If this article was social media focused, it would have a title blasting ‘Make millions with dropshipping with no effort’ and three exclamation marks. As a serious business website, we hasten to caution you about dropshipping as a ‘money for nothing’ option. Regardless of the business model you are launching with, good business practice plus effort correlate closely in ratio to business profits. Today, we share how to get involved in dropshipping realistically and with sustainable success in mind.
Start with your realistic spectacles on
If you are changing from a corporate job to working from home, it is important to note that it is not glamorous. Staying in your PJs all day loses its attraction quickly and is inadvisable. Your home can also lose its “peaceful place away from the world” feel or its “destination for partying” as your work takes over the space and cabin fever grows.
Next, don’t believe the plethora of social media videos from ‘dropshipping professionals’ who are professing that dropshipping is simple, painless and low-risk.
Yes, there is less capital required at start-up; the business is not risk-free. You should expect to face high shipping costs and smaller profits. In addition, if you do not have an established relationship and commercial power over your suppliers, then you will have minimal control over the quality.
Well-run, professionally managed dropshipping can be worth it long-term, but you will need to absorb risks and finance mistakes, fraud events, poor quality events and other elements of regular business if you want to grow your brand value.
What is dropshipping?
Dropshipping is a business model that uses third party suppliers to supply products you have curated, sells the products via third-party e-commerce platforms, and delivers to the buyer’s door via a third-party logistics service provider. Shopify, Square Online, BigCommerce and Shift4Shop are examples of popular e-commerce platforms.
This order fulfillment process does not require you to build up stock or use storage facilities (initially at least), nor does it require you to physically handle the shipping. You sign a contract with a dropshipping logistics service provider, wholesalers and producing factories. These parties arrange the manufacturing, order picking, packaging and shipping on your behalf. You never touch the merchandise.
You get an order, compile your order to all the roleplayers in the supply chain, and the order is delivered directly to your customer.
Unlike the hyped-up messages flying around social media, dropshipping is not a fast way to make a pile of cash. It requires time and ongoing small amounts of investment in the beginning. It is worthwhile starting it as a side business and only leaving your regular job when the profits justify such a move.
Reality checks on how to get involved in dropshipping
Dropshipping is a business that should not be handled frivolously. Research the risks and get an accountant to advise you on how to protect yourself against these risks.
It requires hard work and a careful eye watching payments and customer service. Remember, as a brand, you are responsible for providing an enjoyable customer experience, placing accurate orders, maintaining the website, and improving and monitoring the marketing.
This is time-consuming and complex and may require the outsourcing of web design, SEO and PPC. Doing a course on business management and administration will stand you in good stead. Also, find customer service gurus in your network whose brains you can pick for good advice and gain a good understanding of ecommerce technology so that when you do outsource, you will know what service you do or don’t need.
Using a pre-existing ecommerce platform, like Shopify, reduces the IT responsibilities.
Dropshipping ecommerce is a saturated market, so pricing is very competitive and margins are tight.
Whilst you are buying directly from the source, the source also needs to make a profit so it won’t be dirt-cheap. And if it is, why? In addition, unless you have flown to the origin and inspected the factory, do you know if you are buying from the source or a middle man?
Wholesalers are primarily interested in supplying bulk orders, so they won’t give you their bulk price for three t-shirts and four underpants.
The factory will then add fees for picking the order, packaging it and handing it over to the shipper. Expect to make a 10% profit margin, maxing out at 15% with higher-priced items having smaller margins.
To overcome the market saturation, you need to research to find a gap in the market and curate a stable of products that fills that gap. As your brand will be new, you will most likely have to attract traffic by using price slashing and limited-time offers.
Create compelling product descriptions for each product. If you look on market leader platforms like Amazon, you will see that some of their own products’ descriptions are two thousand words long! Research quality webinars on dropshipping (avoid the hype) and watch as many as you can to improve your knowledge base. Some of the ecommerce platforms offer webinars.
Dropshipping does have a lower upfront risk as you are not pouring capital into stockpiles that might not sell. However, don’t forget that financial risk is a part of doing business – even dropshipping.
Having the product bypass the need for your hands-on involvement increases convenience but significantly reduces your quality control abilities.
Neither objective inspection can take place nor can mistaken order fulfillment be picked up. You will be completely reliant on your logistics service provider for prompt delivery. Your brand will be responsible for any poor delivery service or faulty products, and you can’t sidestep this as this is your selected business model.
The most successful ecommerce brands have very flexible return policies, and statistics show that ecommerce businesses can expect up to 25% returned products. Clothing and beauty merchandise have the most returns. Unreliable suppliers can cause the return rates to increase, so factor that into your business risks until you have established solid supplier relationships.
Your source supplier might take back faulty items ‒ check your contract with them and method of proving a fault. But it should be ascertained up front who will pay for return shipping costs. If your product is deemed unsatisfactory by the end receiver and the supplier isn’t replacing it OR cannot supply a better quality item, you will pay for this plus the shipping costs.
It would be prudent to note that samples sent by factories are usually of superior quality to their mass-produced product line products, so don’t be surprised when the orders are not as you expected.
Logistics costs are a big portion of your business costs when you are using a dropshipping business model. The costs amplify exponentially if you are sourcing from multiple factories or agents. For example, a client orders a short sleeve t-shirt, a long sleeve t-shirt and a hoodie, and each one (unknown to them) is from a different source. Three individual shipping sets will be higher than if all three were grouped in one shipment from warehouse stock.
A dropshipping business usually absorbs a portion of those costs; otherwise, the extreme shipping costs will be a deal-breaker, and you will have high rates of abandoned carts. This is why it is better to limit the number of suppliers you sign with.
When you are not holding stock in your warehouse, you cannot guarantee stock levels. You, in turn, will need to do a daily checkup with your suppliers regarding their stock levels per item.
You will be unaware, for 24 hours if you are doing daily checks, if your supplier has done a bulk deal and sold all your “palm tree t-shirts”. Returning funds to clients costs money and brand value.
Use factories that give you API real-time views of stock quantities, and check what their updating cycle is.
What are the benefits of dropshipping?
Now that we have prepared you with a cautious, eyes-wide-open approach to dropshipping, let’s look at the benefits to reignite your excitement.
You don’t have the responsibility of securing storage space, stock checks, insuring stock against theft, rioting, fire and natural disasters, paying for storage, as well as overseeing the logistics. Therefore, your running costs will be lower, which is great for price points and profit levels.
You don’t have the stress of high stock levels that are not moving. You only buy what the customer has paid for, so cash flow is good.
It is an easy business model to start as you don’t need heaps of startup capital. You do need a good computer, a big data plan, and a reliable internet connection.
Keep your finger on the pulse of trends and switch out slow movers for ‘hotter’ items without the worry of having to change production lines in a factory that your own or high stock levels of the slow mover.
When customers are perusing your online store, your algorithm can propose other products to them that you think they might like or that relate to their item of interest. This can increase basket sizes, and no showroom nor showroom floor assistant was needed.
Are there better options than dropshipping?
When you began reading this article, you might have thought we were trying to talk you out of dropshipping. Indeed, NO. We were trying to wrangle a lid onto the fire of hype and falsehoods that scorch through social media.
Dropshipping is not easy, low-effort, overnight big bangers and mash business. It usually works best in a well-rounded business model that includes traditional selling, so your risk is spread over different areas.
You could, for example, store small, high-quality cat nutrients, tonics, anti-anxiety and fur glossing treats in your garage or small storage solution, then use dropshipping for cat beds, cat webcams (for clients to check on them when they are at work), toys or high-end collars. Remember to limit the number of suppliers.
This spreads your business risk and makes your online store more interesting without ballooning your running costs.
Pick and pack outsourcing
You can also store products that you have made or have had manufactured at a logistics company that will pack and deliver for you. You will have dropshipping freedom but greater quality control. Some ecommerce platforms even offer that service under their brand.
With convenience comes cost. Your accountant can help you assess the strategic value of your time versus outsourcing. The fees might look expensive, but the true cost of your time might outweigh that.
Pick & pack in-house
It makes perfect sense to pick and pack yourself when you are just starting out. It saves a lot of money, and you can learn about the best ways to package your product. Once things are ticking over and orders and product SKUs are increasing, then you can evaluate outsourcing.
Most logistics service providers offer a shipping and tracking platform that will make it easier for you and your clients to track orders. It is best to integrate the logistics tracking platform with your ecommerce site. The platform should calculate logistics prices and print shipping labels and packing slips at the point of packing.
Growing your ecommerce company
Before building a customised online store, consider the existing, popular ecommerce platforms. If you are new to building websites, then a pre-existing platform will save you time and frayed nerves. If you are an HTML propellor head, then platforms like WooCommerce and Magento might suit you. But are you wanting to spend your valuable time on that or sourcing ‘hot’ products? Which expenditure of your time will make you the biggest profits? Probably not HTML tweaking.
If, after reading this article, you are itching to get started with dropshipping and ecommerce, then pause and work through those webinars we referred to. You will be grateful for that knowledge when you hit some speedbumps up the ecommerce road. Consider the combination of dropshipping and traditional selling; it has worked out very well for thousands of brands.
Whichever business model you choose, be prepared to work hard and get professional advice on strategy and finances. And remember, the more you practice, the luckier you get.