It is crucial to know all kinds of business models you have at your disposal before starting a business. Amongst eCommerce store owners, the dropshipping business model has garnered a lot of attention.
But what is dropshipping exactly? And how does it work?
More importantly, how can you make it work?
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.it is a supply chain management method that doesn’t require a seller or a company to actually hold stock of the items they’re selling. Once a product is ordered, the seller buys the required inventory from a third-party supplier (manufacturer, wholesaler, etc) who then ships the product to the customer.
The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.
This is how the Drop shipping process works:
- The customer places an order online.
- The eCommerce store owner or the seller then forwards the order to his supplier.
- The supplier accepts the order and ships it on behalf of the seller. Meaning, when the product reaches the customer, the seller’s name, address, and logo will appear on the bill.
- Once the shipment has been initialized, the supplier sends an invoice to the seller containing a tracking number.
- The seller then forwards the ‘order has been shipped’ message to the customer along with the tracking number.
On the face of it, drop shipping may seem like plain-sailing.
If an eCommerce store owner decides to adopt the drop shipping business plan, then all he needs is a laptop and an internet connection.
But is it really as easy as it sounds?
Well, it’s complicated. The answer is neither a definite yes, nor a definite no.
BENEFITS OF DROPSHIPPING
Every coin has two sides and it’s important to understand each of those sides to be able to devise a successful strategy.
Let’s look into the benefits of dropshipping and see how you can leverage those in your dropshipping business plan.
Drop shipping is a great business model because of its many benefits:
- Easy to get started. For someone who has never created an online store before, getting started with drop shipping is fairly easy. You just need to find a supplier, create a website and start selling. Literally, all you need to set up your online business is:
- A good business idea
- A supplier offering you the best price deal
- An online eCommerce website
- A laptop with a good internet connection
- Low startup cost. The biggest cost to starting a retail operation is purchasing inventory to sell – you don’t have to buy any inventory. Your only expenses are the costs of creating your website and applying for a tax ID. This is the main attraction of the dropshipping business plan. If you don’t have sufficient funds, high inventory costs will kill your eCommerce business idea before it even takes proper form. With drop shipping, there’s no worrying about warehousing and inventory costs. You don’t have to spend a dime on buying a stock before you make sales. This is a huge plus because according to stats, most newly started businesses aren’t able to stay afloat due to insufficient funds.
- Low overhead. Since you don’t own any inventory you don’t need to rent warehouse space. Being an online store you also don’t need a physical space. Your only fixed costs are what it takes to run your website, which can be as low as $30 per month.
- Huge product selection. You’d be hard-pressed to find a product that can’t be drop shipped. There are dropship suppliers for almost anything.
- Low risk. Because you don’t have to worry about your inventory selling, a drop shipping business is an extremely low risk. If you don’t sell, you don’t lose anything!
- Location independence. A lack of inventory means you can run your business from anywhere with a laptop and internet connection. I had my own store while traveling the country in an RV!
- Easy to scale. For traditional retailers, three times the sales meant three times the work orders, packing, and shipping product. With drop shipping, it just means you place three times the orders and your supplier handles the rest – leaving you time to continue growing your business! A retailer who chooses to buy inventory is stuck with it whether sales are made or not. With dropshipping, there’s no problem with overstocking or understocking. All you have to do is buy products when orders are being placed. So there’s always a balance between supply and demand. You can properly gauge the demand for your product by judging the volume of orders being received, and then increase and decrease your stock demand accordingly. This is especially useful if you have consumer goods that don’t have a long shelf life. If for some reason you’re not able to sell the required quantity of your product, you don’t have to worry about bearing depreciation costs.
- EASIER EXPANSION: Owning an inventory can be constraining. A drop shipper will always have a wider array of products to choose from as compared to a retailer who decides to own his inventory. There’s a large variety of products that an inventory-owning retailer will think twice before supplying. Those are:
- Products that have high import costs.
- Products that take up a lot of storage space.
- Products that are not available in your own country.
- Products that have a low shelf life, etc
- A drop shipper can easily supply the above products because the problem associated with them won’t affect him directly.
DISADVANTAGES OF DROP SHIPPING
All the benefits we mentioned make dropshipping a very attractive model for anyone getting started with an online store, or for those looking to expand their existing product offerings. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a price. Here are a few shortcomings to consider.
1. Low margins
Low margins are the biggest disadvantage to operating in a highly competitive dropshipping niche. Because it’s so easy to get started, and the overhead costs are so minimal, many competing stores will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins. If start dropshipping on Amazon alongside your Shopify store, your margin on that sales channel will be much thinner.
Typically, these sellers will have low-quality websites and poor (if any) customer service, which you can use to differentiate your business. But that won’t stop customers from comparing their prices to yours. This increase in fierce competition will quickly hurt the potential profit margins in a niche. Fortunately, you can do a lot to mitigate this problem by selecting a niche/vertical that’s well suited for dropshipping.
2. Inventory issues
If you stock all your own products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change on a daily basis. Fortunately, these days, there are a handful of apps that let you sync with suppliers. So drop shippers can “pass along” orders to a supplier with a click or two and should be able to see in real-time how much inventory the supplier has.
3. Shipping complexities
If you work with multiple suppliers—as most dropshippers do—the products on your online store will be sourced through a number of different dropshippers. This complicates your shipping costs.
Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these calculations can be difficult.
4. Supplier errors
Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway?
Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments, and low-quality packing, which can damage your business’s reputation.
5. Limited customization and branding
Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, the product dropshipped is designed and branded by the supplier.
Some Alibaba dropshipping suppliers can accommodate your business’s product changes, but even then, the supplier has the most control over the product itself. Any changes or additions to the product itself usually require a minimum order quantity to make it viable and affordable for the manufacturer.
6.CUSTOMER SERVICE PROBLEMS
Adapting the dropshipping business model often finds store owners answering for supplier-side errors. If there’s any problem regarding the shipping time, packaging, or quality of the product, the seller has to tackle it.
Going back and forth between the supplier and the customer to handle queries can lower the quality of customer services offered. And the customer is king. Bad reviews can reflect badly on sales.
DROP SHIPPING BUSINESS PLAN
STEP 1: CHOOSE YOUR PRODUCT
One common mistake people make when choosing a product is going for something they’re passionate about without thinking logically.
I think it’s foolish to enter a market with a product that you chose because you like it. You’ll find that your passion for the said product will diminish quickly if it doesn’t translate into sales and revenue.
Which is why there are important things to be kept in mind when choosing a product:
Low initial costs in dropshipping won’t automatically assure you a high profit. Costs will increase as your business grows.
It’s important to ensure you’re not stuck with a product that procures a low profit.
You’ll have to do some research, maybe get a price quote from suppliers to see what is the lowest cost they’re selling at. Then, you’ll have to see the market price of a product and evaluate your profit margin.
2. SHIPPING COSTS
Shipping cost is a major factor that shouldn’t be ignored. You customers will abandon their cart if the shipping cost is too high.
Avoid a product that:
- Is heavy in weight
- Is large in size
- Is fragile to handle
- Has to be brought in from another country that is far.
- Requires a lot of packaging
There’s a big chance that a product falling under the above categories will raise shipping costs and consequently reduce sales revenue and profit.
3. HOW CAN YOU ADD VALUE?
Choose a product that has competitors, but not many. If the market is crowded, chances are there’s very little you can do to innovate and stand out.
One best way to think of a product that adds value is to find out if it’s solving any problems.
For example, a particular product might not be easily available in your area/country, but there might be a demand for it. Or maybe you could find better versions of products that are already being sold in your area.
You can also explore other ways of solving people’s problems. You can think of offering a service or some additional benefit that no other competitor offers in your chosen product market.
For example, you could:
- Encourage your buyers to drop one-minute video reviews on your products.
- Post detailed videos showing the product anatomy and how it works.
- Give as many details and specifications about your product as you can.
- Provide expert advice or detailed information on how to use the products.
4. MARKETING POTENTIAL
Marketing is going to help you attract and acquire customers. You should have an idea of how much you want to invest in marketing efforts.
If you’re not keen on taking up a lot of in-depth marketing activities then it’s best to go for products that don’t require a lot of it.
Also, while choosing a product keep in mind the ease with which you’ll be able to market it.
For example, It might be easier to market a clothing store as compared to a store that sells rare computer parts.
STEP 2: MARKET RESEARCH
Market research and choosing a product actually go hand in hand. You won’t really be able to decide on your product if you haven’t conducted any research on it.
To assess the demand for your product, you can use the following tools and methods:
1. GOOGLE’S KEYWORD PLANNER
You can use Google’s keyword planner to:
- See the monthly search volume of your product.
- Search long-tail keywords and questions that are being asked regarding your product’s niche.
- Get keyword ideas.
- See the difference between local and global search volume. You can look for search volumes country wise and assess which countries/regions are asking for which products.
- You can also use it to evaluate the competition for each keyword. This will give you a rough idea of how many websites are already ranking and how tough it will be to beat them.
2. GOOGLE TRENDS
- Google trends will show you the yearly, monthly, weekly search trend for your keywords.
- You can also check region-wise trends.
- It will show you breakouts and rising trends related to your searched keyword.
- You can compare different keywords and see their relative trends as well.
- Check the seasonality of the product by looking for trends over the past 10 years or so. This will give you a good idea of which months the demand rises in, and in which months it falls.
3. FIND OUT THE BEST SELLING PRODUCTS
Websites like Aliexpress & Amazon have a weekly bestselling/hot products category. You can scour eCommerce websites like these to get an idea of what niches, or what product types are trending or selling like hotcakes.
You can also look at niche eCommerce websites.
4. SEARCH ON WEBSITES LIKE QUORA
Quora has around 500,000 daily users now. Its user base is vast and people have started trusting it the most when it comes to search engine queries.
If you want to learn how you can add value by selling a particular product, then search your product on Quora, and you’ll find what questions people are asking and the problems they’re facing.
Pro Tip: You could ask questions to find out what people think of the product you want to sell, and whether they feel it would solve any problems.
There are a lot of other forums or niche communities to get an insight into your product market.
STEP 3: COMPETITOR ANALYSIS
Your competition analysis should be aimed at answering these questions:
- How well established your competitors are.
- What is their USP?
- How you can beat them and add value.
You can use the following tools and methods to answer the above questions:
1. Tools like Similarweb can be used to assess your competitor’s website traffic, time people are spending on their websites, where the traffic is coming from and much more.2. Moz & Ahrefs can be used to find out your competitor’s website authority. If their domain authority (DA) is above 50, then it’s going to take a lot of effort to beat them.
3. You can also use the above two tools to check the different page authorities on their website. Visiting different product pages and checking their authority will give you an idea of how much traffic they might be getting on that page.
4. Check your competition’s social media pages and handles, asses the following they have and the marketing tactics they use.
5. Check the reviews and recommendations people have left for your competitors on social media, Google, Play Store (if they have an app) to see where they’re lacking and how you can improve on it.
STEP 4: FIND SUPPLIERS FOR DROPSHIPPING
When looking for suppliers, make sure that whoever you choose:
- Gives the best price.
- Is reliable.
- Gives optimal shipping time.
- Doesn’t work with a lot of merchants at the same time.
- Has been in business for an acceptable amount of time.
To find dropshipping suppliers you can:
1. Search for keyword terms like ‘wholesaler’, ‘bulk’, ‘reseller’, ‘manufacturer’, ‘supplier’. You’ll have to combine these terms with your niche or your product.
2. You can also look into various platforms that connect dropshipping eCommerce stores to suppliers in various niches.
3. You can join communities on social media related to your product’s niche and see if you can find any supplier. Suppliers often use social media channels to promote their services, so you might be able to find their contact details and profiles.
STEP 5: SET UP AN ECOMMERCE WEBSITE
To set up an eCommerce website you’ll have to decide which platform you want to use. There are a plethora of platforms online offering different services and functionalities on different scales.
My recommendation would be to go for WordPress as it is the best when it comes to performance, functionality, and scalability.
STEP 6: MARKET YOUR PRODUCT
Marketing your product heavily depends on the kind of product you’ve chosen and your customer base.
To get started:
1. Identify your target audience. This could be based on their geographical location, their need for your product, etc. In fact, you can go as far as creating full customer personas.
2. Find out where your target audience hangs out the most. Is it Instagram, Twitter, or LinkedIn?
3. Look at your competitor’s marketing tactics. Find out the strategies they’re implementing, the online platforms they’re leveraging to acquire customers, the amount of effort they’re putting in.
4. Try to be creative and go where your competitors aren’t going. This could be in terms of marketing channels and platforms they aren’t using or it could mean implementing strategies they aren’t implementing.
How much money can you make with drop shipping and is it profitable?
Drop shipping margins typically average around 20%-40% on average, however some niches like jewelry, clothing, and electronic accessories can be as high as 100%
However, as I said above, that can vary greatly depending on which suppliers you work with. Buying direct from manufacturers can give you much better margins.
How can I be successful dropshipping?
The most important part of having a successful drop shipping business is finding a great supplier to be your partner as you launch and grow your business. Not your legal business partner, but the person or company you rely on to get your products to your customers on time and in one piece.
The second most important piece of the dropshipping puzzle is marketing your business. Simply putting your products on Amazon, eBay, or your own website isn’t going to drive sales.
SaleHoo has tons of marketing tools to help you succeed, such as coupons, an email marketing system, analytics software, and more. I also recommend you bookmark this marketing calendar to keep as a reminder of upcoming holidays you should run sales for.
Finally, don’t forget to leverage social media marketing tactics; Especially Instagram, since 93% of buying decisions are made based on visual appearance.
Now you have a firm understanding of what drop shipping is and how to use it to make money for your business!
We’re sure you’ll find some helpful takeaways from this dropshipping business plan. Once your business grows, it’s important to optimize and improve it continuously. Don’t forget to keep track of the numbers and metrics that tell you where you’re going wrong and where you can improve operations.
Building and nurturing customer relationships is also very important. Devise plans and strategies to see how you can make your customers want to come back for more.
As we’ve mentioned, dropshipping isn’t a perfect, stress-free way to build a successful online business—hard work is always required to start a dropshipping business. The model has some definite advantages, but comes with a number of built-in complexities you’ll need to address.
We’ll be examining these challenges, and how to best address them, in future chapters. The good news is that with some careful planning and consideration, most of these hurdles can be resolved and need not prevent you from building a thriving, profitable dropshipping business.
Like our list of What is Dropshipping with Pros and Cons? Tell us what you think in the comments section below.
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