An Introduction to Dropshipping
Dropshipping has exploded in popularity, and there are many different ways to approach it. What we’re discussing in this guide is an approach that will work for most people, especially new dropshipping entrepreneurs.
What is Dropshipping?
Here’s what we mean when we talk about a dropshipping business. The key aspects are:
- A dropshipping business is an online retail business — dropshipping businesses typically conduct all of their transactions over the internet.
- You provide physical goods to end customers — dropshipping is exclusively for physical products. Services and digital products aren’t suitable for dropshipping.
- Dropshipping is mainly a “Business to Consumer (B2C)” style business — you normally provide products to individual consumers, although some dropshippers do sell to other businesses.
- You have an online store (ecommerce website) — this is the portal through which you sell all of your products.
- You do not hold stock yourself — this is the main difference from a “typical” ecommerce business, you don’t need to hold stock locally yourself, instead your dropshipping supplier holds it for you.
- You never see or handle the product — all product handling is carried out entirely by your dropshipping provider.
- When you sell an item, your supplier “dropships” it directly to your customer — they take care of picking, packing, and shipping the item.
- You pay the supplier the cost of the item together with any other admin and distribution costs — any remainder is your profit.
- You take care of customer service and other business functions.
There’s a distinction between what you do as a dropshipper and what the dropshipping supplier does. This normally breaks down as follows:
What you do:
Identify your dropshipping niche.
Create an ecommerce store.
Get relationships in place with suppliers.
Market your store and get customers.
Take payment for products.
Manage customer service, business admin, and other business areas.
What the dropshipping supplier does:
Holds inventory for the items you’re selling.
Receives orders from you for your customers (often automated).
Get relationships in place with suppliers. Picks and packs the product.
Picks and packs the product.
Sends the product out to your customers.
Is paid by you for items sent.
Is Dropshipping Business Right for Me?
If this sounds too good to be true, here’s a word of caution — it is! Although dropshipping has lots of advantages, there are a number of challenges you need to overcome as well. Here’s a breakdown of the key benefits and issues for a dropshipping business.
Benefits of Starting a Dropshipping Business
You don’t need to hold or pay for inventory
Dropshipping businesses are much less “capital intensive” than traditional retail businesses. You don’t need to invest in warehouses, distribution, pickers, packers, or the inventory itself.
It’s easy to get started
You just need to identify a product that can sell, get relationships in place with suppliers, and start an ecommerce store. From start to finish you could have a dropshipping business up and running in less than a week.
There’s not much out of pocket expense
You don’t need to put out much money to get started. You will need to pay for an ecommerce website, payment processing fees, some marketing and a few other overheads, but compared to many other types of businesses, your costs are low.
You’re location independent
You can run a dropshipping business from anywhere. Want to be a successful retailer while sipping Margaritas in Barbados? No problem.
There are a huge number of products available
If you can think of it, you can sell it. With just a few tiny exceptions, you can find and sell pretty much anything using a dropshipping business model.
You can scale up, fast
You can start your business small with just a handful of products. As you get more successful it’s easy to add to your selection until you achieve total world domination!
Issues with Starting a Dropshipping Business
There’s lots (and lots) of competition
As you’d expect, with all the benefits and low barrier to entry of a dropshipping business, there are hundreds of thousands of them. You need to have a great understanding of your competition so you can effectively position yourself in the market and be successful.
Marketing can be expensive
With all the competition out there, you still need a way to get your store and products in front of the right people. That can mean you need to spend lots of time, effort, and money on marketing. Expect your marketing budget to make up a large proportion of your overall spend.
The profit margins are thin
The drop shipping market is very price competitive. You need to pay all of your business expenses out of the profit margin between what your customer pays and what your supplier charges. That can mean there’s not a huge amount left over as profit. Understanding your costs and revenue is essential to success. We cover this in great detail later on.
You will eat all the distribution and logistics costs
Since all of the distribution costs are passed on to you, that can get expensive. You will typically only charge the customer one shipping cost, but if multiple suppliers are fulfilling that order, they will charge you multiple times. Cost control is vital.
You own all of the mistakes, no matter who makes them
If a supplier sends the wrong item or a product gets damaged in the post, you will get the blame, which means you need to sort out the issue. Running customer service for a dropshipping business can be tricky, as the buck always stops with you.
Reputation is everything
With the prevalence of review websites out there, you need to have a spotless reputation. That means you need to provide exceptional value, speed, and customer service, and you can’t ever afford to let your standards slip.
You have to be distinctive
If you want to make it, you need a clear niche, value proposition, and brand.
Don’t let the downsides put you off. If you properly plan and execute your dropshipping business, do the research, find the right products, market, and manage your business in the right way, there’s an excellent chance you’ll succeed.
Approaches for Starting a Dropshipping Business
Once you understand the benefits and drawbacks, you need to look at approaches for a dropshipping business, there are three main ways to go to market:
- Building your own ecommerce website from scratch using a framework like WordPress.
- Opening an independent store using a specialized ecommerce website builder like Shopify, SquareSpace, BigCommerce, Volusion, etc.
- Opening a store using the “shop” function of other major online retailers like Amazon or eBay.
What You Will Find in the Next Guide…
Competition and Defining Your Dropshipping Niche
- Outmarketing Your Dropshipping Competition
- Creating a Unique Brand and Value Proposition
- Competing on Quality, Speed, Price, or Service
- Finding a Dropshipping Niche
- Why Focus on Finding a Niche?
- Establishing Your Dropshipping Niche
- Using Your Niche Sector or Industry Experience
- Identifying Niche Consumers
- Understanding the Marketplace and Competition
- Finding a Niche Product