The internet has changed so much about the way we consume products. All kinds of niches for products and services once impossible to find are now as easy to reach as a simple Google search. Thanks to various tools, software, and algorithms, customers can receive a more personalized shopping experience than in the physical world. Similarly, social media and other technologies greatly facilitate communication between business owners and their patrons. These are just a few out of many examples.
This is true for the other side of the process as well: the invention of eCommerce has changed the way people create and operate businesses just as much as the way people buy from them. Perhaps the most prominent is that even the smallest of small businesses, entrepreneurs who cannot afford a brick-and-mortar store, can make significant profits from a purely digital presence. All they need is the right combination of high-end technology, the know-how needed to optimize that tech, savvy marketing, a solid business model, and a little luck.
However, while much has changed about the methods that people can use to run their own business, much has also stayed the same. The pertinent example here is the maxim that to make money, you will first have to spend money. When it comes to eCommerce, you may need to buy software to even have a store from which you can peddle your wares. You will likely need to buy products, or the materials needed to make your own products, just so you can have something to sell. Money is required for shipping products to your customers, spreading the word about your website, holding inventory space, and so much more.
Startup capital can remain an elusive prospect and a major obstacle preventing people from starting their businesses, even on the more liberated realm of the internet. Luckily for you, there is a business model out there that can remove many of the expenses mentioned above, as well as lower the risk of starting your own online store. Dropshipping allows business owners of humbler means to stand on the shoulders of manufacturing and supplying giants, freeing up room in your budget and time in your schedule. Here is some information on what makes the dropshipping method the least expensive way to start an online store, as well as advice for how to make this widely popular business model work in your favor.
What is Dropshipping and How Does It Work?
When an online store employs the method of dropshipping, this means that they do not create the products they offer in their inventory. Instead, they have an agreement with a wholesaler, through which the latter handles the manufacturing of the items while the store puts them up for sale. These are separate entities, each taking care of different aspects of the eCommerce process in a relationship that is (at least in theory) mutually beneficial.
To more clearly explain the concept, it helps to understand the different steps of the dropshipping process. Here are some detailed descriptions of each part of the model:
1. Coming to an Agreement
Given that dropshipping requires cooperation with another company, the first step an eCommerce merchant will need to take (not counting the preliminary decision to adopt the dropshipping model in the first place) is as follows: an online store engages a dropshipper to sell its products. You can find more exhaustive information about finding an ideal supplier in one of the later sections of this article, so for now we will focus on what to do once you have chosen a potential business partner.
Just as you would not (and should not) want to work with just any entity presenting itself as a dropshipping supplier, they will not immediately be receptive to just any entity presenting itself as a legitimate business. This is especially true for anyone who is trying to start an online store completely from scratch, and therefore has no reputation. This is extremely important to understand before you even get to the point of forging an agreement with a prospective wholesaler. If they think you are less than genuine, there will be no partnership.
That is why you need to show them that you are serious. Do not just say you want to offer their products on your store; be specific about what types of products you want to sell and to what demographics you are trying to reach. Conduct research on the company, and prove that you did so during the discussion. Tell them precisely what you expect and want out of this relationship, and listen to them as they tell you what they would expect and want. Once you prove to them that you are genuinely interested, you can start hashing out the terms of your agreement.
2. Providing the Products on Your Store
Once you and the wholesaler formally start your partnership, they will grant you access to the products they manufacture and/or distribute. At this point, it is time to move on to the next step of the process: the online store adds those products to their websites, where customers can find and buy them. Your eCommerce software should provide some tool or feature that allows you to insert these listings into your store.
You probably already have at least a vague idea of what you want to sell in your online store, and you would be wise to select products based on that idea. That may seem obvious, but perhaps less apparent is that this can also go the other way around. Instead of simply using your idea to guide your search, you can use your search to expand on your concept for the store. Keep an open mind as you browse the supplier’s stock. You just might find something you might otherwise have never considered for your inventory, and deciding to offer it just might give you a hit — or even a new direction.
3. Handing Over (Some of) Your Duties
Your online store’s active role in the dropshipping process effectively concludes in the third step: when a customer buys something on the online store, the order is passed along to the supplier, who packages and ships the product on behalf of the online store. You may have to manually pass along the order, meaning that when a customer goes through checkout at your store, you go through the same checkout process on the supplier’s website. However, this may not be feasible after you reach a certain level of popularity, and you should apply automation software to this process.
You and your store are no longer the ones handling the storage and shipping of your inventory. This is one of the most appealing aspects of the business model because you can save significant amounts of money and time. However, this also means that you largely give up control over how the items are stored, packaged, and shipped. We recommend ordering one of the products you offer so you can see how quickly it arrives, as well as observe the condition of the item and whether it is exactly what you ordered in the first place. If you have any concerns, let them know.
4. Dividing the Profits
With two companies involved in making this product available, you may be wondering: how much does each party earn from each customer’s purchase? The answer is simple: the supplier keeps the wholesale price of the product, and the online store keeps whatever profit results from the listing price. These companies will not offer their products just for exposure. If you wish to offer their products, you need to pay for them. While you can certainly save money and time by not manufacturing, storing, and shipping the products yourself, you still need to pay for outsourcing the labor.
When it comes to making a profit on your end, the solution is elementary, perhaps the first lesson of Business 101: mark up the listing price. Whatever amount you pay the supplier for their products, charge customers a higher amount and pocket the change. Otherwise, you will not be able to afford to stay in business. With that said, you should never lose sight of your customers’ needs, and how much they are willing to shell out for your products. Mark up the prices, but keep them fair.
Is Dropshipping Right For You? Pros and Cons
Now that you have a better understanding of what dropshipping is like, you may be wondering if this type of business is right for you. Like any business model, this one has its benefits and drawbacks. Whether those potential benefits outweigh those potential drawbacks depends on your personal preferences for running an eCommerce store. Here is a list of a few pros and cons, to help you make a more informed decision.
Pro: Inexpensive to Get Started
We mentioned this at the very beginning of this guide, and we mention it again here because it is perhaps the most appealing aspect of the entire model. Starting a dropshipping company requires far less money and far fewer resources, which makes it far more accessible than other kinds of eCommerce businesses. Another company would be taking care of quite manufacturing, storage, and shipping — all of which are important steps in the ordering process, and activities that not every small business can handle on their own at the beginning.
The money that you can save could then be invested in other areas like website maintenance, technology upgrades, inventory expansion, marketing campaigns, and employee wage increases. By skipping all these financial burdens that would otherwise be necessary, you can get started sooner on building a better business.
Pro: Less Supply Chain Hassle
Each different steps of the supply chain, from actually making the product to completing the delivery, requires a great deal of oversight. Larger companies may have enough experienced workers to divide the labor, which means this is not as much of an issue. However, in smaller operations, one person may have to oversee every order through every step. This can leave them with little time or energy to take care of anything else, which can be a rather unsustainable way of running a business.
Handing the reins on several steps of the eCommerce process to another company is not just great for saving you money from start-up costs. It is great for saving you time and energy, two resources that can be just as important for making sure that your store is running smoothly. This is just one more way that dropshipping makes it easier to create and operate an online business.
Pro: Easier to Grow
Many practices can be helpful for anyone just getting started with eCommerce, yet need to be dropped after a certain point in order for you to grow, like a tadpole losing its tail or a young bird leaving the nest. The pros previously mentioned in this section both describe how dropshipping is excellent for anyone at this beginning stage. However, this method does not need to eventually be dropped. In fact, it is flexible enough that you can scale up as much as you want without necessarily having to rewrite your entire business model.
If your business experiences extraordinary growth and you find yourself with a steady stream of revenue, you can certainly buy some warehouses for your inventory, or take care of the packaging. With that said, even if you have the power to cover all the expenses you could not when you started, you do not have to do so. With dropshipping, you can expand your inventory in accordance with your growth. It helps that by saving on all those expenses in the first place, you already have a headstart on your business’s growth.
Con: Lower Profit per Sale
If you choose dropshipping as your way of conducting business, you can save a lot of money. With that said, nothing comes free. You would not just be purchasing the products in your inventory from a wholesaler or supplier, as you would under a more conventional business model. On top of that, you may have to pay for a variety of services they will handle on your behalf, such as manufacturing, storage, inventory management, and shipping. Spending more on acquiring products for your store can result in making less profit from each one that you sell. Thankfully, you can invest the extra time and money you save from this method into fine-tuning your store and increasing your number of customers.
Con: Less Control
As we said earlier, turning over responsibility over certain stages of the supply chain to someone else can be both liberating and intimidating. Your store’s ability to satisfy customers will depend greatly on the abilities of your wholesaler to provide the items they want and see their orders through to completion. What makes this more complicated still is that your patrons will likely not know anything about the dropshipping supplier, so they will complain to you about any mistakes that the supplier makes. You can minimize this by finding a company you can trust and staying on top of them however you can.
Con: Tougher to Differentiate
Not making your own products can save you on manufacturing costs, but you still pay the price of not being able to offer something unique, exclusive, or distinctly “you.” Exacerbating this issue is that your supplier may have more partners besides you, and you may be competing with those friends-of-friends to offer some of the same products. This is nothing personal; it is just business. You need to find other ways to stand out from the competition, so focus on your brand identity and presentation. Creating a solid marketing strategy is also vital, so customers can hear about you before they hear of anyone else.
Finding the Right Suppliers for Your Business
When looking for dropshipping suppliers to work with you, you cannot afford to choose just anyone. Thousands of companies offer dropshipping services, and some are more reliable and capable than others. Even if you choose to partner with more than one, you should be thorough in your selections to ensure the best experience with dropshipping. Remember: it can be a make-or-break decision.
How to Search for a Dropshipper
Web search may seem like the go-to option for discovering dropshippers, and you can easily find plenty of options through a simple Google session. However, the results may be deceptive: you cannot always determine the legitimacy of an alleged supplier on sight alone, or rather on website alone. Many suppliers spend more time on their work than on their pages, and authentic wholesalers may have outdated homepages that look sketchy.
For this reason, we recommend going beyond the internet and making some calls. Get on the phone and reach out to a representative who can answer your questions about their practices and services. Keep in mind that phone calls can be just as much about leaving a good impression to them as it is about getting a good impression of them. Observe how responsive and courteous they are. As for identifying them as a scam or the real deal, be wary if they immediately assent to everything you say. As we said earlier, they should be interrogating you for legitimacy as much as you are interrogating them.
If you prefer, you can leave the identification to the professionals and work with an aggregator, which is basically a directory of confirmed dropshipping suppliers. Companies like DOBA and WorldWide Brands do the hard work of evaluating potential suppliers and weeding out the scammers, making it easier for eCommerce websites like yours to reach someone reliable.
While utilizing a dropshipping aggregator allows you to skip a few steps in your search, you can circumvent it even further by seeing who other people chose — namely, your competitors. These companies may already be working with dropshipping suppliers, hopefully after doing their homework. You could order one of their products, take notice of the return address on their packaging, and trace it back to the supplier. If they are good enough for your competitors, they just might work well with you.
Questions You Should Ask Before Making Your Choice
- Do they fit your niche? It should go without saying that not all suppliers offer the same products, so find one who can offer what your customers would want you to offer. This is why you should choose your niche at the beginning when working on your online store.
- Are they tailored for retail dropshipping? Some suppliers will only allow you to purchase their products if you purchase a minimum amount. You do not want to buy something in bulk if that amount of the same product is not in demand at your store. Find one that can sell one product at a time, like your retail site does.
- Do they sell the brands you want in your store? Some customers, especially in certain fields like shoes and food items, can be quite loyal to specific brands. Even consumers with less loyalty may find it harder to trust goods that are generic, or possibly bootlegged.
- Are wholesale prices far enough below market prices for you to make a margin? Suppliers might be able to offer you bulk products for far cheaper than elsewhere, or they might not. Once you know their prices, calculate how much profit you can make between purchasing their products (plus their other services) and offering them at a reasonable price on your store.
- Do they have a good shipping track record? A little research never hurts, especially for something as important as the company taking over your supply chain. Read independent reviews online from their past/present partners, and reach out to them for more information.
- Do they charge extra fees? If a prospective partner asks you to pay a monthly fee just for working with them, run away. That is not how this industry works, and they are likely a sham.
- Where are they located? Greater distances between suppliers and customers can mean longer shipping times and higher shipping costs. If you want to serve people in a specific region, find a supplier within that region. Otherwise, look for someone in the center of your country.
- If you have a problem, do you have a direct line to someone who can help? Emergencies can occur at any time on any day, and you will want a customer support team that is similarly always available. Make sure that you can reach someone at your supplier whenever you may need help.
- How do they manage their portion of the supply chain? This other company will be handling many vital duties that make your store possible. You should ask them about their processes, methods, and tools for doing so, as well as how orders are communicated to them.
Process Tips for Working with Dropshippers
Even though you cannot exert much control over the order management process, but there are a few ways you can help your partner streamline that process for greater efficiency and less hassle. Some companies may be more dependent on modern computing technology, while others use more traditional methods. Either way, you need to try to make the most out of what you have. Here are some process tips for working with dropshippers.
Automate Your Orders
Implementing automation is vital for the growth of any business. Manually sending information on individual orders to your supplier is possible only when you have a few orders at a time. If you get more than that — and you do, if you plan to run a successful business — then the task grows impossible. To scale efficiently, you need to automate your order processing. Make sure that your eCommerce platform allows you to automatically forward the vital details of any orders you receive to your supplier, so they can get started on fulfilling them immediately.
Note: while we are on the subject of automation, you should also look into software that can automatically update customer shopping carts with real-time carrier calculated shipping rates.
Connect With Your Supplier for Real-Time Updates
Speaking of updating in real time, you need software that can automatically update your website’s inventory. Before they can make a purchase, visitors need to know how much of a certain item you currently have in stock. If that information proves inaccurate and outdated, they may grow impatient with the wait and cancel their orders. Real-time inventory updates are preferable to passive ones. Instead of someone having to adjust the numbers themselves, this feature gets a computer to do the job for you.
Additionally, real-time inventory updating software can also be used to alter the statuses of customer orders in other ways. When an item is currently unavailable but expected to be restocked soon, you can offer the option of pre-ordering an item, so your supplier can fill the order as soon as the next shipment arrives.
Make It Easy to Return Items
Because of the different ways that eCommerce businesses pay for products, dealing with customers trying to return their purchases can be a hassle — and an expensive one at that. With that said, you must still try to provide gracious and helpful customer service, or they might not buy from you again. According to eCommerce statistics, more than 80% of shoppers cite a convenient returns policy as a strong deciding factor in whether or not they should complete a purchase on an online store.The return process should be seamless. Work with the dropshipper to make it so.
Moreover, because of the expenses that may be involved in the returns process, you may be tempted to charge your customers extra fees for going back on their orders like this. Customers will not appreciate having to pay even more for an already dissatisfying experience, so avoid this mistake.
Special Considerations for Online Stores Powered by Dropshipping
The following pieces of advice are less specific to the actual processes of dropshipping. Instead, they are more about the mindset, and even the philosophies, that a store owner should have if they wish to thrive under this business model. You can know all the different components of the business model, but you will not succeed (at least, not as much) if you do not understand. Here are some broader tips on running your business.
Stand Out in Your Industry
Dare to be different. This motto can be applied to all businesses, but it is especially crucial for dropshipping businesses. Remember that one supplier may have multiple partners: you may be selling the exact same products as your competitor. If you want to survive, your potential customers must believe that you are not only different from the others, but better.
This is where brand identity comes into the picture. Give your site a distinct vibe through the more creative aspects, such as the visual design, color palette, and even the name. Inject some personality into your copy — none of the bland product descriptions a robot could input, but something detailed, with a sense of life in it. All of this makes it easier for people to connect with your business.
Put Yourself on Top with Marketing
If you want to beat your competitors while still selling similar products, you have to reach your customers before they do. Build a strong marketing program that relies on built-in tools. Master all of the marketing features in your eCommerce platform, or at least several of them, and implement them. No one will visit your online store if they do not know of its existence.
To that end, you should also maximize your site’s copy for search engine optimization (SEO). Determine what keywords you want to rank for on search engine results pages, then fix up your site so that people can quickly find it when they search for those keywords. Even minor alterations can seriously increase your visibility.
Prioritize the Needs of Your Customers
Both of those tips are great for attracting people to your business. However, you cannot depend solely on first-time visitors, but also on loyal customers. You cannot just provide a pleasant experience, but also be there for them if they ever have an unpleasant experience.
Offer help when your customers need it most. They will remember the support you give, the speed with which you address and resolve their concerns, and the attitude you show while working with them. If all are positive, they are more likely to trust your business and return in the future.
The dropshipping method can definitely save you a significant amount of money and provide a steady revenue stream in less time than other approaches to eCommerce. These are just a few of the reasons why it remains such a popular business model among online companies. However, it is far more than some simple get-rich-quick scheme. Moreover, despite the fact that it takes quite a few responsibilities off your plate, it still requires plenty of work in order to it right.
That is why knowledge is the most powerful tool you can have at your disposal. As with anything in life, learning more about the dropshipping process can enable you to really make the most out of your experience with it. Hopefully, this extensive guide to dropshipping should provide you with plenty of useful information about this remarkable and popular business model. Whether you are just conceptualizing your business or already prospering after years of labor, it never hurts to learn more than what you knew yesterday.