The Ultimate Guide to Dropshipping
More and more online entrepreneurs are falling in love with a relatively new eCommerce business model. Surely, if you paid enough attention to our headline, you already know what we are talking about. It’s called dropshipping. Are you asking yourself why? This ultimate guide to dropshipping will answer that and many more questions.
Firstly, we need to get into the core of this business model and give you a specific, yet, simple definition of dropshipping. Later on, we’ll answer some crucial questions related to dropshipping, which are the pros and cons of dropshipping, and much more.
What is dropshipping?
Dropshipping is a business model that allows you to sell merchandise online, without the need to set up and manage an inventory.
Pretty intriguing, right? If you still can’t really make a difference between the traditional eCommerce business model and the dropshipping model, the following in-depth descriptions will help you understand better.
Characteristics of the traditional eCommerce business model
If you want to open and run an online store following the traditional eCommerce business model, you would have to acquire a storage space. Furthermore, the products from your suppliers would usually be purchased in Minimum Order Quantities (MOQs) in order to get a better price. Finally, you’ll have to store your products in your storage space until a customer makes an order. When an order is placed, you’ll be the one who packs the product and ships it to the end-customer.
Having explained the details of how the traditional eCommerce business model works, let’s see how dropshipping is different.
Characteristics of the dropshipping business model
First, and most important, is that dropshipping doesn’t require storage space. This is the aspect that puts numerous entrepreneurs under a spell. Not having to invest money, time, and energy in managing inventory is a big plus for new business owners. Not only for people who want to test this business model but also for everyone who wants to start an eCommerce venture as a side project.
In reality, there are people who start dropshipping as a secondary job and then leave their first job to dedicate themselves to dropshipping. One case study demonstrates how profitable dropshipping could be if you choose the right supplier for your business.
Aside from the aspect of not having to manage an inventory and storage space, let’s see how dropshipping works exactly. We mentioned that with the traditional business model once an order is made, the retailer itself packs and ships the product.
In dropshipping, once a customer makes an order, the retailer passes that order to its supplier. Namely, the supplier charges the retailer with the product price, usually wholesale, along with a dropshipping fee. That way, there is no need for the retailer to have a physical space for storing and packaging the goods.
Understanding the roles in dropshipping
There are three major players in the dropshipping game: manufacturers, wholesalers, and retailers. The key to mastering this business model is understanding and learning the role of each.
We start with the role of retailers as this would be you if you decide to start a dropshipping business. A retailer is anyone who owns an online store and sells merchandise to the public. As a retailer, you’ll have an online store where you’ll showcase the products you have in your collection.
A manufacturer is an entity that manufactures a certain product. Most manufacturers don’t sell the products they made to the end-customer. On the contrary, they usually sell their products in bulk and to wholesalers or retailers who resell them to end-customers. Manufacturers offer products in bulk at the cheapest prices, however, they usually have minimum purchase requirements.
With wholesalers, the process of buying and selling is the following – they buy products from manufacturers, mark up the prices, and sell them to retailers. Similarly, as with manufacturers, wholesalers often require a minimum purchase. However, it depends on the wholesaler’s philosophy of operating but they are mostly selling in bulk at a lot lower prices than manufacturers.
Lastly, various features make dropshipping an attractive business opportunity. This ultimate guide to dropshipping is created to help you learn and understand all of them. However, just like with any other type of business model, these qualities have advantages and disadvantages.
In the following section, first, we’ll cover the benefits of dropshipping that lure people towards exploring this popular eCommerce model. Second, we’ll discuss some of the advantages that could be a potential discouragement for beginners in the dropshipping industry.
The benefits of dropshipping
You don’t need inventory
As we already mentioned, dropshipping means that you don’t need to store the inventory. This suggests that fewer resources are spent with dropshipping. Additionally, it also means that you can sell things like perishable goods which will be difficult to sell if the products are stored where your business is based. This way you can choose to be based anywhere and your products can still be sold around the world.
You have flexibility in choosing a location
You can set up and manage a dropshipping store from anywhere in the world. It’s that simple. The only necessary thing is having a good internet connection. Furthermore, if you manage to build a good relationship with your suppliers and customers, your dropshipping business will be on a roll.
You are not responsible for packaging and shipping
In dropshipping, the process of packaging and shipping is completely taken care of by your dropshipping supplier. Those processes take up a lot of space and time logistically. Since dropshippers are usually big businesses they give the customer lower shipping rates than your business (who might be medium or small) can offer them.
You don’t carry the risk of product damaging
Dropshipping also reduces the risk of the products being damaged because they are shipped directly from the warehouse to the customer.
Logistically, dropshipping saves you from a lot of possible problems, like overstock or shortages of products, as well as the passing of trends. If you want to expand your range of products, that’s also possible since many dropshippers carry a great variety of products, niche as well as classic ones.
You have the ability to test different products
Dropshipping is a great way of testing if something sells. In this business, you don’t have to be afraid of whether your products will sell. You can experiment with different products and niches until you find the right one for your store. You can do the testing of the market in real-time without investing in resources beforehand. If the product doesn’t sell you can always switch to another one without the loss of profit.
You don’t necessarily need to deal with product returns
As your dropshipper will be responsible for all of the packaging and shipping of your products, it’s logical that you won’t need to deal with returns as well. Suppliers are those who manage all steps of the process with customer care and handling returns. The only thing you’re responsible for here is finding a trustworthy supplier that will deliver premium customer service.
The advantages that the dropshipping model brings are appealing to everyone who has a desire to try something new without having to invest much money. However, aside from advantages, this model also has some drawbacks you should be aware of.
The drawbacks of dropshipping
You could have to deal with dense competition
Since dropshipping allows you to start a new business venture very easily, it’s tempting for many people. This makes it a very competitive business. If you are starting now, have in mind that your online store will have a lot of competition. But this shouldn’t be a discouragement for you. There is a way to outperform competition and that’s being different and offering something unique that brings value to your customers.
You could end up with an unreliable supplier
Another drawback of dropshipping could be not choosing your dropshipper cautiously. Many online entrepreneurs who are racing to get in the dropshipping game as soon as possible make this mistake. And it’s a crucial mistake that can lead you to failure. When choosing a supplier, you need to put time into conducting exhaustive research and analysis to find someone you can depend on.
You could face difficulties with managing inventory
The fact that you won’t have to manage your own inventory is a big plus in dropshipping. However, from this point emerge different types of issues you might encounter. You should be prepared that you could face difficulties in this section as you might be sourcing your products from several different suppliers.
You could deal with shipping issues
Similar to inventory difficulties, in dropshipping, one major problem could be shipping. As you won’t be accountable for the shipment of your products, you also won’t be able to have control over the process. Besides, if you work with multiple suppliers, you could experience one common problem. If a customer orders, for example, four products at once, and these are from four different suppliers, they’ll have to be shipped separately. You need to have this in mind beforehand. Coming up with a proper solution for this issue could save you a lot of headaches.
You could experience limitations in branding and customization
Another disadvantage of having someone to deal with packaging and shipping your products directly to your customers is branding. If you buy in bulk usually you are able to customize your products’ packaging and give a touch of your brand. On the other hand, with dropshipping, it all depends on your supplier. Some suppliers don’t allow their retailers to customize or design packaging, while others do. That said, if this aspect is important to you and you want to brand the products you sell, you’ll have to look for a supplier who will allow that.
You could get low margins
One common challenge that owners of dropshipping stores face is related to low margins. It’s always cheaper to buy a certain product in bulk than as a drop ship product. However, this doesn’t mean that it’s more profitable. In fact, there are dropshipping suppliers that ensure high dropshipping margins and you’ll have to spot them in the crowd.
Frequently asked questions about dropshipping (FAQ)
After doing research, we’ve realized that many people have different questions regarding this eCommerce business model. Therefore, we’ve decided to include a section where we’ll try to answer the most common questions about dropshipping we’ve stumbled upon.
Is dropshipping hard?
Dropshipping is not hard, nor a complex business model. Everyone could succeed in the dropshipping sector if they put their mind to it. If you want to bring the most out of dropshipping, you need to follow all the steps mentioned in this ultimate guide to dropshipping and build a profitable dropshipping store.
Is dropshipping still profitable in 2021?
Dropshipping is profitable in 2020 and will continue to be in 2021, and the years to come. Numerous numbers and data speak about the potential that dropshipping holds. Research conducted by Grand View Research, Inc. anticipates that the global dropshipping market will grow exponentially and will reach $557.9 billion by 2025.
Is it possible to make a full-time income with dropshipping?
Every business can be successful if done in the right manner. With dropshipping, it’s fairly possible to make a full-time income, and numerous owners of dropshipping stores are proving it. An example of a success story with a dropshipping business is a couple from Eastern Europe that makes 10,000€ monthly by selling clothes with BrandsGateway. Another example is an online entrepreneur who by dropshipping clothing earns over $44.000 per month. Therefore, you can definitely make over $10,000 a month with dropshipping, if you develop a good business plan and choose the right supplier.
If dropshipping is so profitable, why isn’t everyone doing it already?
Dropshipping is not a complex business, but it does require time, energy, patience, involvement, and most importantly passion. Finding the right products to sell is the foundation for building a profitable business. Also, as the competition is becoming heavier, you should explore niches that are not very common. One example is dropshipping luxury clothing from high-class brands and designers.
Is dropshipping legal?
Dropshipping is legal, and it’s a business model that many eCommerce entrepreneurs across the globe manage. However, as with any other type of online business in general, depending on the location you plan to register your business, there might be different protocols and regulations one needs to follow.
All in all, as long as you follow your country’s regulations for opening and managing an online store you’ll be safe. Obtaining a business license, avoiding suppliers that sell counterfeit as well as restricted or prohibited products, and following tax rules are some of the things that you need to have in mind before starting your business.
How does dropshipping actually work?
Now we’ll explain in detail the process of dropshipping from start to finish. This will help you get the best picture of how dropshipping works so that you can decide if it’s the right business model for you.
To illustrate the process more comprehensively, we’ll make up a scenario of you owning an online boutique for luxury clothing where BrandsGateway plays the role of your dropshipping supplier.
Step 1: An order is placed
Let’s suppose that you have established an online store on Shopify and partnered up with BrandsGateway as your dropshipping supplier. How does the ordering process work? Well, a potential customer comes to your clothing boutique with the intention of buying a high-end Dolce & Gabbana dress. Your potential customer becomes a buyer in the moment of making an order and a purchase ADD. Once an order is placed, the second step follows.
Step 2: The order is forwarded to your supplier automatically
After the first step is completed, the order is automatically passed to your supplier, in this case, BrandsGateway. BrandsGateway receives the order with all of its details, including a confirmation that your customer has paid. In this stage, as a retailer, you pay the wholesale price to BrandsGateway.
Step 3: The supplier ships the product
After receiving the order and the payment, your supplier packs the product and prepares it for shipping. The difference between the retail price your customer paid to you and the wholesale price you paid to your supplier is your profit. Finally, BrandsGateway ships the product directly to your customer.
Step 4: The retailer informs the customer about the shipment of the product
Even though the dropshipping supplier packs and ships the product, their role is invisible. In the dropshipping process, the end-customer doesn’t need to know who ships the product. Instead, the customers consider this eCommerce model as the traditional one and they don’t know precisely what happens backstage. In reality, the dropshipper doesn’t exist for the end-customer. As a retailer, you have the duty to inform your customers when their products are shipped, and when they are supposed to arrive.
Overall, the above-mentioned four steps are crucial to grasp the concept of dropshipping. Once you fathom the fundamentals of the dropshipping model, everything becomes easier.
How to find the best supplier for your dropshipping business
To excel in the drop shipping industry, you must collaborate with a supplier who will deliver top-notch services. In contrast, you’ll risk losing valuable customers and head your dropshipping business toward a breakdown.
Doing research into finding the best suppliers doesn’t mean just typing in the search word “dropshipping”. Most dropshippers work with other businesses, so their work model is called Business to Business (B2B). They are not Business to Consumer companies. B2B companies will most likely not appear at the top of your search results since they use different strategies for advertising and finding their customers.
This fact increases the likelihood that you’ll find it complex to identify the right dropshipping suppliers. It’s more likely that through search engines you’ll come across a wide range of fake suppliers. For that reason, in this section, we’ll focus on some tips and tricks when it comes to spotting the bad and the good dropshipping suppliers.
Recognizing fake supplier deals
This section is to help you find the answer to the first question we mentioned above ‘Does the supplier have a reputation for being legit, reliable, and trustworthy?’. Before diving deeper into the key aspects of legitimate suppliers we must cover the topic ‘how to recognize and avoid fake dropshipping suppliers’.
Here are some red flags you need to watch out for that could be a sign for fake and unreliable suppliers:
Selling to the general public
If you are looking for actual wholesale prices, ensure that you sign up for a wholesale account. You will need to provide proof that you actually have a genuine business, then wait for the wholesaler to approve your account before you can start placing orders. Just in case your “wholesaler” is offering wholesale prices to everyone in the general public, they are not genuine; they are retailers that sell products at extortionate prices.
Identifying trustworthy dropshipping suppliers
Now that we established some of the ‘red’ flags that you should watch for and the tricks for spotting illegitimate dropshipping suppliers and signs of fraudulent operations, let’s see the green signs that are usually a characteristic of legitimate suppliers.
Per-order shipping fee
It is an industry-standard for dropshipping suppliers to ask for a pre-order fee. The fee can be diverse depending on the products you are ordering and the services a certain supplier provides. It will depend on the involvement and bulk of the order. This practice is expected in the industry because packaging and shipping orders for single individuals are more involved and expensive, compared to bulk orders.
Legitimate dropshipping suppliers generally are offering different pricing packages for subscribing for their services. Depending on your needs and requirements, usually you will be able to choose from several different pricing plans. To sum up, if you are asked for a recurring service or membership fee, this supplier charges for its services in a legitimate way.
Some dropshipping suppliers set a minimum amount that you’re required to pay for your first order. This also is an industry practice which you should expect and respect. In fact, it helps dropshipping suppliers to differentiate between window-shoppers and real buyers.
How to increase chances for success when opening a dropshipping store?
When embarking on a dropshipping journey, it’s not enough only to understand the basics and team up with a reliable supplier. There are some aspects that are related to providing a seamless experience to the people visiting your store and that you need to take into account.
People don’t appreciate receiving a product that looks nothing like in the picture displayed in your online store. This means that, even if you already have chosen a potential supplier, you need to do your due diligence, order a sample product, have it sent to yourself and check it out. Then, ensure you present the products in your portfolio in the most realistic way possible, to avoid inconveniences and customers’ complaints.
A refund policy is something you mustn’t ignore when starting a dropshipping business. Similar to every type of eCommerce business, a policy for handling refunds is a necessity. You don’t want to find yourself in a situation where a customer is dissatisfied with a certain product and asks for a refund that you can’t provide. In dropshipping, the one responsible for returns is your supplier, therefore when looking for a legitimate supplier make sure that he works professionally and offers the possibility for a 14-day return policy.
Nowadays, the majority of consumers are not familiar with the European Trade Law which poses the need for traders to accept 14-day returns, so suppliers are using this to their advantage and don’t offer a smaller return policy or some offer returns under ‘special circumstances’. When doing your research for a supplier don’t forget to check if it operates according to this EU regulation.
Testing the quality of the product is one thing while testing the time for delivery is another thing. Both are equally important for owners of dropshipping stores. You may wonder why that is. It’s simple. Your hands are tied when it comes to shipping because your supplier is responsible for that stage of the process. What you are responsible for is testing your supplier’s delivery times. If your customers wait a lifetime for their product to arrive, your business is not heading in the right direction.
Depending on your suppliers, sometimes you can’t rely 100% on them doing a good job when packing and delivering your products. At the end of the day, you are not monitoring their work, so you can’t be sure that a product will be packaged orderly and delivered on time. To avoid these kinds of issues, you need to ensure that your supplier invests in delivering premium services. To test their services, you can order a product to see if it’s carefully packed and taken care of.
In a nutshell
In the end, today’s technology is ever-changing and luckily it’s anticipated that the dropshipping industry will only get better and stronger. This guide to dropshipping was created to support you in the way of learning about this eCommerce sector in order to make a decision if it’s something you are interested to pursue.
Evaluate the advantages, prepare for the disadvantages mentioned above, identify which dropshipping suppliers have convenient offerings, and don’t be afraid to take a risk and open your own online store.
Table of Content
- What is dropshipping?
- Understanding the roles in dropshipping
- The benefits of dropshipping
- The drawbacks of dropshipping
- Frequently asked questions about dropshipping (FAQ)
How does dropshipping actually work?
- Step 1: An order is placed
- Step 2: The order is forwarded to your supplier automatically
- Step 3: The supplier ships the product
- Step 4: The retailer informs the customer about the shipment of the product
- How to find the best supplier for your dropshipping business
- Recognizing fake supplier deals
- Identifying trustworthy dropshipping suppliers
- How to increase chances for success when opening a dropshipping store?