Dropshipping has become one of the go-to eCommerce business models for new business owners looking to establish an online brand, and established online entrepreneurs interested in testing demand for a product without large overhead costs.
This business model focuses on the benefit of relatively low startup costs that allows anyone with a little research knowledge to make an income from fulfilling unfulfilled demand.
An example of a dropshipping business would be supplying Americans with a new Korean beauty product that is not available through normal retailers in the USA.
How Does Dropshipping Work?
Dropshipping is when an individual or organization creates a new, small-scale supply chain to deliver products to regions where there is a demand, but no supply. They create a catalog of items, take orders and payments, and instruct the supplier to send the product to their customers. This benefits everyone involved: the consumer has access to a new product, the supplier gets more sales, and the dropshipper gets to set their own prices, making a small profit on every item sold after paying the supplier for their expenditures.
A dropshipping business essentially acts as a middleman between a supplier or wholesaler and the customer. It is one of the easiest ways to enter the world of eCommerce, because the dropshipper doesn't have to worry about overhead costs like manufacturing, shipping, inventory management, or supply chains. They simply establish a relationship with a source, and deliver that source to customers.
What are the main stages of dropshipping?
- The dropshipper (you) finds a supplier for a niche product and displays that product on an online store, setting a retail price
- A customer visits your store and places an order for the product by submitting a payment
- You send the order request to your supplier and pay them the price for the product
- The supplier packs and ships the product directly to your customer
You can see from this model that dropshippers never actually handle the item they're selling. This comes with cost-benefits in that you don’t have to worry about the logistics that come with traditional retailing.
However, just because you are not stocking inventory or taking care of shipping does not mean you will have nothing to do. There are still several aspects and steps to consider before starting your business.
- Select an eCommerce platform or website builder that provides all necessary dropshipping features, like metric tracking, integrated cart management, and multiple payment methods.
- Design an online store that is professional, ergonomic, and user-friendly. This is easier with a robust web builder or eCommerce website as they often have pre-built templates to get you started.
- Partner with reliable suppliers or wholesalers that source high-quality products. The products you sell will affect your reputation for better or worse, so try to either offer value, quality, or both.
- Invest in marketing, Search Engine Optimization (SEO), and Social Media Marketing (SMM) to gain traffic and increase visibility online. This will help you attract customers and understand who is looking for your products.
- Provide a great customer experience from start to finish. Because there is little you can do about the product itself (besides offer returns), the customer experience should make an impact to keep customers coming back.
Understanding the Supply Chain
The supply chain of a product refers to the steps it goes through from manufacturing to reaching the customer. Just like in any business, dropshipping starts with fabrication and ends with delivery.
The three major ‘players’ in a product supply chain - that are relevant to dropshippers - are manufacturers, wholesalers, and retailers.
- Manufacturers are organizations that take raw materials and form, build, or otherwise create the products that people want to buy. They usually do not sell directly to the public due to the sheer amount of labor involved in customer relations, meaning they need wholesalers or retailers to market and sell their goods.
- Wholesalers buy products (usually in bulk) from manufacturers for the purposes of reselling to multiple retailers. While they do mark up their prices, they usually tailor them to bulk purchases. Wholesalers can be independant, but are just as often part of the manufacturer. Dropshippers need to form good relationships with wholesalers so they make a profit without needing to set the price unattractively high.
- Retailers are usually the final step between the product and its final destination; the customer. Their main task is to market the product to generate interest and offer storefronts (online or brick-and-mortar) where customers can initiate a purchase and organize shipping. If you run a dropshipping business, you fall into this category.
Setting the Retail Price
For your dropshipping business to be profitable, you need to set a retail price that covers your business expenses. Once you have an idea of how much you’re spending on running your business, you can set a price that covers those expenses and provides an income.
When pricing your product, take into account the cost of:
- the wholesale price of your products and shipping.
- your marketing and advertising costs.
- employee salaries if applicable.
- ongoing website development and maintenance fees like your eCommerce platform plan fees, any paid apps or services, hosting fees, and more.
One tactic for attracting customers is to offer them free shipping. You can include the cost of shipping in your retail price and aim to cover the average shipping fee. Sometimes shipping will be more expensive than average, and sometimes it will be less than average. If you find that you’re spending too much on shipping, simply increase the retail price accordingly.
When setting your retail price, remember to take a look at your competitors if any exist. Analyze what prices they set, if they offer discounts, if they charge for shipping, and which regions they ship to.
You want to find a ‘sweet-spot’ so your prices in comparison to your competitors. Don’t set the price much lower than your competitors since generous prices can imply low quality. Don’t set your prices too high either, as this may encourage your customers to search for cheaper alternatives.
A markup of 2.5 - 3 times higher is usually a good strategy, but give yourself some wiggle room to test different options and analyze customer response.
The Benefits of Dropshipping
For many aspiring retailers and entrepreneurs, dropshipping is a great way to enter the sphere of eCommerce. It’s easy and inexpensive to get started, has relatively low startup and maintenance costs, lets you scale your business, and offers flexibility in terms of location, operating area, and product catalog.
Easy to Get Started
You can set up a dropshipping business quickly - potentially in a single day. All you need is a well-maintained website, reliable suppliers, and the wherewithal to understand an unfulfilled demand. You will not have to deal with physical inventories, stocking products, securing a warehouse, renting an office, or setting up shipping logistics. You can allocate most of your resources and time to marketing and offering a top-notch user experience.
Low Startup and Maintenance Costs
With dropshipping, the only costs you need to cover are your website plan, marketing, and the cost of the products you source. Even then, you only pay your supplier when a customer places an order, which means there is no overhead for inventory management. The costs of running a traditional retail business, which includes inventory, warehousing, rent, and facility maintenance are not needed in a dropshipping business.
Scalable Business Model
Since you are not responsible for various logistics like stocking, packaging, and shipping products, you have significantly more time to focus on marketing and growing your business. Advertising, marketing, and effective SEO are all ingredients of making your eCommerce store a success, but they are also the critical factors of spreading awareness for your brand and generating customer loyalty. Once your brand is established, scaling is simply a matter of adding new products, securing new supply chains, and leveraging your marketing to gain additional customers. There is no need to buy more storage space or reinvest your profits into the overhead costs that typically come with business scaling.
Easier to Test
As opposed to traditional retail models, dropshipping does not require you to buy in large bulk volumes. You only pay your supplier when a customer orders a product from your website, which allows you to test demand for products at a smaller scale without much risk. Study buying trends and experiment with products, pricing, and marketing strategies that you think will have an impact in areas where certain products are not available.
More Flexibility
Running a dropshipping business allows you to be flexible with your location and time because it is almost purely online. You don’t need to worry about your locale as you operate as a middleman between wholesalers and customers, you can set your own hours of operation within reason, and as long as you establish regular communication with your suppliers and customers, you can start your business from anywhere on the planet. This allows you to start where you already live, or even from an area with attractive business taxes and low cost of living.
A Wider Product Catalog
You can add and test a wide variety of products as a dropshipper. There are thousands of suppliers and online wholesalers with extensive product catalogs, which allow you to add almost any product to your online store. It is best to stick to a particular niche, but testing the demand for new products is a great way to scale once you’ve established a trustworthy brand.
Challenges of Dropshipping
As with any new business venture, you can’t expect everything to be sunshine and rainbows. Despite the benefits that dropshipping offers, some challenges may arise when dealing with this model, but you can prepare for them.
Lack of quality control
Because you rely on suppliers to source your products, you do not have direct control over their quality. Issues like product defects, extended shipping times, or product safety oversights can lead to bad reactions from your customer base. Despite not having any control over product quality, you are the entity that customers are purchasing from, so you are viewed as responsible for such issues. Customer complaints will not be sent to your suppliers; they will be sent to you, and you will have to solve them.
Request product samples
One excellent way to tackle this is by ordering samples from the supplier so you can test the quality personally. Not only will you be able to verify that these products do what they claim to do, but you can also take your own photographs of the products and use them as the product images on your store. The stock images that your supplier will give you are not usually high quality.
Research product quality
One method for avoiding quality issues is by doing research on the products you source. If you choose to work with suppliers from AliExpress, look at the customer reviews. Some reviews will be written by the product manufacturer themselves, but if there are significant quality problems, there will be no shortage of negative customer reviews.
Also look for visual consistency on any product images available. Be wary of products that only have a single image, or have a product that looks different between different images. Remember that customer reviews may include an image as well, so be sure to look for these types of reviews, especially if they take a picture of the product failing to work as advertised.
Customer service safety net
If you do encounter product issues, be generous with returns and put in the extra effort to work out these issues with the supplier. Great customer service can turn a bad situation into one that increases customer satisfaction and trust in the thing that matters most to dropshippers: your brand. If the item in question is causing lots of returns, remove it from your shelves until you can sort out the problem with your supplier.
Form good supplier relationships
Finally, don’t forget to stay in touch with your suppliers. Establish trust, get familiar with their refund policies, and check the quality of their customer service. If you are dissatisfied with the level of customer service they offer, it’s a sign that your customers will also have an issue. Reconsider working with them.
Long shipping lead times
Many suppliers are based in China, meaning that your customers will need to wait weeks or months to receive their products. With giants like Amazon offering two day shipping as a near-baseline, you will need to offer more than just a unique item to stay competitive.
The key here is being as transparent and clear with your customers as possible. Ensure that you have a good shipment tracking system in place, either from your supplier or dropshipping platform. Address all customer concerns regarding delivery time and make sure the standard shipping time is displayed throughout their buying journey.
Offering free shipping is another way to ease the pain of long shipping times. If your prices are competitive enough, your customers will not mind waiting so long to get a good deal. Finally, consider sourcing locally if such sources are available, as local shipping times should be significantly shorter.
High competition
It is easy and inexpensive to get started as a dropshipper, but that rule applies to your competition too, meaning that dropshipping is a very competitive industry. This means you have to make an effort to stand out.
Start with a solid niche, an ergonomic and attractive website, well researched marketing strategies, and high quality customer service. To stand out in the world of dropshipping, you need to make sure all stages of the sale you have control over are world-class. If you’re unsure of how to design such experiences, do some competitor research in your niche to understand what works and what doesn’t.
Issues with inventory
You are not responsible for inventory as a dropshipper, which is great for your budget, but has drawbacks. Suppliers may run out of stock for a specific product, inventory might be miscalculated or lost, and production defects may occur. While this is largely out of your control, you can mitigate these risks by working closely with your suppliers and staying up-to-date with their policies on refunds, lost orders, and other issues.
Dropshipping and Customer Experience
When it comes to dropshipping, providing a good user experience and quality customer service is an absolute must. Excellent customer service will make you stand out from your competitors, increase customer loyalty, and will reward you with great reviews, which in turn instills trust in new customers. You need to give people an incentive to purchase from your store instead of buying from your competitors or directly from big-box online retailers like AliExpress or Amazon.
“Why do people buy from dropshippers?” There are plenty of other options like AliExpress or Amazon that offer similar products for around the same price. The answer is “a personalized customer experience.” Customers want an experience that makes them feel valued not only as a consumer, but a person; a user-friendly and easily-navigable website, responsive and helpful customer service, reasonable and generous return policies, and assistance when they need it most are all factors that many large suppliers fail to offer. These are the pain points that dropshippers can solve.
So, there you have it - the basics of dropshipping! In the next chapter, we’ll cover the types of dropshipping and which type of dropshipping store you want to open.