27th July, 2022
A fairly recent development in retail fulfilment, dropshipping sounds like a godsend for small operators. In this article, Renae Smith puts dropshipping under the microscope so you understand exactly what it is, and how to get the most value from it.
In the past few years, the dropshipping business model has seen a huge rise in popularity. But despite what you might read online, dropshipping is not a quick money-making-scheme that comes without hard work or risk.
While the concept itself might sound simple enough, few people get all the processes and potential pitfalls involved in dropshipping.
How then, can you work out if dropshipping is right for you?
Dropshipping is a retail business fulfilment method that doesn’t require a company to keep stock on hand. Instead, when a retailer or merchant sells a product, they simply pass the purchase details on to a third party, who ships the product directly to the customer.
This means that the seller never sees, stores or handles the product, they merely act as an agent between the product’s manufacturer or supplier and the buyer. Shipping = dropped.
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This delivery model is undoubtedly a low cost/high return type of business, as it doesn’t take a lot of investment (either financially or time-wise) to set up a store that uses dropshipping to deliver products to customers.
After a relatively small investment of setting up your website, you could theoretically offer an unlimited selection of products that will appeal to a huge pool of potential customers.
Adding new products to the store is instantaneous and requires no up-front purchases. As it’s only once a customer purchases and pays for an item that any physical action needs to take place.
In addition, because there are no warehouses to run, orders to pack or stores to supervise, many dropshipping retailers are run by a single business owner, from a laptop, anywhere with a WiFi connection. This keeps overheads costs low and offers complete flexibility when it comes to the businesses location and the option of scaling the business up or down.
These low cost, high convenience benefits make the dropshipping model incredibly attractive, but it’s important to understand the disadvantages before deciding to create a business with this structure.
While the dropshipping model has some definite advantages, it’s those widely appealing advantages that have raised industry competition in popular markets and which feed the built-in complexities of dropshipping.
Oversaturation in this field means any number of competitors could be selling the exact same products as you do, no doubt at very similar prices. In addition, larger, more established companies will have more buying power, meaning that they can reduce their prices to a level that may not allow smaller operators to compete.
It’s essential to understand that dropshipping models work on very low profit margins and when working on your business plan, a realistic approach should be taken when calculating whether you believe it can work for you.
According to Fit Small Business, you can predict your potential income by using the formula of 20 percent margin with a two percent conversion rate (the reported averages across the e-commerce industry).
Their website offers a real-life scenario: ‘If I sell SuperDuperFuture TVs for $1000 I would expect to make $200 on each sale. And if I have 1,000 people visit my site per month, then I would estimate that 20 of those people will buy my product. If I made $200 per sale and had 20 sales, I have made $4,000’.
While this formula is a good place to start, Big Commerce recommends considering an additional three factors. They note that in most instances, your discount on buying from manufacturers and wholesalers will be less than 20 percent. In addition, this 20 percent margin doesn’t account for any of the additional expenses that you have to pay from your end, meaning it’s not the final profit.
Also consider you’ll likely have to cut into your profits to keep your sales prices competitive. If you stubbornly hold on to your 20 percent margin, other companies will easily undercut you.
A further risk involves the fact that you do not have access to products you sell before they reach your customer, so there’s no possibility of conducting regular quality control.
If there’s an issue with a product or a delay in delivery, this can not only result in bad reviews and customer complaints, which can be expensive to handle, but may also raise legal liability issues.
It’s important to remember that, while dropshipping seems like a ‘low maintenance’ business model, when it comes to customer service issues relating to complaints, returns or damaged goods, these must all be managed by you.
As the person speaking with both the customer and supplier, your workload is essentially doubled and problems can take a lot longer to fix.
There are a couple of primary approaches entrepreneurs can take to dropshipping.
In this situation, business owners seek out specific suppliers with the products they want to sell. These vendors may be in the same country as the business owner or located elsewhere.
Entrepreneurs approach the suppliers and set up dropshipping terms and functions directly with them. You might pick one product to on-sell or multiple ones from each supplier you get in touch with.
These days, many apps and platforms exist that are designed to gather thousands of suppliers together in one digital space so entrepreneurs can connect to them and order directly via aggregators.
For example, the popular Shopify eCommerce platform has a specific ‘DSer’ app that integrates with Shopify. It’s set up to make it easy to browse suppliers and products on the enormous AliExpress marketplace.
Business owners can click on a few buttons to select the products they’re interested in and import that information directly into the DSers app, which is, in turn, connected to their Shopify storefront.
From there, once a customer buys a product listed on the eCommerce storefront, it’s just a matter of fulfilling the order in the DSers app, which is a streamlined process. Store owners check that details are correct and hit the Order button in the app, after which the product is sent directly to the consumer from the AliExpress vendor.
This second option can be a good choice for automating and streamlining functions. On the other hand, it does mean you may not be selling items that are as unique or bespoke as you wish.
You need to follow a few key steps to start a dropshipping business.
Start by working out what type of product you’re interested in selling. Look for a target market that’s currently under-served or a product type that’s new, on-trend, or otherwise could be popular with customers.
Research how competitive this space is and if there could be a smaller niche to serve to give you less competition to worry about. Or, perhaps you could sell the same products but to a new customer type.
Think about ways you might acquire customers and ensure there will be enough demand to bring in good sales. You want to differentiate your store in some way and curate your products specifically based on this unique selling proposition (USP).
Next, study the costs you’ll need to cover to run your business. Do some calculations to ensure you’re likely to be able to run a profitable venture.
Work out the margin on each product and how many you’ll need to sell to break even.
Costs to familiarise yourself with include subscription fees to domains and platforms, product costs charged by suppliers, and shipping fees.
If you plan to outsource any customer service functions, add in the charges you’ll need to pay a provider for this work.
Don’t forget marketing and accounting expenses, business registration costs, and, if in Australia, the 10% GST (Goods and Services Tax) that gets added to sales of goods.
Finding products you want to sell and dropshippers you want to work with takes time and effort. It’s not generally as easy as simply typing in “dropshipping” into Google.
You may want to combine this term with words related to the types of products you want to sell; it pays to get specific. For instance, you might search for “polo shirt dropshipping suppliers in Australia”, “plush toy resellers shipping to New Zealand”, or the like.
Alternatively, check out dropshipping aggregators online, as mentioned above. Multiple platforms exist in this area, and helpful comparison lists and blogs can provide details of dropshipping options to investigate further.
Another option is to contact the manufacturers or distributors of desired goods directly.
To choose the best dropshippers for your business, consider the margins you’ll get and what you can sell products to your customers for. Factor in the quality level and the reliability that different manufacturers are known for when it comes to both their goods and shipping processes.
There’s no point in getting great deals on product costs if you receive many complaints and requests for refunds because goods are faulty or damaged upon arrival.
Ask if there are minimum order quantities or values to consider. Check if payment options suit you okay and if turnaround times for delivery are acceptable. Plus, find out how long suppliers have been in business and see if there are customisation options for products or shipment types.
Determine, too, if there’s easy ordering and customer updating functionality plus acceptable integration options for your eCommerce site to streamline processes.
Once you have chosen products, take the time to perform test orders to ensure all functions work correctly in the dropshipping process. It pays to order a product yourself so you can see how long shipments take to arrive, how items are packaged, and what the quality of products is like.
While it’s essential to find excellent products to sell, you won’t get far if you don’t market your business effectively. A well-executed marketing plan will make all the difference to your results.
This strategic thinking should start from choosing a stand-out business name and branding and come through in how you write product descriptions and showcase images, provide customer service, connect with people on social media, create targeted ads, and so on.
Work on the SEO side of things so your sales platform shows up when people search online for the things you sell, too, and don’t forget to add testimonials and reviews to your pages where possible.
As in most areas of business, with careful research, strategic planning, and a bit of creative thinking, there’s still room for new entrepreneurs looking to enter the retail space.
Take things step-by-step and test and measure as much as possible to increase the likelihood that you sell popular products at a decent margin that you can make for your business.
Listen to customer feedback, develop strong relationships with suppliers, and stay up to date on current trends, too.
Consider the risks and look for ways to mitigate them as you go, and you can create a profitable dropshipping business that helps you attain your work and life goals.
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