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What Is Dropshipping? (A Complete Guide)
May 26, 2021
What if you could open an online store without needing inventory, packaging, and shipping facilities? It may sound far-fetched, but that’s exactly what dropshipping empowers you to do.
Dropshipping is an e-commerce model that allows businesses to fulfill customers' orders without stocking any products themselves. Instead, they source their inventory from third-party vendors and ship them to their customers. Every aspect of distribution, from packaging to shipping, is handled by the supplier.
You’re probably here because you’ve heard that dropshipping has low overhead costs and requires little capital to start. However, you also need to understand that it is not as glamorous as it’s often painted. I encourage you to read through this whole article to understand the true nature of dropshipping.
Many Shopify stores use dropshipping as a complimentary source of sales, and for the most part, they have gotten the formula for success down to a science. That’s the information I’ll be sharing with you in this comprehensive dropshipping guide.
How Does Dropshipping Work?
It starts with the customer ordering a product listed by the vendor. The vendor then passes on the order to the supplier with instructions on where to ship it.
Although the customer purchases from the vendor, it is the supplier that fulfills the order. The vendor only pays for the product, usually at a discounted price, which is only possible if they work directly with a manufacturer or wholesale supplier.
That’s where the profit margin lies—in the difference between the initial item cost and the vendor’s resale price.
The supplier handles packaging and shipping while the vendor focuses on marketing products, providing good customer service, and establishing their presence online.
They don’t need a warehouse because they don’t handle inventory directly, and they only need to pay for shipping products to their customers.
What Are The Benefits Of Dropshipping?
Entrepreneurs are flocking to dropshipping because of its low entry costs. The order fulfillment method takes away most of the hassle of running an e-commerce store with your products.
Its benefits are eye-catching, to say the least, especially for startups looking for an easy way into e-commerce. They are:
Demands Less Capital
One of the biggest obstacles you have to overcome when launching an online store is the large inventory you need to buy.
Before dropshipping, retailers had no choice but to tie up thousands of dollars worth of capital in inventory that they had to buy upfront. This was a considerable risk to undertake, especially since there was no guarantee that the stock would sell as projected.
Dropshipping eliminates that risk by making it possible for entrepreneurs to buy their inventory after a sale is made. By the time they contact the supplier to order a product, the customer has already paid and is awaiting shipment.
Without the need to have a sizable inventory before you can start selling, it is possible to start an e-store with very little capital. There’s absolutely no pressure to sell through your stock because you get all your inventory from third-party suppliers.
There’s also no risk of ending up with dead stock. You only purchase products after there is a demand for them.
Easier To Launch
A warehouse, packing materials, inventory tracking systems—these are just a few of the requirements for starting an online store that fulfills orders in a conventional manner.
However, you don’t have to deal with physical products or even manage a sizable inventory when you sell via dropshipping.
It takes away a lot of the hassle of starting an e-commerce site, including keeping track of stock levels to ensure timely restocking, dealing with inbound shipments like returns, and paying for/ managing a warehouse. Dropshipping only requires you to have an online store, suppliers, and customers.
Low Overhead Expenses
Most entrepreneurs that sell products via dropshipping do it from home. With such low overhead expenses, you need little more than a laptop, an internet connection, and a little money for recurrent expenses to get started.
Of course, these expenses grow as your business expands, but compared to running a brick-and-mortar store; they may even seem insignificant.
It Can Be Carried Out Remotely
All it needs is an internet connection, so dropshipping allows entrepreneurs to work flexibly in terms of location. As mentioned earlier, most of these businesses are home-based, and that’s because you can manage your entire company—from customers to suppliers—from your laptop.
Lots Of Products To Sell
One of the biggest perks of selling via dropshipping is that you can sell anything at any time without the logistical hassle of clearing old stock and buying new inventory.
It’s an excellent way to take advantage of trending products and goods that perform well seasonally. Also, you have a wide array of products at your disposal, and you only need to check their availability before listing them on your e-commerce store.
Lets You Gauge How Well A Product Sells
We can all agree that the most significant benefit of dropshipping is that you can sell products without purchasing large quantities of inventory upfront. That comes with yet another advantage: the ability to test customer appetites for specific products before committing to buy.
For example, if you sell cameras online, you can use dropshipping to check how well camera accessories sell before permanently including them in your listings.
This advantage can also be enjoyed by entrepreneurs launching new product lines or a new online store.
Easy To Scale Upwards/Downwards Depending On Market Trends
In a traditional e-commerce setting, getting double the amount of orders means doing double the amount of work to fulfill them. You’re packing and shipping twice as much, so you need to work twice as hard.
The more business you get, the more work you need to put in. That’s why scaling a business can be a huge challenge for small startups.
Dropshipping is different. Even when the demand goes up, the work input for the vendors barely changes because most of the fulfilment process is handled by suppliers.
Therefore, it is much easier to scale upwards when you’re selling via dropshipping. It is also easy to scale downwards when business is slow because the overhead costs generally remain the same whether you’re selling more or fewer products.
The Disadvantages Of Dropshipping
It’s easy to assume that dropshipping has no downsides, but its convenience and flexibility come at a steep cost.
Even though it’s a good approach to consider when launching an online store or expanding product offerings, that notion couldn’t be farther from the truth.
Dropshipping comes with drawbacks that can make any entrepreneur think twice about selling using this approach. These drawbacks include the following:
Dropshipping has very low capital requirements, so that anyone can do it. The problem is that it can get very competitive, especially in popular niches like electronics, fitness, and self-care.
The low overhead costs allow entrepreneurs to undercut product prices as much as they want in order to attract more business. It is possible because a business that doesn’t require a lot of initial investment can survive on minuscule profit margins.
That’s a problem for you, especially since your price point will be a crucial factor influencing the demand for your products. You might be forced to take home very little in the way of profits, making dropshipping seem like not such a worthy venture. Fortunately, there are a few workarounds for this.
For starters, you can make your website look more professional, which is easier than you think. Dropshipping attracts a lot of low-budget entrepreneurs with poorly made websites and low-quality content.
If you can build your store around a website with superior quality, you will potentially attract more customers even with a higher price point.
But the reality is that this isn’t often the case. Ultimately, customers are going to want the lower prices, and if you can’t match the profit margins set by your competition, you can be bullied out of business.
However, another way to avoid being stuck with low margins is by picking the right product niche. Some niches aren’t very popular, or the prices are so low that it’s not feasible to undercut them any further, so they might help you avoid this problem.
Complicated Shipping Processes
Working with multiple suppliers can complicate your shipping costs, especially when a customer orders products from different suppliers. In such cases, the entrepreneur incurs separate shipping costs, which can be more expensive.
Passing on high shipping costs to your customers will drive them to look for a cheaper option, so it’s not advisable. Yet, there’s no way to stop them from ordering from separate suppliers, so the responsibility for shouldering exorbitant shipping costs falls squarely on you.
In the event that you can pass on some of these costs to your customers, you’ll have to do it manually because it’s hard to automate. That makes dropshipping from multiple suppliers potentially expensive and time-consuming.
Little Control Over Product Branding
Vendors have little control over how the product is customized or branded before shipping out. All that is done at the supplier’s discretion, so unlike stores that sell custom-made products, vendors using dropshipping don’t have much say over how the final product ships out.
There are some suppliers that take requests for product customization, but for that to happen, you must meet a minimum purchase requirement. That means you have to buy a sizable inventory to get custom-made products, and that deprives you of the main benefit of dropshipping.
Errors from suppliers can cost you steeply in terms of reputation. Remember, you’re the one dealing with customers, not the suppliers, so you have to answer for all mistakes, even when you’re not responsible for them.
Picking the right supplier is crucial for this exact reason. However, no one is perfect, and even the best suppliers make errors every so often.
Low-quality suppliers can be a constant source of frustration if they repeatedly botch shipments or pack items poorly. It’s your reputation that suffers, and if it becomes a repetitive issue, you’ll lose your customers' trust.
Hard To Track Inventory
Of course, you don’t need to track inventory if you’re not stocking it in-house, but that also means that you’re not always up to date on the availability of the products you sell.
Your suppliers fulfill orders for several other merchants, so the inventory changes on a near-daily basis.
Luckily, we have apps that let you synchronize with suppliers, and they can help you keep track of inventory from multiple suppliers in real-time.
How Much Does It Cost To Start Dropshipping?
The initial cost of dropshipping is what attracts entrepreneurs to invest in it. Exactly how much do you need to spend to get started?
We’ll be looking at the estimated cost of dropshipping in this section.
Note: these won’t be actual figures but estimates since there are a lot of different factors that come into play.
What You Need
An Online Shop
The first order of business is looking for an e-commerce platform from which to launch your online store. This platform will also serve as a host for your store, so it’s vital that you choose wisely.
A good place to start is Shopify, one of the biggest e-commerce platforms available. It offers marketplace integrations like Oberlo, great customer support, and free branding tools.
You can launch an e-store from Shopify for about $30/month.
A Custom Domain Name
A domain name is necessary to build trust with your customers. It’s essential to choose a domain name that suits your business and has a .com extension. A domain name may cost you between $5 -$20 a year.
You’ll need to test out a handful of products before you choose what to sell on your e-commerce store. This is vital for ensuring that the products you ultimately list on your store don’t have any defects or shortcomings that will make your customers unhappy.
Remember, poor quality products will be returned, and as damaging as that is to your reputation, it can be just as bad for your budget.
The cost of these initial test products will vary based on what they are, your supplier, and shipping costs.
The larger chunk of your budget will go towards marketing the products you sell on your online store. You’ll need to invest in paid marketing activities like display ads, search engine marketing (SEM), and social media ads.
You can cut down marketing costs by finding consumers organically, that is, through SEO, content marketing, and referrals. Advertising will cost you a minimum of $500.
From the information above, we can speculate that the total cost of launching a dropshipping business ranges between $600 -$1,100.
Approaching Dropshipping The Right Way
Should you model your entire business around dropshipping, or should you use it to compliment your existing e-commerce company?
I recommend the latter because dropshipping isn’t meant to be the main event. Building your company around this order fulfilment method leaves you vulnerable to all the drawbacks we discussed earlier, but using it strategically to enhance your services and keep costs down can be very rewarding.
There is a right and wrong way to implement dropshipping, and in this section, we’ll be discussing all the right approaches to use to get the most out of dropshipping.
Dropshipping To Conduct Market Research
Dropshipping might not be viable for long-term implementations, but it is certainly valuable for temporary projects like market research.
It can help you avoid the risks involved in introducing a new product by allowing you to perform market research cheaply. You don’t need to stock up on an unpredictable product when you can source it from the manufacturer and have it shipped to your customers.
The benefits of using dropshipping for market research are:
- You’ll be able to gauge how well a product sells before buying a large inventory.
- It helps you know how much a product sells for, information that’s useful when deciding the quantity of the product to stock at a time.
- It frees up your resources (your warehouse, cash reserves, and workforce) to focus on products that perform well, so you can conduct market research on new and unpredictable items without disrupting your day-to-day operations.
Dropshipping is extremely useful for experimenting with new products. For example, if you sell hoodies and sweatpants but would like to venture into shoes, you can use dropshipping to see how your customers respond first.
If the shoes sell as well as you expect, then you can include them in your inventory. If they don’t, you can easily turn your attention to something else and repeat the experiment.
You can avoid costly commitments on risky products by using dropshipping for market research.
Dropshipping To Cut Down On Shipping Costs
A client that lives three states away wants a product from you. Is it cheaper to ship it from your warehouse or to source it from a manufacturer in his state and have it shipped to his address?
In some cases, dropshipping can be a cheaper alternative to conventional order fulfilment.
Maybe shipping normally would cost too much or would incur extra fees and taxes, which is usually the case when shipping across state lines.
Dropshipping is also an alternative to setting up shipping centers in cities where the cost of storage is too high. It’s a means of researching supply trends in different locales so that it can facilitate geographic market research as well.
Dropshipping To Prevent Overstocking
The unpredictable nature of market trends can drive you into stocking more products than you need in anticipation of a hike in demand.
Apart from raising inventory costs, overstocking can leave you with dead stock and tie up funds that could be used to improve elsewhere.
A better approach is to use dropshipping to meet a surprise bump in demand. You can save money and get sales by using dropshipping when your inventory runs out.
What’s more, you can focus on stocking products that sell rather than experimental inventory that may or may not move as much as you’d like.
Dropshipping can also be used as insurance from unpredictable events like fires and natural disasters.
Instead of housing valuable stock that could be lost unexpectedly, dropshipping lets you shift all the responsibility of handling the inventory to your suppliers.
It can also serve you well when a shipping emergency causes delays.
Dropshipping To Reduce The Cost Of Stocking And Shipping
High maintenance products can drive up warehouse and shipping costs. Products can be considered high maintenance for a lot of reasons. For instance:
- Heavy products cost more to ship.
- Large products require bigger storage facilities.
- Fragile products require a lot of care when handling, so they cost more to ship and stock.
- High-value items attract extra fees for secure storage and transportation.
- Sensitive products like fresh produce may require special refrigerated spaces for storage and shipping.
It minimizes the risks of dealing with valuable items, saving you the money you might have spent on security and special shipping equipment.
How To Get The Best Dropshipping Suppliers
Adapting dropshipping to your business strategy in any capacity means you must partner with suppliers.
Choosing the best supplier requires care and consideration. Before making the final decision leading up to the signing of the Dropshipping Agreement Contract, get answers to the following questions:
- Will my orders be insured?
- What’s your return policy for damaged and defective goods?
- How quickly do you fulfill orders?
- Do you offer fraud protection?
I also recommend ordering a product to test the supplier’s product quality and shipping efficiency. It gives you a taste of how long your customers will have to wait and gives you a sample product to evaluate.
It’s also a good idea to check on customer service to ensure that they’re quick and responsive on all their contact channels.
Lastly, go online and look for the supplier’s references and reviews. They’re often the most telling indicator of a business’s standards of operation.
To Jumpstart Your Research, Here Are 14 Excellent Suppliers To Consider
AliExpress connects dropshippers to millions of products and suppliers in forty niche categories. The wholesale distribution platform specializes in a diverse range of products, including apparel and electronics. It is also free to join and a suitable option for general e-commerce.
If you’re shipping items within the US, Suppliersdata.com can help you find a lot of “hidden” suppliers within the country. It costs $29.95/year and allows you to shortlist suppliers and place them on your watchlist to contact later
Spocket is a marketplace for dropshippers where you can find thousands of suppliers based in Europe and America. Spocket offers a subscription-based service for dropshippers that includes paid plans and a free dropshipping plan.
Doba compiles suppliers and manufacturers into groups based on the type of products they offer. It allows you to sort suppliers by any product and save them into custom lists for quicker access. Doba offers a number of subscription plans starting from $29/month.
Wholesale2B has over one million products from hundreds of suppliers, making it a respectable supplier integration system. You can connect it to selling platforms like eBay, Amazon, Shopify, or a custom ecommerce website. Although this supplier source is free, you may need a subscription plan to sell on your preferred app.
The SaleHoo wholesale supplier directory includes suppliers based in Australia, United Kingdom, and the United States. It features products from a variety of niches and costs $67/year to use. However, there’s a 30-day money-back guarantee that lets you test the product before committing.
National Dropshippers offers over 250,000 products at wholesale prices below 50% of the MSRP. You can access a wide range of products here, including BBQ grills, tents, pocket knives, and custom-made umbrellas. The platform charges $2.49 for every dropshipping order, plus a $19.99/month subscription fee.
OfficeCrave.com has a massive selection of office supplies, electronics, industrial supplies, and business products. There are over 100,000 products available in the store, making this a valuable source for office supply dropshippers.
OfficeCrave.com is free to join, which you can do by accessing the sign-up form on their dropshipping information page. It also offers blind shipping to customers across the United States.
MegaGoods is a viable dropshipping solution if you’re looking for electronic goods like televisions, kitchen appliances, clocks, cameras, and Bluetooth devices. They charge a general service fee of $14.99/month.
This is a general dropshipping platform that hosts over 890 suppliers and 1,700,000+ products. They offer a variety of goods, including jewelry, electronics, and beauty products.
You can choose to pay a one-time $99.00 access fee for their list of dropshippers or pay $69/month to get the products directly from Dropshipper.com.
Wholesale Central is a dropshipping directory that is free to access. It offers products in categories such as pet supplies, books, and candles. The directory is classified according to product type and features several product niches.
Inventory Source gives you access to over 150 suppliers and connects to shopping platforms like BigCommerce and Amazon. It helps you keep track of inventory from all suppliers and sync product data from your dropshipping sources. It offers a number of pricing plans starting from $50/month.
Sunrise Wholesale offers 15,000+ products in categories like health and fitness, jewelry, and home décor. Like other dropshipping integrations, it connects to Shopify, eBay, Amazon, and BigCommerce. Membership fees start at $29.95/month and $99/year.
Worldwide Brands is a directory for wholesalers and bulk distributors across all niches. The directory certifies and qualifies all suppliers as reputable and reliable and consistently updates their supplier list. The directory is accessible through a one-time $249 access fee.
Dropshipping FAQs: Everything You Need To Know About It
To recap, dropshipping allows vendors to fulfill orders from a third-party supplier who can ship directly to their customers.
The vendor lists the product on their store or website and passes each order to the supplier, who fulfils it.
The vendor enjoys a small profit from buying products at wholesale prices and selling them at retail prices. The supplier benefits from increased sales and free marketing.
The vendor doesn’t store any inventory and therefore avoids warehouse costs, but they spend money on creating an online presence and advertising the product. They also pay for shipping, although that depends on the agreement contract they have with their supplier. Here are some of the most frequently asked questions about dropshipping.
Why Get Into Dropshipping?
Even though it’s not the most lucrative venture, dropshipping can be a worthwhile activity for the majority of e-commerce retailers.
It keeps startup risks low, requiring little in capital investment and inventory to flourish. Dropshipping isn’t expensive to start; it’s more time-consuming than anything because most of the hard work involves looking for a decent supplier.
Dropshipping allows you to sell products at a lower cost, and if you’re competing against stores that don’t dropship, you can comfortably outsell them with your lower prices. Low prices are a fantastic incentive that encourages people to buy more, especially when there is a time limit or finite stock.
You can sell any product you like using dropshipping because there’s a diverse range of options. Regardless of your niche, you can find suppliers for all types of relevant products to your business.
There are no storage or inventory costs involved, and so dropshipping can be cheap to start. Even so, it is a very scalable mode of business that grows without demanding more resources.
How Do I Get Started With Dropshipping?
Assuming that you already have an online presence and possibly an e-commerce store, launching a dropshipping business can be a straightforward, hassle-free process Here is a step-by-step breakdown.
Step One: Product Research
Find products that fit your customer base, marketing strategy, and market.
Step Two: Market Research
You need to know how the competition sells the product, and more specifically, how they price it.
Step Three: Find a Supplier
There are suppliers in every product niche you can think of. Use the checklist above to narrow down the best options.
Step Four: Draft An Agreement Contract
Iron out the fulfilment details with your supplier and work in the process into your system.
Step Five: List Products
List the products you want to dropship and include information such as special shipping times or fees.
Step Six: Register Your Business
You don’t need to do this right away, but you’ll need these credentials to withdraw and deposit funds with digital payment providers once the sales start picking up.
Can I Profit From Dropshipping?
Yes, as a merchant, you may find dropshipping profitable, especially if you narrow in on a niche that’s lucrative to you and find a great supplier.
You can become profitable faster with dropshipping than with other business models because of the lower overhead costs.
What Can I Dropship?
If you’re looking for general dropshipping ideas (not niche-specific), here are some products that might interest the vast majority of e-commerce entrepreneurs:
- Branded merchandise (pens, caps, t-shirts, mugs, tote bags, etc.)
- Tote bags for charity
- Novelty items like t-shirts and mugs with funny anecdotes.
- Cheap jewelry or watches.
- Branded smartphone covers.
Alternatively, you can perform market research to find out what products will sell better.
Can I Dropship Products From eBay and Amazon?
Yes, both eBay and Amazon allow dropshipping.
On eBay, it is called “product sourcing,” and any vendor can participate provided that they accept full responsibility for the safe and timely delivery of the item.
The platform is quite supportive of dropshippers as it doesn’t require them to reveal that their products are sourced straight from the supplier.
Amazon permits dropshipping as well, but only if the following conditions are met:
- Dropshippers can’t purchase from another retailer and have the product shipped to the customer, and;
- Dropshippers can’t use another seller’s name and contact information on their invoice slips.
- The vendor must agree to be the seller on record and appear on all documentation as such. They should also be capable of fulfilling all the associated responsibilities, such as product returns.
Can I Dropship Internationally?
Yes, but this largely depends on your supplier.
International shipping can get costly quite fast. You need to quickly get accurate estimates for shipping, customs, and duty fees for hundreds of countries to be an international dropshipper.
Most of the time, it’s not a worthy pursuit. It takes longer to process international orders, plus there is a lot more paperwork involved. There may also be an uneven distribution of fees, so knowing the exact estimates for different orders can be a nightmare.
Is Dropshipping Legal?
Dropshipping is 100 % legal, but you need to ensure that your suppliers (and their products) don’t infringe upon any laws.
There are no legal grey areas with the fulfilment method itself, so ensure you protect yourself as a vendor with the Dropshipping Agreement Contract we touched on earlier.
How To Be A Successful Dropshipper
With so much to learn about dropshipping, it’s easy to forget the few valuable things that can bring you success.
Dropshipping might be relatively new, but already, there is a right way to do it to earn more success, whether that means growing your customer base or selling more products for you. These are the four tips for dropshipping success.
The best way to set yourself apart is to add more value than your competition. All businesses need this to succeed, but with dropshipping, value can give you a huge edge over your competition, even if their prices are lower.
Don’t think about it as selling a product to a customer; think about it as selling solutions, insights, and information that your customers find useful.
The only thing that can beat good value is a lower price, but you won’t be able to build a business by undercutting your competitors. You need to provide real value.
All successful dropshippers have one thing in common: they are highly specialized. Specialization gives you a smaller market to compete in. More importantly, it narrows down your target audience.
Specializing means targeting a very specific audience. For instance, rather than just selling beanies, you can sell beanies with cool designs for skateboarders. That way, you’re not just another business selling hats online; you’re a source of cool skateboard merchandise too.
Specialization allows you to refine your marketing strategy because you know exactly who your buyer persona is. When you can consistently meet their needs and demands, your sales are guaranteed to skyrocket.
Marketing And SEO
When launching a dropshipping business, one problem you’re bound to face is a lack of customers.
That’s why focusing 75 % of your time and resources on marketing and SEO, at least for the first four to six months, is absolutely vital to your success.
Marketing is the engine that will drive customers to your business. Once you set up a nice foundation, you can redirect your focus on other aspects of the business—but only if you have a steady traffic source to your website and store.
The reputation of your business depends on how well you treat your customers. With the rise of social media, transparency in businesses has also increased.
These days, you can learn more about a business from its online reviews than from its official website.
That means that potential customers can find out about you long before they visit your store. If the reviews from your customers are negative, they’re not even going to bother visiting your website.
Great customer service makes an impact on your customers, just as poor customer service doesn’t go unnoticed. If you’re recognized for offering above-the-cut services, you’re going to attract more customers because that is in short supply on the internet.
You can have the highest prices in the niche, but most people won’t mind paying just a little more for better services if you back it up with stellar customer service.
About THE AUTHOR
After working for multiple digital advertising agencies and managing hundreds of client accounts, spending millions of dollars via Google Ads, Facebook Ads, Native Ads and Direct Media Buying, I took things out on my own and started SparrowBoost. Now, my tight-knit team and I continue to get smarter and more efficient for our strong client base.Learn more about SparrowBoost