What is dropshipping? And how do you start a dropshipping business?
If you’re interested in online business, you’ve probably heard a lot about the dropshipping business model.
This ecommerce model holds the promise of a relatively hands-off business that provides an enormous amount of lifestyle flexibility.
But what is dropshipping exactly? How does dropshipping work? And how can you start a dropshipping business in 2021?
What is a dropshipping business?
Dropshipping is an ecommerce retail fulfillment method in which online retailers don’t hold the inventory they sell. Instead, they partner with third-party suppliers who hold the inventory and ship products directly to customers on the retailer’s behalf. As a result, the retailer never needs to handle products.
How does dropshipping work?
Let’s take a closer look at how dropshipping works. When a customer places an order on an online store, the order details are forwarded to the store’s third-party supplier. The store pays the supplier for the product and shipping, keeping a small profit. Then, the supplier sends the product directly to the customer.
Here’s a diagram of the dropshipping business model to illustrate this process:
Dropshipping FAQs answered
Before we dive any deeper, here are the answers to some frequently asked questions about dropshipping.
Is dropshipping legal?
Absolutely. Dropshipping is legal. Like any business model, there are opportunities to run into legal issues. However, the act of dropshipping products to customers from a third-party is a perfectly legitimate order fulfillment method.
How much does it cost to start dropshipping?
You can start a dropshipping business from anywhere between $0 and $1,000, sometimes more. Typically, most of your startup capital will be used to market products with methods like Google Ads and Facebook Ads. You may also need to spend money on website hosting and incorporating your company.
Is dropshipping profitable?
Yes, dropshipping can be profitable for merchants. And thanks to such low overheads and little need for startup capital, it’s possible to start a dropshipping business that turns a profit relatively quickly. However, the profit margins are usually relatively small, which can make it challenging to generate significant profits quickly.
Do dropshippers ship internationally?
It’s possible to dropship products internationally. For example, many businesses dropship products from China to customers in Europe or the US. However, it costs more to ship products internationally, and the additional fees can eat into profit margins. Also, there are a lot more administrative complexities to handle when trading internationally.
Is dropshipping allowed on eBay?
Yes, eBay allows users to dropship products. However, eBay states: “If you use drop shipping, you’re still responsible for the safe delivery of the item within the time frame you stated in your listing and for the buyer’s overall satisfaction with their purchase.”
Is dropshipping allowed on Amazon?
Yes, Amazon allows sellers to dropship products. However, Amazon Seller Central states that dropshippers may not:
- Purchase products from another online retailer and have that retailer ship a product directly to customers.
- Ship orders with packing slips, invoices, or other information indicating a seller’s name or contact information other than your own.
6 benefits of dropshipping
Now that you understand how dropshipping works, let’s take a closer look at the key benefits it offers.
1. It requires very little capital
As mentioned, dropshipping requires very little startup capital. In fact, it’s possible to start a dropshipping business for free.
For example, you could build a website by using an ecommerce platform’s free trial. Using Shopify’s free trial would give you two weeks to earn just $29 from your dropshipping business to pay for the subscription once the trial ends.
Additionally, you could use Shopify’s free dropshipping app Oberlo to add products to your store – Oberlo’s free plan allows you to sell up to 500 products.
Then you could use organic marketing methods to make your first sales, such as social media marketing and direct outreach.
That said, it’s easier to start a dropshipping business if you have some money to spend on dropshipping product research tools and paid marketing methods, such as influencer marketing and pay-per-click advertising.
2. It’s easy to get started
Compared to other ecommerce business models, starting a dropshipping business is easy because you don’t have to worry about things like:
- Ordering inventory upfront
- Managing a warehouse and stock levels
- Tracking inventory
- Handling shipping and returns
3. The overheads are low
Again, without the need to purchase inventory or manage a warehouse, a dropshipping business’s expenses are relatively low.
To continue with our example above, as long as you have a computer and an internet connection, it’s possible to run a profitable dropshipping business with one small overhead: a $29/month Shopify subscription.
4. You can work from anywhere
The dropshipping business model is so simple that all you need is a laptop, an internet connection, and some elbow grease. As a result, many dropshipping entrepreneurs work from home or while traveling.
5. You can test and sell many products easily
You can easily test multiple products without any additional costs or risk because you don’t need to purchase or hold inventory upfront. You can simply add products to your store and start marketing them to see how they perform.
For this reason, many ecommerce businesses selling their own branded products test new products or expand their product lines with dropshipping.
6. It’s simple to scale
Dropshipping businesses are easy to scale. Without needing to worry about inventory and logistics, scaling the business requires you to scale only your marketing and customer service efforts. As noted above, it’s also easy to expand your product lines and categories without incurring additional expenses.
5 disadvantages of dropshipping
Although the dropshipping business model has many advantages, there are also a few key drawbacks. Here are five challenges that entrepreneurs need to overcome when starting a dropshipping business.
1. Low margins
Although you don’t need to manufacture, store, or transport products, you still need to pay for these services. As a result, you’ll need to pay your supplier a large cut of each sale you make to fulfil the customer’s order.
What’s more, although it’s relatively easy to start dropshipping, this means that many new businesses will often start selling the same items at rock-bottom prices in an attempt to attract sales. Consequently, dropshipping businesses often engage in a “race to the bottom.”
Selling products with small margins means that dropshipping businesses typically need to sell large volumes of products to generate a significant profit.
2. Limited branding and customisation options
Unlike brands selling custom-made products, dropshipping businesses usually can’t customise or brand the products themselves. This can make it very challenging to differentiate the online store from competitors’ and build lasting, meaningful relationships with customers to win repeat business.
3. Potential inventory issues
When you don’t control your inventory, you can’t do much about inventory issues – which can be devastating for your business. For example, if your supplier runs out of stock, the dropshipping business you’ve spent months building is suddenly put on pause.
That said, there are apps and tools to help manage potential inventory issues. Plus, most dropshipping businesses source products from multiple suppliers to mitigate these risks.
4. Supplier errors
Dropshipping businesses place themselves in an awkward situation: they’re responsible for the product’s quality and delivering products on time, but they have no real control over these two things.
In other words, if a supplier ships a product late or the product is defective in any way, the customer will hold the dropshipping business responsible.
5. Complex shipping arrangements
Working with multiple suppliers can complicate shipping costs.
For example, say that you use three different suppliers and a customer purchases one product from each supplier. You’ll be charged three separate shipping charges by your suppliers. However, the customer isn’t likely to checkout if they have to pay a huge shipping bill.
And even if you charge these shipping costs to your customer, automating the calculations can be challenging.
How to start a dropshipping business
Now that you understand what dropshipping is, how it works, and its pros and cons, let’s run through how to start dropshipping in five simple steps.
Step 1. Find dropshipping products to sell
First things first: Before you can start a dropshipping business, you need to identify a profitable product or niche with a high demand.
To do this, you could start by visiting ecommerce marketplaces like Amazon and eBay to see what’s trending and get dropshipping product ideas. You could then use a tool like Google’s Keyword Planner to see how many people are searching a particular term on Google each month. You could also use Google Trends to see if demand is increasing.
Step 2. Research the competition
If a product or niche is overly saturated, it will be tough to generate sales with a reasonable margin. So, once you’ve identified a few potential product ideas, it’s time to research the competition.
Then, compile a list of five top competitors and research them in-depth. You can use tools like SimilarWeb, Alexa, and Facebook Ad Library to help. Evaluate competitor’s websites, ads, and product pages. Maybe sign up to their email list. You could even purchase products from competitors to see what you’re up against.
Then, pinpoint how you’ll set yourself apart from the competition.
Step 3. Set up your sales platform
After you’ve determined your niche, chosen the products you want to sell, and strategise how to beat the competition, you need a way to sell products and get paid online.
If you plan to sell through an ecommerce marketplace like eBay or Amazon, sign up for an account. Alternatively, you may want to dropship products through your own website. In which case, consider using an ecommerce solution like Shopify, BigCommerce, or WooCommerce.
It’s also a good idea to set up a Neat account to streamline your finances.
Step 4. Find dropshipping suppliers
Step 5. Market your dropshipping products
Once you’ve added products to your store, you can begin marketing your products. There are tons of different digital marketing methods that you could use to do this.
Some marketing methods can take a while to get up and running – some enable you to start making sales very quickly. Here’s a quick rundown of three online marketing methods that you can use to land sales fast:
- Social media marketing: Network in groups on social media platforms and promote your products with hashtags and content.
- Influencer marketing: Partner with micro-influencers (~5K-100K followers) in your niche to promote your products to their audience.
- Pay-per-click advertising: Use tools like Facebook Ads, Instagram Ads, and Google Ads to run highly targeted ad campaigns.
Summary: Dropshipping 101
Dropshipping is a relatively hands-off ecommerce fulfillment method.
How does dropshipping work? Simply put, online sellers partner with a third-party supplier who holds inventory and ships products to customers on the online seller’s behalf.
Dropshipping is a legitimate business model, and you can dropship on Amazon and eBay.
Dropshipping has many benefits, too. For example, it’s relatively easy and inexpensive to get started, the overheads are low, and it’s simple to scale. On the other hand, dropshipped products typically have low margins, you can’t brand or customise them, and you’ll be held accountable for supplier errors.
Here are five steps to follow if you want to start a dropshipping business:
- Find dropshipping products to sell
- Research the competition
- Set up your sales platform
- Find dropshipping suppliers
- Market your dropshipping products
Dropshipping isn’t a get-rich-quick scheme – it takes a lot of work to create a successful dropshipping business. However, it’s a great way to start your first online business or expand an existing ecommerce business.