Dropshipping continues to be a force to be reckoned with when it comes to making tidy profits. According to Grand View Research, the dropshipping market is predicted to be worth $557.9 billion by 2025. This proven track record of reliable income has meant that up to 27% of established online retailers are now incorporating dropshipping into their business models.
Little wonder why many budding entrepreneurs are so enamored with the idea of setting up a dropshipping business. People everywhere have started dropshipping to bring in a little extra spending money or a full-time, scalable income. There are relatively low overhead costs to deal with and no specific, extensive skills or expertise to learn.
That is why we have put together this beginner’s guide to dropshipping. This guide will detail the benefits of dropshipping, potential cons to look out for, and some fundamentals you need to consider before starting your dropshipping business. We will explain the dropshipping business model and provide an overview of the dropshipping process.
What is dropshipping?
Dropshipping is a process that allows online business owners to sell third-party products on their online store.
Whenever a customer orders something from their online storefront, the owner packages and sends the product directly to the customer, this differs from a traditional retail model, where retailers would have to order products for a wholesale price and then keep them in their inventory or storage space.
The traditional store model meant that retailers would spend a lot of time packing and shipping products rather than working on marketing and product development. They would also have to constantly monitor inventory management to ensure they never ran out of stock and had enough space to store their stock in the first place.
Thanks to dropshipping, this has all changed. When a customer orders a product from a dropshipping store, the owner has to inform third-party suppliers of the order, and they will take care of packing and shipping the products. This model removes the middle man and streamlines the process between the customer ordering and receiving their package.
How does dropshipping work?
The dropshipping process is relatively straightforward, though, like any other eCommerce website, it still takes time and dedication to ensure optimal results.
Dropshipping works from a fulfillment model. Here is how the process works:
- The business owner will set up an online retail store and choose which products to sell. Several factors will determine what products are sold.
- The business owner and dropshipping companies will confirm agreements and commission rates. When an agreement has been made, the business owner will list the products on their website. The items sold are usually branded products.
- The owner will promote the products through social media and marketing strategies. Customers will visit the owner’s website to buy products.
- After a customer purchases an item, the owner will inform the dropshipping suppliers or manufacturers and pass on the customer’s order and contact information.
- The dropshipping supplier will package and ship the products directly to the customer.
What are the pros of dropshipping?
As with all eCommerce retailers, dropshipping has several key benefits that make it an attractive option for selling online products and goods.
1. Easy to start
Of all the different forms of eCommerce platforms, starting an online dropshipping business is one of the easiest to get started. You don’t have to worry about many critical aspects of setting up a business from scratch, including paying for storage space, tracking inventory, packing and shipping, restocking, and handling returns.
This means that you can focus more of your attention on marketing and creating content. Most drop shipping businesses start from home, requiring little more than a laptop and a reliable internet connection.
2. Lower upfront costs
If you wish to start an online business, you will need capital to get everything up and running. For more traditional online stores, much of this initial investment is tied to stock purchasing, warehouse space, packaging, and shipping costs.
Not needing to purchase stock in advance is a particular advantage if you sell large quantities of a product. You won’t have to worry about constant restocking and inventory management.
Having a lower startup cost also means less risk. Less risk means you are free to experiment a little with sourcing products and trying new things until you find an approach that works for you.
3. Wide product selection
In theory, there is no limit when choosing the right products for your business to sell. As long as the supplier has the item in stock, you can advertise it on your website.
Dropshipping is a hugely versatile method of selling products. If a product you have listed isn’t selling well, you don’t have to sell that product anymore. You can easily replace its listing on your website with an alternative product to see if it yields better results.
4. Easier scalability
You will want to scale your eCommerce store’s revenue as a business owner. If you’re using a traditional retail business model, the bigger your business grows, the harder you will have to work.
With a dropshipping model, the manufacturers and suppliers handle much of the hard work. You can quickly scale your dropshipping business and increase profit margins by dedicating more time to marketing and content, increasing the variety of products, and negotiating with additional suppliers to tap into their potential customers.
What are the cons of dropshipping?
While it is clear that there are several good reasons to buy and sell online via dropshipping methods, there are also a few drawbacks that you need to consider.
1. Competition
Low startup costs and the ease of starting a dropshipping business are a double-edged sword. The bar for entry to dropshipping is low, meaning anyone with an internet connection can set up a dropshipping business. Competition is fierce for a finite number of customers.
Inevitably, this can create a race to the bottom scenario where rival business owners can get away with selling their goods with very low pricing and margins. Competition can make your attempts to sell your products much harder than they would be through other forms of eCommerce.
2. Product quality
With dropshipping, you are advertising and selling products that other companies have produced. You won’t have experience dealing with the product in most cases unless you make an active effort.
As a result, you may end up selling poor-quality products to a customer base with whom you have built a connection and trust. It only takes one poor dropshipping product to wreck customer experiences and derail a lot of hard work.
3. Complex shipping
As you grow your business and sell more products using the dropshipping and fulfillment method, your business operations will become more complex. The complexity includes shipping responsibilities, even if you aren’t directly handling that part yourself.
Many larger dropshipping companies work with multiple shipping partners. Since you won’t have control over the supply chain, you will be unable to streamline this process.
Customers who make orders for numerous products may incur multiple shipping fees. These fees may need to be absorbed into your pricing strategy rather than passed directly to the customer.
4. Limited product control and customization
When you start your business and select your first few dropshipping products, you will enter an agreement with the dropshipping supplier or manufacturer. Some of these companies may have specific requisites and requirements that you must adhere to when stocking their products.
Limited product control can occasionally limit the amount of control you have on your website regarding which products you can list. Most products have privately labeled branding already in place. This lack of customization can cause issues with dropshipping owners with creative flair and imagination who want more control over branding.
How do I start a dropshipping business?
Starting a dropshipping business is one of the more straightforward business ventures you can try, though it still needs to be done professionally. It is estimated that up to 90% of dropshipping businesses fail for one reason.
Many people expect an easy ride and are not prepared to put in the hustle. Here are the five fundamental steps you’ll need to take to start a dropshipping business.
Step 1: Find your niche
The competition within the dropshipping space becomes more demanding every year. To stand out from the crowd, you will need to sell products within a product category or niche market that isn’t saturated. Choosing a viable niche or product category will allow you to target specific demographics who are more likely to be interested in what your business has to offer.
You can use business tools such as Google Trends and Facebook Audience Insider to decipher what people are looking for via search engines to help guide your decision.
Step 2: Define your audience
Once you know what you want to sell, you’ll need to determine your target audience. You’ll need to ask yourself which type of person will benefit most from your product.
More importantly, you’ll need to research where this type of person is most likely to be found. This will help inform which sales and social media channels you pursue further down the line.
Step 3: Select your dropshipping partners
Some of the prominent key players in this business structure are your dropshipping suppliers. These are the companies that manufacture the products you are hoping to sell. Some of the most reputable suppliers include Spocket, DSers, and Modalyst.
There is also Fulfillment by Amazon or Amazon FBA. Amazon is the largest online marketplace, with almost any niche you can think of accounted for, so it is little surprise that an Amazon dropshipping service exists.
If you partner your dropshipping business with Amazon, you can store your products at one of their fulfillment centers. For more information on Amazon FBA, check out our comprehensive guide on the service.
Step 4: Build an online store
Countless website-building tools help you create a website or an online store. Each option will have a different price point, and some will even include a domain name as part of the package.
Make sure your domain name is short and straightforward, as these generally do far better regarding search engine optimization (SEO) and search engine results.
Shopify is one of the most effective eCommerce platforms out there. It is easy to use and has high-security protocols. With a Shopify store, you have the potential to attract a large pool of potential customers.
Step 5: Market your store
Once your store is set up and your products are ready to sell, you will need to start getting traffic to your store. If you have an existing pool of potential customers, perhaps through your social media presence, you can leverage this to your advantage.
Facebook groups can also be an excellent resource. These groups are usually already curated with people who share similar interests, so you may find some traction if your products correspond to those interests.
If you do plan on using Facebook groups, however, it’s vital that you show genuine interest in the group and don’t just use it as an advertising platform. Otherwise, you will be found out and ostracized pretty quickly.
Content marketing is another powerful marketing strategy. For this, you will create blog posts, videos, and photography related to your products and brand to give potential customers additional value when they visit your store.
Summing up
Suppose you’ve always dreamed of setting up an online store to sell and advertise products, but you’ve felt intimidated by the vast number of possibilities. In that case, dropshipping can allow you to experience the feeling of running a store and making profits without being inundated by too many tasks.
Dropshipping is perhaps the best entry point to running an online business. At Flippa, we are the world’s number one online marketplace for buying and selling online businesses of all kinds. We have accumulated over twelve years of experience, so you can be sure that our advice and expertise are tried and trusted.
If you have a dropshipping business you are looking to sell, then why not check out our valuation tool to see how much you could potentially sell it for? Alternatively, if you have any other queries, then don’t hesitate to contact us today.
Frequently asked questions
What are some great business ideas?
At Flippa, we put together a list of 10 untapped eCommerce niches that will help savvy business owners investigate to conduct market research for new product ideas.
How much are the shipping rates?
The shipping rates vary between fulfillment platforms. You’ll also need to factor in the location too.
Take Shopify, for instance, which offers free shipping, single flat shipping rate, tiered flat rates, and per-item shipping rates. A plate being shipping to Canada could cost approximately $2 — but if it’s shipped to the United States, then it would be approximately $1.
Amazon, on the other hand, offers weight-based shipping and price-banded shipping. You can read more about Amazon’s shipping rates here.
What are packing slips?
A packing slip is a document that contains all of the product information. This might include, weight, dimensions, SKU numbers, and the total number of units.
