What is Drop Shipping?
Drop shipping is a retail fulfilment method in which customers order through your website/store and goods are delivered to them directly from the manufacturer/distributor. This fulfilment method allows you to sell products on your website without having to warehouse or ship them yourself. You essentially work as a middle man that takes orders from customers and fulfils them through the manufacturer. Here is how it works:
- You sell products on your ecommerce store/through an established platform without having to stock them in a warehouse
- When a customer places an order, you send the order to the dropship supplier/manufacturer/distributor/retailer
- The dropship supplier gets the order ready and ships it directly to the customer
Why Start a Drop Shipping Business?
Many people are sceptical of starting a drop shipping business due to a variety of reasons. Limited information, uncertainty about suppliers and communication issues all add up to the equation. However, despite all these hurdles and intense competition, a drop shipping can still be profitable.
Around one-third of ecommerce businesses are now using drop shipping to fulfil orders and the number is expected to increase as more businesses switch to the fulfilment method. Whether you want to work as a full-time drop shipping business owner or looking for some extra passive income, drop shipping can be the right fit. However, it might not be perfect for everyone as it also has its own set of disadvantages. Let’s have a look at the pros and cons of the fulfilment method.
Advantages of Drop Shipping Business
- You can run a drop shipping business from anywhere using the internet
- The drop ship supplier takes care of most things related to fulfilling an order, your order fulfilment costs are low
- Since you don’t have to stock anything, you can offer your customers more variety
- It makes starting an ecommerce business simple and easier
- Minimal upfront costs, no huge capital required to setup a new business
- Can get started even if you are not a developer, e-commerce platforms allow you to add new products in just a few clicks
- You don’t have to bear the costs associated with warehousing and managing inventory
- Minimum risk involved as you only order what the customer actually wants to buy
- Can change the product catalogue without having to worry about dead inventory
- Can easily adopt according to changing trends and customer behaviour
- Many drop ship suppliers don’t charge you an extra fee to working with them
- Many suppliers allow you to brand their products with your labels, allowing you to establish your own brand without having to manage everything yourself
- You can start small and experiment with eCommerce. It offers a great learning experience with a upside potential
Disadvantages of Drop Shipping
- Less barriers to entry mean fierce competition, drop shipping business is highly competitive
- Drop shipping is not always a high-margin business. Anyone can join in and starting offering the same product at a cheaper price or even at a small loss to acquire new customers
- Profit margins have become narrower as more people join the bandwagon
- You need to generate a lot of sales to compensate for low profit margins, while still having to face the competition for each sale
- You don’t get complete control over the order fulfilments and returns
- Despite less control, you still have to deal directly with the customers
- Establishing a strong brand around the drop shipping business is difficult, especially if you are selling a wide range of products
- You have to rely on the stock of other seller and cannot make a sale if they run out of stock, which could mean lost customers and longer lead times
- Drop shipping can affect the quality of customer services. A supplier might not be very interested in dealing with customer issues so you have to face the music if the supplier delivers a damaged/wrong product
- You are the seller and responsible for the products. Pick the wrong supplier and you’d have to deal with annoyed customers
- You need strong connections and reliable suppliers to work with. Google might not be the best place to search for ‘drop ship suppliers’ (it takes a lot of work to find reliable suppliers)
- Any miscommunication with the drop ship supplier can lead to longer delivery times, unexpected backorders, cancellations and ultimately unhappy customers
How to Start a Drop Shipping Business?
Choose Your Products
It’s highly recommended to stick with product categories you are familiar with. Keep in mind that you have to deal with the customer support and have to answer any queries related to products. If you don’t know much about the products you are selling, you’d have to go back and forth with the supplier. This could result in delayed response and all sorts of other problems.
- Choose a niche based on your own interests, experience and knowledge
- Research the competition and choose a niche with medium competition. It’s hard to compete in saturated niches and no competition usually means there is no demand for the product
- The higher the profit margin a niche offers the better. Avoid choosing niches with too little profit margin
- Identify the competition and analyse their listings and customer reviews. You’ll get a wealth of information that would help you outsmart the competition. Look for ways to improve on what the competition is doing
It’s better to target somewhat expensive products from your niche as the amount of work to sell a $10 item is almost the same as a $200 product. A relatively expensive product usually means higher profit, but try not to select too expensive products. In most cases a product with no competition is the one with no demand. It’s very rare that you’ll come across a product with high demand but no competition.
It’s better to select products that can be white labelled, allowing you to establish your own brand down the road. Selling products that are not readily available locally make your business more attractive to the local audience and can help generate more sales.
Some characteristics of drop ship products to focus on include:
- Generic, no-brand products (without compromising on quality)
- Lightweight and easy to ship (weights under 2KGs and fits nicely inside a shoe box)
- Non-seasonal, year-around products (at least in the beginning)
- Medium-priced (up to $200), better not to focus on too cheap or very expensive products
Online Tools
Use online tools such as Google Keyword Planner to identify the types of products people are actively searching online. You can also browse through Amazon’s top selling products section to see which items are hot.
Supplier Screening
Selecting reliable suppliers is perhaps the trickiest part in the drop shipping business. You know what products to sell, but you still need a partner you can trust. The best way to search for suppliers is through personal connections and word of mouth. Searching online for drop ship suppliers might be easier, but there is no guarantee that they’ll deliver what they promise on their website.
Platforms such as Yellow Pages and wholesale directories can serve as a good starting points but you still have a lot to do to find reputable drop ship suppliers. Some important things to consider while selecting a supplier include:
- How long they take to ship orders?
- How they ship and track?
- How would they manage returns and exchanges?
- What is their reputation in the market, can they provide some references?
- How they communicate? If an overseas supplier cannot communicate properly, you should move on with your search
Shipping Costs
Although your drop ship supplier is going to handle most things related to packing and shipping, you need to consider the costs of shipping. High shipping costs add up to the total cost and customers might buy the same product from somewhere else if they have to pay less shipping. You can also consider offering free shipping if you can absorb this cost as a business expense.
Where to Sell
You have different options to choose from when selecting a platform to sell your products. This includes selling directly through the drop ship supplier (orders go through your site) or through established platforms such as eBay, Amazon and Etsy.
Working with established platforms is a better option if you want to get started quickly without worrying about setting anything up on your own. Creating your own site works better if you are planning for the long haul. It’s a good idea to use online tools that help you calculate fees such as the AMZScout FBA fee calculator, allowing you to make a more informed decision about choosing the viable platform.
Build a Website/E-Commerce Store
Gone are the days when you were totally dependent on a developer to setup an e-commerce store. Although you might need some help from time to time, many platforms such as Shopify allow you to get started on your own and start adding products. It’s better to hire a web designer/developer if you have a sizeable budget to ensure everything is working as it should.
Your own website gives you complete control over branding and user experience and it does not cost much to register for one. You also don’t have to pay any fees and depend on third-party platforms. However, you’ll miss out of the kind of traffic established platforms such as Amazon offer and have to invest a lot of time and effort in establishing your own website.
Get Noticed
It takes time and effort to get noticed in search engine results. But there is a lot you can do to get noticed quickly. Different paid solutions include Facebook and Google Ads for eCommerce, while free solutions include social media marketing, blogging, content marketing and email marketing.
Drop Shipping Business Recommendations
- Pick a product category you are familiar with. Avoid jumping into PC components if you don’t understand how the technology works. Avoid selling products you have no knowledge about as at end of the day you’ll have to deal with customer services.
- Choose easy-to-ship products as you can expect 10-15% of sales to be returned. Heavy and large volume products can mean money lost on return shipping.
- Focus on quality. Low-cost, high volume products might not be the best option for a drop shipping business.
- Start small and make sure a quality control system is in place. All the listings should match the actual product. You can also outsource quality control if necessary, but make sure the product listings are accurate and contain all the necessary information customers need to make a buying decision.
- Keep track of the top selling items and monitor real-time data of all the sales. Apply the 80/20 rule (20% products generate 80% of the sales revenue). Identify and focus on revenue-generating products.
- Buying top-selling products in bulk and fulfilling orders through 3rd-party fulfilment centers such as FBA (Fulfilment by Amazon) works better for a variety of product categories
The Wrap Up
A drop shipping business is fairly simple to setup, does not require huge capital and you have a whole world of products to choose from. However, it’s not like printing money online and so simple to run profitable drop shipping business. You need to pick the right niche, reliable suppliers and be prepared to deliver exceptional customer services. Choosing products you are passionate about helps a lot in this line of business and helps in meeting customer expectations.
Your own website is a better option if you feel you can deal with technicalities related to building and maintaining an e-commerce store. There is no alternative to quality content if you want to rank higher in organic results. Quality content that includes your product links helps customers make a more informed buying decision and establishes authority, which can be more cost effective than paid ads.
The best strategy is to find a unique product and have it shipped through the supplier. But it does not happen so often so in most cases you’d be competing on price or value for money. Amazon FBA is a great option if you just want to sell through an established platform that deals with most aspects of order fulfilment.