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A definitive guide to dropshipping

25 Jul, 2022 | Business Tips

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One of the biggest hurdles to starting a business is coming up with the money. It’s assumed — and often the assumption is correct — that a new business will require substantial funds to get established and maintain day-to-day operations. Depending on the business, money is needed to start the business, purchase inventory, buy or lease warehouse space, and coordinate logistics to transport inventory. This all has to happen before a single sale is made.

What if we told you that you can run a business without spending a dime buying, storing, or delivering your products to your customers? And what if we told you that you can make a good profit? Sounds too good to be true, but it is. It’s called dropshipping.

Dropshipping lets you effectively open a bookstore — or any other type of online retail store — without owning a single book. It’s not quite that simple, but we’ll show you all the ins and outs to opening and running a successful dropshipping business.

 

What is dropshipping?

Dropshipping is a form of retail business where you sell products that you do not own or have in your possession. To dropship means to cut out the normal distribution channel of warehouse to retail outlet to customer. In a dropshipping business, the retailer acts more like a facilitator, facilitating the sale between the warehouse and the customer. To facilitate, retailers take a fee, which is their profit off the sale.

While a traditional business purchases products to fill their store before finding customers to buy those products, a dropshipping company identifies products from suppliers to offer customers, and then entices customers to place an order for those products. Once the order is placed, the dropshipper orders the product from the supplier, who ships the product directly to the customer.

Benefits of dropshipping

The dropshipping model has several benefits to incentivize businesses.

1. Low operating cost

Dropshipping is less expensive to operate than a retail store, including a conventional ecommerce store, because you do not need to carry any inventory. There is no requirement to buy products before they are sold. Additionally, dropshipping saves the cost of acquiring and maintaining warehouse space.

While dropshipping can save a substantial amount of money in reduced overhead costs, dropshipping businesses are not without their own set of expenses. One of the largest of those is the website. This includes building the website, third-party apps to ensure it runs smoothly – especially where orders are concerned – marketing, paid advertising, and website maintenance.

Often dropshipping businesses will opt for a platform like Shopify that offers all-in-one solutions for most dropshipping businesses.

2. Risk-free product testing

Because no inventory is stored in-house, dropshipping retailers can test products to see if there is a demand without incurring substantial costs. This allows the retailer to quickly adapt to changing trends in the marketplace.

Both brick-and-mortar retailers and conventional ecommerce businesses run the risk of over-purchasing inventory to meet new fads. Part of this risk is associated with buying in bulk to get the best pricing possible – and the most profit should the products sell. However, should customer interest change suddenly, there is a risk of being “stuck” with inventory that either must be sold at a substantial discount or at a loss. Dropshippers avoid this risk.

3. No hassle manufacturing and fulfillment

Dropshipping companies do not have to manufacture products. Instead, dropshippers build relationships with manufacturers willing to ship directly to the final customer. There are large and small suppliers willing to do this.  A good manufacturer makes dropshipping hassle free by fulfilling orders as quickly as you place them.

4. Easy to scale

Brick-and-mortar retailers scale up by physically expanding into new markets. As their operations grow, so do inventory holding costs, employee costs, and all other operating costs.

This is not the same for dropshippers. Dropshippers have the ability to scale up quickly because they are not tied to a physical location. In most instances, scaling involves finding new suppliers and marketing new products to new and existing customers or expanding into new regions with targeted advertising.

5. Wide product range

Dropshippers can offer a wide product range from many different suppliers. By targeting people from different consumer segments with different products, dropshippers can create broad demand for their products, creating a more stable business.

 

Disadvantages of dropshipping

Dropshipping can be an easy way to start a low-risk, high-return online business. However, just like any business, it’s not perfect. If you plan to start a dropshipping business, you should be aware of some major limitations of this business model.

1. Heavy reliance on suppliers

Because dropshipping companies do not hold their own inventory, there is a heavy dependence on third parties. Retailers using this model do not get to inspect the products being sent to ensure quality. However, customers blame the dropshipper for poor experiences, such as receiving damaged goods or incorrect items. This can result in bad reviews on Google or other social platforms. Additionally, resolving complaints can be time-consuming because most have to be routed through the supplier.

2. Differentiation is difficult

Branding helps distinguish your products from the competition, and it boosts customer loyalty. However, branding is difficult in dropshipping as you do not have complete control over the product which is designed and distributed by the supplier. Often several companies source their products from the same supplier. This makes it hard to differentiate your products from the competition.

Although some suppliers may include a catalog or other promotional material from your store in the package, there is no guarantee this will happen. Even if you get a supplier who agrees to do some product changes (branded dropshipping), there may be a minimum quantity you must order.

Thus, differentiation comes down to how the products are marketed on your website and whether you offer a niche or hard-to-find product.

3. Low profit margins

Dropshipping is easy to start and requires low initial investment. That makes it attractive to many people, which translates to more competition.

Intense competition means you may have to keep prices low to compete, leading to lower profit margins. Additionally, much of the revenue goes to the suppliers who fulfill your orders. To increase profits, sales volume must increase.

4. Shipping challenges

Having several suppliers to deal with can complicate the shipping process. Suppliers need to be compensated for shipping and handling, and different suppliers can result in different shipping charges. For instance, if the customer orders four products that are sourced from four different suppliers, shipping cost can differ significantly. This requires more coordination by the dropshipper and may affect profit margins.

 

How to start a dropshipping business

It’s easy to set up a dropshipping business, but it takes time to make the business profitable.

If you want to dive in to design a business around your style, here’s a four-step process to get up and running quickly.

1. Selecting products

When you are not confined to warehouse or retail space, you can sell anything. Your best bet is to pick a niche.

Ideally, you should pick a niche that you are interested in — just make sure that there is enough market demand. Niches such as fitness, beauty, tech, and fashion are evergreen, meaning there is always demand for products within those industries.

Begin by creating a shortlist of niches that interest you. Search Google trends to find out what type of demand there is for your ideas. Complete a competitor analysis to see who else is selling what you want to sell. (Also, browsing the competition can give you insight into popular products for your store.)

There are “analysis” tools available for a more complete competitive analysis. Some include Similarweb, Ahrefs, and Spyfu.

2. Find suppliers

Once you know what you want to sell, you’ll need to contact suppliers to source your products. You can leverage platforms such as AliExpress and DHGate to connect with dropshipping suppliers. You can also partner independently with manufacturers to list their products on your website.

Selecting the right supplier is vital to the success of your business. Partnering with irresponsible suppliers means poor quality products, bad after-sales service, and fulfillment delays.

Finding suppliers is the most important part of your dropshipping business. If you are using AliExpress, you can check the suppliers’ ratings, reviews, and duration on the platform. After you have a list of potential suppliers, contact each of them to discuss their shipping terms, minimum order requirements, and anything else related to order fulfillment. It’s also a good idea to ask about branded dropshipping, even if you’re not yet ready to do that.

3. Create your store

You have two options to create an ecommerce dropshipping store. You can either build one from scratch or use an ecommerce platform like Shopify.  With either option, you will need to choose a domain name. Make sure your domain name sounds credible and trustworthy. For instance, leatherbags.com vs leatherbags4u.xyz. When choosing an extension, try to get a name with a .com extension. The .com extension means that it is a commercial site, and the extension is recognized around the world.

There are definite pros with using an ecommerce platform like Shopify, but be aware that these sites may have higher monthly service fees. If you’re tech savvy, you can use a hosting service to set up your own website and ecommerce store. Getting started may require hiring outside help, but it’s often worth it.

Analytics are vital to making changes that positively impact your customers. If you will be selling across multiple channels, you’ll want an order management system to provide clarity on how each channel is performing.

4. Promote your products

If no one knows about your shop, you will not make any money. Social media can be helpful for generating leads for your business. You can publish content describing your products and engage with potential customers. You can even allow interested customers to place an order directly through their favorite social media channel (in most cases).

Because you are saving money on manufacturing and fulfillment, you can spend more on your marketing campaigns. Paid ads are available on most platforms, such as Facebook and Google. Many digital advertisers use data analytics to help you target your ads to specific audiences..

It is not feasible to run ads all the time, so don’t forget word-of-mouth advertising. Offer a stellar customer experience by being quick to answer questions and solve problems. Strive for five-star reviews by exceeding customers’ expectations. Happy customers will tell their friends about your business and leave good reviews. Pro tip: always ask your customers to leave a review.

 

Common questions around dropshipping

Here are a few of the more common questions people have about dropshipping.

Is dropshipping legal?

Yes, dropshipping is a legitimate business. In fact it’s a $128.6 billion industry worldwide and expected to grow to $476.1 billion by 2026.

What is branded dropshipping?

Branded dropshipping means your products are marked with your logo before they are shipped.

Can I use the supplier’s product pictures on my website?

Absolutely. In fact, it’s a common practice to do so. Just remember, it’s all about building relationships with your suppliers, so you should ask permission first.

 

Scale your dropshipping business using DEAR Systems

Dropshipping is a low-risk, high-reward business where you do not need to incur high upfront costs. If you already have an online store, dropshipping can help you test new products without the risk of holding inventory that doesn’t sell. If you already operate a dropshipping company, you will likely need to upgrade as the market expands to meet customer expectations.

DEAR Systems can help your dropshipping business. You can assign suppliers for each product, so the purchase order is automatically sent to the supplier whenever an order is placed. The purchase order contains all the details regarding the product, quantity, and shipping details to help the supplier with fulfillment. You can also generate invoices with DEAR Systems.

Book a free call with our experts to discover how DEAR Systems can help with your dropshipping company.

 

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