What is Dropshipping?
Dropshipping - why has it become the go-to eCommerce business model? What are some of the pros and cons? Read on to find out.
The central premise behind dropshipping is that anyone can set up an online store and avoid the hassle that comes with the classic eCommerce model. With dropshipping, online store owners can sell products without having to deal with manufacturing, storing, and shipping them. Instead, they act as a middleman, and their main task is to select a niche, create a website, and market their products.
Before discussing some of the pros and cons and learning how to start a dropshipping business, it is essential to understand how the process actually works. What does becoming a dropshipper entail? Let’s find out.
How Does Dropshipping Work?
Dropshipping is one of the best ways of entering the eCommerce sphere, and the process is pretty straightforward. Dropshipping differs from the standard retail model because you don’t stock or own inventory - instead, you find a supplier that does this for you. As a dropshipper, you won’t be handling the product at any point.
So, what are the main stages of the dropshipping process?
You find a supplier for your niche and add their products to your store, setting your retail price*;
A customer visits your store and places an order for the product - paying the retail price;
The order is sent to your supplier;
You pay your supplier the wholesale price + shipping, and they prepare and ship the product to your customer;
Your customer receives the order.
*The retail price is the price you set for the product to make a profit, taking into account several factors further explored down below. The wholesale price is the cost at which you buy the product from your supplier.
However, just because you are not stocking inventory or taking care of shipping does not mean that your hands are fully untied. There are still several aspects to consider before starting your business, including the following:
Choosing an eCommerce platform/website builder that is easy to use and provides all of the necessary features
Designing an online store that is professional and user-friendly
Partnering with reliable suppliers that source high-quality products
Investing in marketing, SEO, and SMM activities to gain traffic and attract customers
Providing a great customer experience across the buying journey
But fear not! By the end of this guide, you will possess the knowledge necessary to start a dropshipping business and more. Now, let’s get into some of the details.
Understanding the Supply Chain
The supply chain for a product is the lifecycle it goes through until it reaches the customer. In the case of dropshipping, this starts with the manufacturing process and ends with the final delivery - the same as with any other business.
There are three key players in this process:
Manufacturers - organizations and factories that create the initial product. They do not sell directly to the public and will usually sell to wholesalers in bulk quantities.
Wholesalers - individuals or organizations that buy products from manufacturers, usually in bulk. They stock the products, slightly raise the price (referred to as a markup) and then sell them to retailers. Like manufacturers, wholesalers do not generally sell to the public. They are essentially the suppliers in this chain.
Retailers - individuals or organizations who purchase products from wholesalers and sell them directly to the public at a markup price. If you run a dropshipping business, it means you fall into this category.
As we’ve only listed the general steps of the dropshipping supply chain, let’s factor in the players:
A manufacturing company produces mass quantities of a specific product;
A wholesaler purchases that specific product from a manufacturer, usually in bulk;
The wholesaler then imports the products onto their online platform at a slight markup price, where dropshippers can browse and add the products to their online store;
The dropshipper connects with the supplier (i.e., the wholesaler) and notifies them that they added the specific product to their eCommerce platform, setting the retail price;
A customer visits the eCommerce platform and decides to purchase the specific product, placing an order and paying the retail price;
The dropshipper pays the supplier the wholesale price once the order is placed, and the supplier begins to process and pack the order;
The supplier ships the product to the customer. If this were a traditional online store, the retailer would be in charge of packaging and shipping instead - a fundamental difference in the supply chains.
Setting the Retail Price
We’ve mentioned the terms “wholesale price” and “retail price” quite a lot in this chapter. For your dropshipping business to be profitable, you need to set a retail price that takes into account all of your costs.
When pricing your product, some expenses you need to take into account will include:
The wholesale price of the product
The wholesale cost of shipping
Your marketing and advertising costs
Employee salaries, if it applies
Ongoing website maintenance fees (e.g., the cost of your current eCommerce plan, any paid apps or services, etc.)
What concerns shipping, you can choose to provide free shipping to your customers by including the wholesale shipping cost in your retail price or charging your customers separately by including a shipping fee - more on that in Chapter 7.
Aside from calculating your expenses, it is also a good idea to carry out a competitor analysis. Take a look at some of the online stores selling similar products to your niche. What retail prices do they set? Do they offer discounts? Do they charge customers shipping fees? You don’t want to set the price much lower than your competitors since very generous prices can imply low quality. Likewise, you don’t want your markup to be too significant, as high prices may encourage your customers to search for cheaper alternatives.
A markup of 2.5 - 3x is usually a good strategy to adopt, but give yourself some room to test different options and observe the response.
The Benefits of Dropshipping
For many aspiring retailers and entrepreneurs, dropshipping is often a great way to get started and enter the sphere of eCommerce. But why is this so? Listed below are the main benefits of becoming a dropshipper. Let’s dive in!
Easy to get started
With the right tools, you can set up a dropshipping business quickly - potentially in one day. All you need is a good website, reliable suppliers, and the knowledge to start a dropshipping business (since you are reading this guide, consider the knowledge aspect covered). Given that you are not dealing with physical inventory, you do not need to worry about stocking products, securing a warehouse, renting an office, setting up shipping, recruiting employees, and so on. This also allows you to allocate most of your resources and time to marketing activities, which will help you to scale your business more effectively.
Low Startup and Maintenance Costs
Another incentive lies in low startup costs. With dropshipping, the only costs you need to worry about are the costs associated with your website plan, advertising, and the wholesale price of the products you source. Even then, you only pay your supplier when a customer places an order on your site, which means there are no upfront costs for inventory either. The costs of starting a dropshipping business are meager in comparison to a traditional retail business, where you would have to pay for everything - inventory, warehousing, rent, salaries, facility maintenance, and various overhead costs. Everything else that concerns marketing and advertising - you are in charge of your budget.
Scalable Business Model
Since you are not in charge of stocking, packaging, and shipping products, you have significantly more time to focus on marketing activities and growing your business. After all, advertising, marketing, and effective SEO are the ingredients to making your eCommerce store an online sensation. We do not promise success overnight, but the combination of factors that come together during dropshipping will definitely allow you to become successful faster.
Easier to Test
As opposed to traditional retail models, dropshipping does not require you to buy in bulk. Moreover, you only pay your supplier when a customer orders a product from your website. This allows you to test out as many products as you want and see what works best. Experiment with products, pricing, and even marketing strategies to determine what users gravitate towards.
Running a dropshipping business allows you to be flexible with your location and time. You don’t have to go to an office, monitor employees, or even visit a warehouse. As long as you have an internet connection and maintain regular contact with customers and suppliers, when and where you work won’t really matter.
A Wider Product Catalog
As mentioned above, you can add and test a wide variety of products. There are thousands of suppliers and online wholesalers with extensive product catalogs, which will allow you to add just about any product to your online store. Still, it’s best to stick to a particular niche and then test products within it.
Challenges of Dropshipping
As with any new business venture, you can’t expect everything to be sunshine and rainbows from the very beginning. Despite the many benefits that dropshipping offers, some challenges may arise when dealing with this model. Nevertheless, for every problem, there is always a solution! Let’s go through them one by one.
Lack of Quality Control
Since you rely on one or more suppliers to source your products, you do not have direct control over the product quality. Because of this, many issues can arise - product defects, lost orders, or bad reactions in the case of cosmetic products. However, since you are the entity that customers are purchasing from, you are liable for such issues. Customer complaints will not be sent to your suppliers - they will be sent to you.
One excellent way to tackle this is by ordering samples from the supplier. Not only will you be able to see, feel and test the products yourself, but you will also be able to take your own photographs of the items and use them as the product images.
You can also avoid quality issues by doing a more in-depth investigation into the products you source. For example, if you choose to work with suppliers from Aliexpress, there are a couple of lifehacks you can use to avoid quality issues in the first place:
Check out customer reviews of the product you want to source. What are customers saying? Are they happy with the quality, service, and shipping?
Look for visual assets in customer reviews and see if they match the product image. Stay skeptical of sourcing products where the only photo available is the product image posted by the supplier. You want to see what the items look like in real life.
Finally, don’t forget to stay in touch with your suppliers! Establish mutual trust, get familiar with their refund policies, and check their level of customer service. If you are dissatisfied with the level of customer service they offer to you as the retailer, it’s a sign that you need to reconsider working with them.
Long Shipping Lead Times
Many suppliers are usually based in China, meaning that your customers will be required to wait approximately 3-4 weeks, if not longer, to receive their products. In the current environment of almost-instant shipping provided by giants such as Amazon, you will have to amp up the quality of your website and customer service to establish competition. Ensure that there is a good tracking system in place, either offered by your supplier or dropshipping platform (if you choose to go with the latter), and address all customer concerns regarding delivery time. One way to avoid long shipping lead times is to opt for a local supplier, so consider exploring local options.
Remember when we said it was easy to get started as a dropshipper? Well, this aspect can either work in your favor or equally against. Since it is possible for anyone to become a dropshipper (with the proper knowledge), and the startup costs are pretty low, the entry barrier also becomes pretty low. Dropshipping is a very competitive industry, with many people rushing to open such online stores due to the vast number of benefits. This means you have to make an effort to stand out - starting with the choice of niche, construction of the website, how marketing strategies are put in place, and how you deliver customer service. Likewise, it is also necessary to research competitors in your niche to understand what works and what doesn’t.
Issues with Inventory
As briefly mentioned above, you are not in control of the inventory as a dropshipper - your suppliers are. This means that several problems can arise; suppliers may run out of stock for a specific product, inventory might be lost at any point during the dropshipping process, production defects can occur, and so on. Given this risk, it is necessary to work closely with your suppliers and study their policies on refunds, lost orders, and other potential issues.
Dropshipping and Customer Experience
When it comes to dropshipping, providing a good user experience and 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 (meaning more customers). You need to give people an incentive to purchase from your store instead of buying from your competitors or directly from AliExpress.
You may be wondering why customers buy from dropshippers at a higher retail price when they can just purchase the same products from Aliexpress for much cheaper. The answer - customer experience! Remember, customers want a seamless experience across all selling channels, a user-friendly and navigable website, and good customer service. These are some of the factors that many large suppliers usually lack. We’ll be covering this in more detail in Chapter 4.
So, there you have it - the basics of dropshipping! Next stop - deciding on the type of dropshipping store you want to open.