How Does Dropshipping Work? The Good, The Bad, and the (potentially) Ugly.
Want to sell products without the startup expenses of keeping items in stock? Hate dealing with shipping issues? Welcome to dropshipping! Read on to learn more about the process as well as the good, the bad, and the ugly of dropshipping.
What is Dropshipping?
If you ever bought anything online, there is a good chance the item was dropshipped. Dropshipping is often used by online stores to fulfill orders using inventory stored and shipped by a warehouse. Merchants choose the products for sale (some with the possibility of customization or adding branding) and the consumer received the products directly from the warehouse. Most consumers have no idea that they are not receiving their items directly from the merchant.
When it comes to shipping and order fulfillment, the merchant does not need to get involved making this a great model for those that want a simplified process. There is no need to buy items in bulk, pay for inventory space, or deal with varying shipping prices.
There is some flexibility in pricing products as well. The supplier will have a set wholesale price for the item and the merchant can decide how much of a markup is needed to make a profit.
Once items are chosen and customization is set, the merchant’s main responsibility is to attract customers by driving traffic to the store. While this is no easy feat, once you have a steady stream of customers, the model works almost effortlessly.
The best part? You can run a whole store right from your laptop without the overhead of leasing a space or needing employees. Hello digital nomads!
The Process
Once you decide on products you want to sell, you will need to research dropshipping suppliers. This may be a manufacturer, someone you met through a trade show, or choosing popular suppliers like Alibaba, AliExpress, SaleHoo, or one of the many others found online.
A marketing plan is needed to determine how much money is needed for advertising, SEO, and other ways to get customers to your website. Once the budget is set, it is a careful balancing act to price your products attractively enough to generate sales, cover all your costs, and still make a profit.
You will need to create an e-commerce website and connect a payment processing system to collect money. Your online store will need to have the capability to automatically send customer order information to the fulfiller.
When a customer finds your store and places an order, you will be paid through your own payment processing system. The website automatically notifies your supplier and they begin the process of fulfilling the order. and it is sent directly to the customer. You are billed for the wholesale cost of the product plus any additional processing fees.
As with starting any business, it is important to consult with a business attorney to ensure you are conducting your business legally in your area.
The Good Parts of Dropshipping
Dropshipping is easy to start up. You don’t need any prior business experience or even retail experience to get started.
Startup costs are low. There is no need for a warehouse or even office space or employees. You will not have to spend thousands upfront in inventory or maintaining an inventory system.
There are no packing or shipping hassles including returns or inbound shipments.
Dropshipping is scalable. You can offer as much or as little as you like and changing the variety of your products will not change your business model.
You can quickly capitalize on trending products without the problems normally associated with changing products in-house. Likewise, it is easier to phase out products that are not working well.
You can set your own hours. You choose how much time, what times work the best, and set your own pace. If you are leaving on vacation, everything can be automated to generate income while you are away.
You can run your business from anywhere. Whether it is your basement or Fiji, you just need internet access
The Bad Parts of Dropshipping
Competition is fierce and margins may be slim. Because starting up a dropshipping company is so easy, others will be willing to beat your prices to make more sales. If you are offering a popular product, the competition may be too high to make any money. Choosing the right product for the right niche market is key.
You have no control over inventory issues such as low stock, discontinued products, or shipping times. The manufacturer dictates what is available and when.
There can be customer service issues. Supplier problems may cause you to lose customers over no fault of your own. For those who like total control, this may be a deal-breaker. But for most, this is just the price of doing business and part of the reselling model.
The costs to ship from multiple suppliers can quickly exceed your profit margin if you don’t plan carefully. Different manufacturers have their own shipping solutions so it is important to have a strong shipping plan in place.
There are limited options for customization or branding. Unlike print-on-demand suppliers, dropshipping suppliers may require a large minimum quantity guarantee to customize a product.
Different supplies will have different structures in place for billing and processing. Again, having a strong plan in place is key.
The Ugly Parts of Dropshipping
The profits of dropshipping are low. This is a volume game. The more you sell, the more you make. But in order to get that volume you need to put money into finding customers.
Chances are, especially in the beginning, your profit will not cover the costs to maintain your site, pay for needed SEO, pay for advertising and marketing, and cover your time for research, dealing with supplier issues and payments, or handling customer service problems or returns.
If you are building your business on Shopify or BigCommerce, you will be struggling to find a client base for a long time.
You need to have a good grasp on marketing and think quickly on your feet. You will be competing with others who have an extensive background in digital marketing, social media influencing, or more.
Advertising costs will be high. You will be competing against others that have been doing this for years and have a steady customer base. Bidding against them for digital ad space will not be cheap.
You will not have an exclusive deal with your suppliers. Anyone can buy from them, price their products, and spend the money to attract more clients.
Now for the Very Ugly
As mentioned earlier, you have no control over your suppliers. What happens if they decide to discontinue a product or the quality suddenly changes for the worse? Your reviews will pay the price and customers will stop buying from you. Bam! Your business is kaput.
Also, suppliers and manufacturers may be from far away or another country so it may be difficult to ensure that they are legitimate in person. There are reports of suppliers using another company’s trademarked logo or items that were never shipped. As with any business arrangement, it is important to work with a good business attorney who can help you with a dropshipping agreement contract. Hopefully this be enough to ward off any scammer.
Is Dropshipping Still Worth It?
If you are the eternal optimist who thinks he will be living in the islands with just flip-flops, a coconut drink and laptop right away, please stop reading this now and find a different way to make your fortune. If you are more of a realist, please continue because there are ways this can work:
Dropshipping works best as a side venture to another established business. Say you have a surf shop where your main business is selling and refurbishing boards. You have good website traffic so you may want to offer your customers snorkeling gear or wetsuits through a supplier. Selling and refurbishing boards is what pays the bills. Anything you get extra from dropshipping is gravy.
Dropshipping is also a good way to test the market with a new product without the added cost of inventory and storage. If you notice you are selling quite a bit of snorkeling gear, maybe it’s time to expand your shop and offer it in-house as well. It will also give you a better idea on what the ideal selling price may be.
Dropshipping may also be a good option for overflow. If you are a Halloween costume supplier and can only keep so many outfits in house, dropshipping may be a great way to get through the seasonal rush without having to expand your store for just a short period of time per year.
This also holds true if you need insurance against any disaster happening to your in-store stock. What if there was a fire or flood? At least your customers could still buy their outfits in time for Halloween. This can also work if there are supply chain delays.
Dropshipping may be an option if you want to test the market in a new location. Before spending the money in buying or leasing a space, why not try dropshipping and see if the demands is there? Yes, the shipping costs incurred through dropshipping are much higher than warehousing and shipping your own but at least you will not have to shell out a fortune to set up a failing new location.
If you have large, heavy, fragile, or valuable products to sell, storing and shipping can be an absolute nightmare. Unless these are the bulk of your sales, it may be more cost effective to go with drop-shipping and leave the literal heavy lifting to someone else.
How to Choose the Best Dropshipping Supplier
If you are ready to forge ahead, one of the most important decisions to make is to choose your suppliers. After all, they will be your business partners and you are relying on them for quality products and timely shipping. Here is a minimal list of items that should be addressed:
How are their reviews? Can they supply references?
How long will it take for order fulfillment and what are average shipping times?
How are returns and damaged products handled?
How is their customer support?
What happens if a product is lost in transit or arrives broken? Is there insurance?
Other e-Commerce Options
After reading this, you may decide that dropshipping is not for you. There are several other ways to consider when building an e-commerce business:
Stock your own inventory and ship products yourself. This method gives you much greater control over the process but at a cost. Since it is not easy to test the market this way, you run the risk of spending thousands on a product that may not sell. On the other hand, your profit margin may be much higher.
Retail arbitrage is the process where you buy products from another retailer (either brick and mortar or online stores), but turn around and sell them at a higher price online. This is a common practice on Amazon. Be aware that this is a highly competitive method and savvy buyers can easily comparison shop.
Print on demand allows you sell highly customized products that are only produced if a customer places an order. Again, there is no need for inventory or shipping. There is flexibility in pricing but the profit margin tends to be very low, even lower than dropshipping.
Affiliate marketing is the process of advertising a product on a website that directs a customer to another site to make a purchase. Successful bloggers and influencers use affiliate marketing as one of the main ways to make an income. You will not collect payments so no payment processor is needed. You are paid a commission usually based on the type of product and the selling price. This method has the lowest profit margin of all but is the easiest to manage.
Ready to Learn More?
Having an e-commerce store can be a fun, flexible way to make a living but it does require a significant amount of time and expertise to make it successful.
Want to find out if your idea may work? Schedule a free, no obligation consultation. Charlotte’s Web Designs, LLC has successfully worked with multiple startups, nonprofits, multi-generational larger firms, and more. Feel free to view my portfolio here. Your idea will stay confidential until you are ready to release it to the world!
