but are overwhelmed by the legal and financial aspects of running a business.
Low startup costs
Dropshipping companies are cost-effective because there are no initial start-up costs. You don’t have to worry about whether or not you’ll sell enough units in order to break even.
In order to start a dropshipping business, you only need about $100 as your startup cost. If you want to, you can also use Shopify, BigCommerce, or any other shopping cart software that is completely free. This is an incredibly low investment for any small business owner.
Low overhead costs
In general, drop shipping has very low overhead costs. This means you never have to worry about investing in inventory or storing products, so your business will always be cost-effective. Instead of paying for retail prices, you only pay wholesale costs, meaning more money in your pocket at the end of the day.
As a dropshipper, you never actually have to worry about any products. This means that you’re unlikely to lose money on a sale. Almost all of your risk is taken on by the person who stocks the inventory and keeps stock of their products. If they get an order from one of their other customers or distributors, you’ll get the sale.
Easy to test products
Since you don’t have to worry about buying or selling products, it is easy for you to test new products on your customers. Not only can you find out what they like and don’t like (and adjust accordingly), but you can also find some hidden gems that sell surprisingly well. In order to be successful with your particular audience, it’s helpful to perform a target market analysis. Then, you can use this data to market and sell products to your ideal customers.
Work from anywhere
Since you don’t have to worry about keeping an inventory, you can work from anywhere. You can do this while traveling or living abroad! It gives new entrepreneurs the opportunity to start their businesses without having to invest in an office.
High potentials for growth
Since drop shipping is so easy and profitable, there are high potentials for growth. If you are able to reinvest your profits or get funding from other investors, your business can grow quickly.
One great thing about drop shipping is that it’s extremely easy to scale. If your business is working well, you can simply spend more money on advertising to increase your customer base. Since all of their orders are fulfilled by the manufacturers, you never have to worry about increasing production or managing inventory.
No experience necessary
Since you don’t have to worry about stocking or selling products, you can start a drop shipping business with absolutely no experience. All you need is an idea and the willingness to learn! This is ideal for entrepreneurs looking to test out new ideas without facing the steep learning curve that comes with more difficult types of businesses.
Cons: Why Dropshipping Might Not Be Ideal for Everyone
Although dropshipping may sound like the perfect business model for some, there are a few disadvantages to keep in mind.
Lower profit margins
Although a higher profit margin can be made in some cases, this comes with a higher risk and more work. Since dropshipping is such an affordable business model, there is very little room for making more money on each sale. Once you factor in the cost of advertising, materials, and shipping costs, it might be difficult to make a large profit.
No brand recognition
Dropshipping is a model that doesn’t give you much room for branding or marketing yourself. You can do some things to build your brand awareness on Etsy, for example. However, without the ability to customize any products, you won’t be able to give yourself much of an edge.
Passing shipping costs on to customers
Since the seller is responsible for all shipping costs, there may be some cases where it’s not possible for you to pass shipping costs onto your customers. Your customer base might not include enough people who are willing to pay $5 extra for their product, or you might find that the shipping costs outweigh the overall price of your product.
One of the biggest downsides to dropshipping (and similar eCommerce models) is that there are lots of other entrepreneurs who are trying to do the same thing. If you want to make your business successful, chances are you’ll be up against some fierce competition.
Shipping is a key part of dropshipping, but it’s not always easy. You have to be careful about who you choose to fulfill your orders, and you’ll want to make sure that the cost doesn’t outweigh the price of your product. Also, you might need to invest in shipping software or apps if you are looking for more advanced solutions. However, if you are able to find the right products for your business and run a tight ship, drop shipping can be extremely profitable.
Difficult to customize products
Since you don’t actually purchase, store, or ship your own products; you are at the mercy of the supplier. This means that you can’t customize or change anything about your product, even if it’s just a label. If there is an issue with one of your suppliers, it could cause some serious problems for your business.
With dropshipping, your business is only as good as its suppliers. If they make mistakes or don’t send you what you ordered, it could be nearly impossible to fix it. For this reason, some people choose to use their own warehouse and shipping service in order to avoid this problem.
While there are some downsides to dropshipping, they can all be overcome if you do it right. With low startup costs and no risk involved, anyone can start this business model without having to worry about any setbacks. Once you get used
How to Start Dropshipping in 4 Steps
Here are 4 simple steps to start dropshipping today. If you’re looking for more details for launching a dropshipping business, check out our comprehensive step-by-step guide on how to start a dropshipping business.
Step 1: Launch your online store. The first thing you’ll need to do is launch your online store. This can be done on sites like Shopify, BigCommerce, or Etsy.
Step 2: Find products to sell. Once you have an idea of what kind of product or niche you would like to sell in your online store, it’s time to find the perfect suppliers. Once you get in contact with a supplier, tell them that you are interested in dropshipping their products. Since you are not purchasing these products in advance, you’ll let them know that you will only be able to pay after your customers buy the products from you.
Step 3: Promote your online store. Promoting your dropshipped eCommerce store is easy with social media advertising. Just use Facebook Ads or Google Ads to send interested clients ads and focus on optimizing your conversion rate.
Step 4: Make sure shipping and fulfillment go smoothly. If you are dropshipping from a supplier that has its own warehouse, shipping and fulfillment shouldn’t be difficult. However, if you choose to use your own warehouse and shipping service, it’s important that you develop a streamlined process so things go as smoothly as possible. You can do this by:
- Providing tracking numbers to customers
- Incorporating a solid return policy
- Making your customer service line available to customers
Is Dropshipping Legal?
The legality of dropshipping isn’t as black and white as other business models. On one hand, it’s not illegal to just advertise a product that you don’t have in your possession, but on the other hand–if the item is counterfeit or infringes on another company’s copyright then it could be illegal.
Possible legal issues
Some legal issues that you might face include:
- Trademark Infringement. If you are selling counterfeit products, then this will almost certainly be illegal. Sometimes it can be hard to tell if your supplier is selling counterfeit items, but there are some ways of finding out before you make the purchase; like searching for reviews on social media or asking your supplier what the product is made of.
- Copyright Infringement. If you are importing products under your own brand (like creating a private label product) then this act could be infringing on someone else’s copyright. However, if you do not copy any information or try to change the package in any way; then you might be ok even if your supplier’s logo is featured somewhere on your product.
- Customs. If you are importing goods from abroad, then you will need to work with customs in order to get the items into your country. Your supplier might not be able to help with this unless they are working with their own customs agent or shipping company. However, some manufacturers might be willing to help you get your products shipped.
There are many other potential legal problems that could arise, including issues with the supplier not being able to sell their items to you, counterfeit manufacturers who try to scam you, and more. If this is something that concerns you then it’s important that you do some research about any suppliers before you begin working with them.
Is Dropshipping Profitable?
Dropshipping definitely has its perks; but is it profitable? It’s difficult to say because there are many different variables that go into this equation. Here are some factors that can affect your profit margin:
- Number of Products. If you sell more products at once then you will obviously make more money than if you only sold one product per month.
- Amount of Profit. You will need to add on a certain percentage for your time, overhead, etc., so it’s important that you add this on top of the cost of each item in order to get an accurate figure.
- Markup Amounts. If you sell items for more than what they cost from your supplier then you will have a higher profit margin. However, this isn’t always the best choice because you might scare away customers if they think your items are too expensive.
- Average Margins. You will find that some products have low margins, while others have much higher margins. Try to focus on the ones with high profit margins so that it becomes worthwhile to sell them. You can use a profit margin formula to calculate your margins and determine if the risk makes sense for you.
The key to dropshipping is finding a product that has a good margin. However, in order to do this, you will need to test out different products and see which ones make the most money when you subtract the cost from the final price.
Final Thoughts: Is Dropshipping Worth It?
Dropshipping can be a great business model if you know what you’re doing. It can be a great way for entrepreneurs to start their businesses with a low cost and minimal amount of work. However, you should always try to do your research in order to avoid any potential legal issues or product problems before you begin working with your supplier.
If you’re looking for a cheap business to start, then dropshipping might be the perfect answer. It’s free to get started, minimal costs involved, and it is very easy for entrepreneurs to scale up their businesses if they see that there is demand for it. If this interests you then definitely consider trying out drop shipping in order to see if it’s the right fit for your company.