When you want to sell physical products online, you often need large capital and a warehouse. However, if you start a dropshipping business, you don’t need much money or a depot. But what is a dropshipping business, and how to does it work?
What is a Dropshipping business?
With a dropshipping business, the store owner never physically holds the products to sell. Instead, the retailer sells a product on their website they bought from a third-party supplier who usually ships the item directly to the customers.
The online seller never actually holds or ships the item. Their main focus is to effectively advertise it to the suppliers and mark up the price to make a profit. So you can sell products without holding any inventory or paying for the products upfront.
Dropshipping is a great opportunity for entrepreneurs to build a sustainable source of income.
How does dropshipping work?
In a dropshipping business, there are three parties involved the retailer(you), the customer, and the supplier/manufacturer.
The dropshipping process works like this:
- You “stock” the products on your website or marketplace
- The products held by the supplier/wholesalers could be anywhere in the world. So let’s say the product costs $20 per unit from the supplier. Then a drop shipper can list the item at $25( it makes you 5$ profit for each sale).
- When a customer buys from your website, you as the merchant receive a notification. Then you need to forward the orders to the supplier either manually or automatically.
- The supplier then fulfills the order by shipping the product directly to the customer.
What are the Pros and Cons of a dropshipping business?
Every business model has its pros and cons. You just need to weigh them up and decide whether they are right for your circumstances and needs.
Advantages:
It is relatively easy to start a dropshipping business because you don’t need as much budget, research, or planning before you can sell. Dropshipping doesn’t require the initial resources needed to build a conventional online store where you need capital, a warehouse and office space, etc.
Your biggest concern is to find a supplier and choose a marketplace or build an e-commerce website.
Another advantage is you don’t need to purchase and hold the stock you want to sell, So you only buy a stock when you make a sale, and the customer has paid you. The good thing is you don’t need capital for stock, and if products aren’t selling, you can just remove them from your store.
A dropshipping business can be accessed anywhere you have a stable internet connection which gives you a lot of flexibility. So you can even start it from home without having to quit your job, and it can be balanced around current commitments.
You can offer a large variety of products almost anything that a supplier sells.
It is far easier to grow a dropshipping business than a traditional online store. When you make more sales, the work falls to the supplier rather than you. This allows you to grow your business without hiring extra staff. So you can scale easier and quicker the traditional online shops.
Disadvantages:
The key to successful dropshipping is to make a profit on the difference between the selling price and supplier price of products.
While it is great, you don’t have to bulk buy products; you also don’t get bulk pricing. It means you probably end up paying more for each individual item, so your prices won’t be as competitive.
You can react and adapt to consumer trends. However, it can lead to sudden stock shortages with not enough products. So popular product is a blessing for traditional retailers who stocked up products but a curse for drop shippers.
The problem is dropshipping is a highly competitive space as a lot of people are doing it.
You often don’t know in which circumstances the product are made so sometimes you sell low-quality products from the wrong businesses.
Low margins are probably the biggest disadvantage. It is very difficult to compete in the paid advertising space, so you need to make an effort to build SEO content and deliver excellent service.
How to start a dropshipping business?
If you decide to start a dropshipping business, you need to keep the following steps in mind:
1. Figure out the business license
To set up your business, you need to know what licenses and permits are required to start a dropshipping business. First, select a name and a business structure that is best for your needs (sole proprietorship, LLC). Then you need to acquire an employer identification number (EIN) for tax purposes.
Also, make sure to find out if you need any other business license, or a seller permits to sell your products. It is a good idea to consult local government agencies in your country to ensure you meet the proper guidelines.
2. Find a market and choose a niche
Narrow down the specifics of your dropshipping business idea. To do this, you need to identify a targeted audience you want to reach with your product. Remember, you and your competitor all have access to the same product and can work with suppliers that have a similar level of service. So to differentiate yourself from your competition, you need to put time into your marketing efforts.
Start by searching for a niche. It has to be something that interests you because it will make your efforts a lot easier. Identify a specific market for a smaller group of people. For example, you want to sell hockey sticks, so you need to find the people that play hockey.
What is also helpful is doing keyword research and looking into google trends to see how high the demand and competition are. Find on major e-commerce marketplaces like Amazon and eBay or Oberlo what products are the best selling. It is also possible to discover popular products and social media sites like Instagram, Youtube, or Pinterest.
In a similar way to the keyword and product research, you can also look into your competition. So use platforms like Google, Amazon, eBay, and social media again to see how good a product is selling. Ideally, you find a niche with buyer demand so you can make a profit but isn’t too competitive to stand out.
Evaluate if the chosen niche and product can be profitable because dropshipping margins are often low, so you want to ensure you can earn money. It is a good idea to sell a non-seasonal product that is cheap to ship and retails for at least $15.
It takes time to figure out the right niche, but it is necessary to start a successfully dropshipping business.
What you also can do is find gaps in the market. It means you need to look deeper into where the real money-making opportunities are. To get this insight, you can review sold items through eBay’s advanced search feature.
Compare the result with products that are being searched for to identify market gaps. It helps you find products that have high search volumes but don’t have much competition or aren’t sold at the right price.
No matter how you search for products, keywords and competitions, always make a list and save the links you find interesting.
3. Searching for the right supplier
The next very important step you need to do is to find the right suppliers. The Supplier is key to starting your dropshipping business. Use the following criteria to determine if you discovered a good supplier:
- Experience: You want a supplier that is already in the dropshipping business and provides great customer service. Look for their Net Promoter Score and find reviews on sites like Trustpilot and Better Business Bureau.
- Fees: Research if there are any fees, for example, a small monthly fee for working with them. You should not pay more than 5$ per item for stocking packaging and shipping.
- Fast shipping: Customers want their products fast, so the shipping shouldn’t take longer than one or two weeks.
- Product samples: It is a good idea to order/request product samples from the supplier you choose. This way, you can see if the products are not low quality.
- Referrals: The right supplier can refer to other businesses they work with. If they refuse to do you probably shouldn’t work with them.
Dropshipping marketplaces
The easiest way to get started is to use dropshipping marketplaces. These businesses work with eCommerce drop shippers. You can find millions of different products on marketplaces that suppliers purchase from manufacturers and importers, so drop shippers can sell them at a markup.
There are many special tools and plugins which make integrating products into your eCommerce website easier. Some of the dropshipping marketplaces are
- Aliexpress: Has free service and offers one of the largest drop ship product marketplaces
- Dropship Direct: Has also free service and offers over 100,000 products
- Oberlo: Free service and integrates with Shopify
- Wholesale2B: Cost $24.99/month and can be directly integrated with Shopify and BigCommerce
- Doba: Cost $29/month and directly integrated with Shopify and Volusion
While these are some popular marketplaces, it is important to do your own research. Also, keep in mind the supplier criteria to find a reliable partner for your dropshipping business.
Manufacturers and importers
When you work with manufacturers and importers directly, you can earn a lot more money. The reason is you can cut out the middle man( the marketplace) and buy directly from the source.
But manufacturers typically have an average order volume that dropship newbies might not be able to sell. The integration with an e-commerce site isn’t as seamless, so you need to put in a lot of work to add and manage your inventory.
It is better to wait until you have an established dropshipping business before selling source products and working with manufacturers like Alibaba or IndiaMarkt.
No matter what option you choose, it is important to do enough research and make a list of options to find the right suppliers for your business.
4. Building your e-commerce website
After you find your niche and supplier, you need to create an e-commerce store. You can choose between an e-commerce marketplace like Amazon or eBay or build your own website from scratch.
An eCommerce marketplace is a lot easier to set up, and users find it more trustworthy.
But a marketplace limits your independence as a merchant, and you don’t get full control over the branding design and marketing of your store. There are also fees for every sale you make, and you must follow their guidelines.
So it is better to build your own eCommerce website because you get a lot more functionality and customization. This will help you set yourself apart from your competitors.
There are many good e-commerce builder platform providers like Shopify or Gambio. Depending on what supplier and which platform you choose, some offer direct integration with Shopify. These platforms make it easy to build an online store and integrate your products. But you have to pay monthly to get most of the important functions.
If you want to build an e-commerce store that is more content-focused, you should consider using Woocommerce, a plugin for WordPress, to build your own store. With WordPress, you have the biggest customizing options and can choose between thousands of Plugins and many very beautiful themes.
Whatever you choose, remember to test your site and purchase path, so everything works. Also, try to make your website user-friendly, fast, easy to navigate, and integrate fitting graphics and pictures.
5. Marketing of your dropshipping business.
When you created and launch your dropshipping website, there is one important point left in marketing. You want to get customers, so you need to make efforts to get traffic to your store.
To do this, you can use online advertising where you pay to get clicks to your site.
Another option is to build a following on social media to attract a specific audience that could be interested in your products.
What you should definitely do is make use of SEO so you can rank in Search engines like Google and Bing. It helps you to get free organic traffic, especially when you create engaging content. You also need to ensure to search for the right keywords.
You can utilize email marketing to get more leads and attract more customers. When people sign up for your email list, send them new offers, coupon codes, and valuable insights to get them to buy from your site.
There are also many more online marketing methods like giveaways or creating a referral program where people advertise for your store in return for a small provision.
If you think marketing is too hard for you, you can also hire a freelancer that has the experience.
6. Analyze and improve your offers
After you do marketing and manage your dropshipping business, you should look for results. It means when you made a number of sales, analyze your product and marketing efforts.
Find out what product is selling best and which marketing channel is performing well and which isn’t. Do you have more desktop or mobile users? And where is the conversion rate better?
You can answer a lot of these questions by looking into your website analytics. Depending on how you build your dropshipping business, you can also research your Google Analytics if you have it set up.
It is important to compare the marketing platforms where you advertise to find out what you can improve and what doesn’t work.
When you consistently analyze over time and improve your dropshipping business, it helps you make smarter decisions to grow your eCommerce store and offer more best-selling products.
Nevertheless, you need to invest the time and money and get the know-how to make your dropshipping business successful.
Dropshipping tips you should know
Ther are some tips that help to become more successful with your dropshipping business
1. Provide customer support
When a customer complains about a product, it is very important to answer professionally and friendly. Try to find a solution and, if necessary, contact the supplier. When the supplier can’t or won’t fix your problem, you might want to give a refund of a part of the full price.
Also, for a bigger mistake, make it up to the customer by giving a coupon code or refunding the shipping cost, for example.
While every drop ship supplier can make mistakes but if this happens often, it will hurt your business reputation. In that case, you should stop working with that supplier
2. Have a FAQ
With a FAQ, you can answer the questions about return and delivery policies, your products, account settings, etc.
3. Order Fulfillment
Depending on what tools you use and how you fulfill an order, you need to keep some things in mind. Try to fulfill orders as fast as possible. When an order is too large for your budget, wait for the payment and then fulfill the order
If you work with different suppliers directly, you can route the order to one location where they will be intelligent packed and fulfilled.
4. Fraud and security prevention
Don’t store the payment information on your website. It is better to use third-party payment options like Stripe or Paypal.
To prevent fraud orders when you are unsure, do an address verification. Fraudsters tend to follow patterns like different billing and shipping addresses/names. An unusual email address like fjghfhj@gmail.com is a sign of fraud. Or they choose the most expensive and fastest delivery method.
If you see signs of fraud, first contact the customer and try to legitimate the order. When there is no answer in a few days, cancel the order and issue a refund to avoid problems.
5. Have effective return policies
With a return policy, you let customers know what time window they have to return a product. When you have different suppliers, look at their policies and integrate/merge that information into your website.
Don’t have a restocking fee as part of your return policy because it is outdated and unfriendly towards your customers. Even if you might have to pay a fee here and there.
Compensate your customers for return shipping fees. But it doesn’t make sense to pay a $10 return for an item that is worth $12. At the start, you don’t need to pay such a fee unless you have enough budget and want to stand out.
Depending on the product, you can also ship the new product without getting a return from the customer if you trust your customer’s complaint.
Some suppliers maybe pay for returning shipping products.
It is fairly reasonable to be to give a customer a refund for a non-defective product.
6. Use simple shipping rules and keep policies and taxes in mind
Shipping rates are often a big mess for a dropping business owner. So at the start, it is a good idea to choose for example only one region like Europe or the US. This makes things a lot easier because not only need to keep shipping costs in mind but also taxes, fees, and policies of different regions.
You can implement three shipping rates:
Real-time rates: A method your shopping cat will use the collective weight of all time purchase and the shipping destination and calculates a real-time quote. It is very accurate but difficult if it has various supplies.
Per-type rates: You set a flat shipping rate based on the type of products ordered. So smaller ones cost 5$, and bigger ones cost $10 to ship.
Flat rate shipping: You charge one flat rate for all shipments, no matter what type. This could also be free shipping on all orders. It is an easier method to implement but isn’t accurate in reflecting actual shipping costs. An idea is to integrate the average shipping costs into the product margin, so you don’t lose money.
Also, choose a reliable carrier that is right for your dropshipping business that doesn’t have high fees and offers fast and secure shipping
7. Products you shouldn’t ship
Some product choices can complicate things, and you have to deal with many problems. So do your research and look that the product isn’t copyrighted or knock-offs which can give you serious legal issues.
A product shouldn’t be too fragile where it can be easily damaged or is too heavy to be lifted. When it is technically too complex, it’s better to avoid a product that requires careful check-up before the purchase.
