Inventory management is one of the biggest challenges that every retailer faces. Having the right products at the right time requires proper demand forecasting and savvy purchasing practices.
If you don’t order enough merchandise, you risk disappointing your customers and sending them to your competitors. But if you order too much, you end up stuck with inventory that you’ll have to unload at a loss. It’s a tricky balance, and many merchants just aren’t up for it.
Enter dropshipping, an ecommerce business model that eliminates the burden of stocking merchandise. As you’ll learn below, dropshipping allows sellers to sell items without having them in stock. Instead, they partner with manufacturers who agree to ship items only after the customer has placed an order.
This post will offer a detailed look at dropshipping. You’ll learn what it is, how it works, and how to set up a dropshipping business.
Let’s dive in.
What is dropshipping?
Dropshipping is a business model in which the store selling the merchandise online doesn’t actually hold any of the products in stock. When a customer buys an item from the merchant, the seller arranges for the item to be shipped to the customer from the supplier directly.
This model saves the seller from needing a warehouse and numerous staff to manage items. And it benefits the supplier by giving them an additional channel through which they can sell their goods. The dropshipper, in a nutshell, simply acts as the go-between; arranging the transaction between the customer and the manufacturer or supplier, such as a factory or importer.
The popularity of dropshipping has grown immensely over the last few years. According to 3dcart, around 23% of online sales in 2016 were fulfilled using dropshipping — that amounts to $85.1 billion. What’s more, nearly 33% of online stores use dropshipping as their fulfillment model.
Dropshipping comes in many different forms, but consider common examples such as Etsy, Notonthehighstreet.com, and even Amazon, who incorporates elements of drop shipping into its model.
In the case of Etsy, dropshipping gives small product creators a platform on which they can sell their goods. Customers have a single place where they can shop from a range of different suppliers. Etsy simply acts as the marketplace or platform on which those items can be purchased, but the company itself doesn’t carry its own merchandise.
Advantages of dropshipping
Some of the pros that come with dropshipping include:
Sellers and manufacturers can focus on their strengths.
The reason dropshipping has had so much success is that it allows each party to focus on their particular area of expertise. The business setting up a dropshipping site should be doing so because they have the skill or the vision to create a storefront that is going to attract and convert customers.
On the other side, dropshipping greatly benefits suppliers who are excellent at manufacturing or creating their products, but are too busy or uninterested in developing the ecommerce platform to sell them.
The benefit of dropshipping is that it offers both parties (the dropshipper and the supplier) an opportunity to lean on their strengths and partner for prosperity.
No upfront inventory costs for the seller
Securing inventory capital isn’t an issue when you’re dropshipping. As the merchant, you won’t have to spend funds to buy inventory, so the upfront costs are minimal. When the customer places an order, your supplier or manufacturer will fulfill the order, and you’ll get paid.
This makes dropshipping an attractive option for risk-averse merchants. If you’re unwilling or unable to purchase inventory upfront, you can team up with a supplier or manufacturer to handle stocking and fulfillment.
Eliminates logistical headaches for the seller
Another major headache for retailers lies in logistics. Printing, packing, and shipping takes up a lot of time and requires a certain level of expertise, especially today, when consumers expect their online orders to be delivered quickly and cost-effectively.
Merchants who use the dropshipping business model are spared from the issues of order fulfillment.
The disadvantages of dropshipping
Just as there are great benefits, there can also be some disadvantages.
Tricky supplier relationships
In some cases, the supplier may prefer to sell in bulk and ship products wholesale to a retailer, rather than ship them individually to customers as the orders come in. They also may resent that the dropshipper takes a commission for the sale, a commission that could have been the supplier’s if they were selling directly to the customer.
Of course, both of these scenarios come down to the personal preference of the supplier. Both bulk sales and setting up their own ecommerce site could be beneficial, so it is always up to the supplier to decide which avenues are viable for their business and capabilities.
Some manufacturers and suppliers even have their own e-commerce site and choose to also participate in drop shipping arrangements as it helps to expand their reach and bring in extra business.
Little control over the customer experience
You can’t always guarantee that suppliers will deliver on time and products will meet expectations.
Reputation is everything for an online business. Therefore, placing your reputation into the hands of a supplier network is a big risk. When you’re not the one holding the stock, it becomes very hard to control the turn around times and customer satisfaction.
The most successful dropshipping companies have invested greatly in maintaining high standards from suppliers and constantly battled to ensure they commit to agreed delivery schedules.
Product quality may be inconsistent
Product quality can be a hit-or-miss, particularly if you’re dealing with dropshippers overseas. As the merchant, you don’t have a say in your supplier’s manufacturing processes; if you don’t vet your vendors carefully, you could end up selling products don’t match the description and quality standards on your website.
Step by step guide to setting up a dropshipping business
Contrary to what some online gurus would have you believe, setting up a dropshipping ecommerce business is not all easy breezy. It requires hard work.
If you’ve decided that you’re up for the challenge and you’re ready to embrace the benefits that dropshipping can offer, here are the steps you should take to open and run a dropshipping ecommerce business:
Select Your Niche
The first step to starting a dropshipping business is figuring out your niche. What market do you want to serve? What types of products should you sell?
Often, the best way to answer these questions is to look into your own interests. It’s much easier to run a business if you’re truly passionate about what you’re selling. So, when you’re determining your niche, set your sights on the things that pique your interests.
That being said, you also need to find a niche that makes business sense. Working on a product that you’re passionate about is great, but if it doesn’t make you money, then it’s a hobby, not a business.
So before you decide on what product to sell, ask yourself the following questions:
Are people searching for it?
Jump on Google Trends, type in your products, and see if people are looking for them. If yes, you have a winner. If no, you can use Google Trends for further research.
Does it generate appealing profits?
As a merchant, you’re in the business of making money. That’s why you need to choose a product or niche that can offer reasonable profit margins — at least 25%. You can do this by doing some research on the products being sold on dropshipping websites.
Visit a site like AliExpress and conduct a search for your product. Look at the cost of goods, then run the numbers to figure out how much you can sell the items for.
Are shipping costs low?
You may not be the one who’s doing the shipping and handling, but the costs to send and deliver orders matter a great deal to your customers. Unless you’re planning to cover the shipping costs yourself, set your sights on products and suppliers with low shipping costs.
Research the market
Already found a great product? Great. Next up, study the competitive landscape for your niche. Who are your competitors? What are they doing well and what are their shortcomings? The answers to these questions will help you figure out how to market and position your ecommerce business.
Define your standards
At this stage, you’ve already selected a product that you want to sell and figured out how you can position yourself in the competitive landscape. The next step is to set standards for how you want the items to be fulfilled. Here are some questions to ask:
- What will your deliver turn-around be?
- How much of a margin will you take?
- What is your refund policy?
- What are your supplier terms?
The answers to these questions will help you find and vet the right suppliers for your dropshipping business.
Build your ecommerce site
Now let’s talk about your ecommerce site. Dropshipping businesses run primarily online, so you need to find an ecommerce solution to power your store. There’s no shortage of choices on the web when it comes to ecommerce platforms — in fact, you can check out our detailed reviews of various solutions here.
That said, when it comes to dropshipping, we highly recommend Shopify, as it’s one of the most dropshipper-friendly platforms on the web. Shopify connects with several dropshipping platforms (including Oberlo) which make it easy to find suppliers and source products.
We’ve outlined an incredibly detailed guide for how to build an ecommerce site for your dropshipping business, but generally, the process involves the following steps:
- Create an account with an ecommerce solution provider
- Connect your ecommerce site to a dropshipping platform
- Start adding products
- Set up your catalog
- Customize your site
- Add pages and set up your navigation
Further reading: Dropshipping on Shopify: The Definitive Guide
Find your products and suppliers
This part of the process goes hand-in-hand with the site-building step above. As mentioned earlier, you want to pick an ecommerce platform that integrates with a dropshipping solution. Once you’ve done that, you can start browsing the platform for products and suppliers.
The specific steps here will vary, depending on your ecommerce solution, but here’s what you can expect to do:
Run a search for the products you want to sell. Dropshipping solutions typically have a search function for finding the right items and vendors. Simply enter your product or niche, and the system will generate a list of items that you can add to your site.
Add the items to your site. Most dropshipping solutions make it extremely easy to add products to your site. In many cases, you can do it with a click of a button. On Oberlo, for instance, all you need to do is click “Select product” and set your price. From there, the item will be sent to your store.
Review, analyze and optimize
Once the sales start coming through, you should analyze your performance and determine a strategy based on what is working for you. Make sure you have Google Analytics installed so you know where your traffic is coming from.
It’s also important to analyze your acquisition costs. Unless you’re selling a premium product, dropshipping margins can be tight, so you want to be efficient and cost-effective when acquiring new customers.
Finally, look at customer feedback and speak to your suppliers to see how the processes are going and if there are possibilities to improve or optimize them.
Costs of running a dropshipping business
The costs of running a dropshipping ecommerce site can, of course, vary. It all depends on the products you’re selling, the tools that you’re using, and how you operate your business.
Here are some of the common costs associated with running a dropshipping business:
Ecommerce platform costs
Ecommerce platforms cost money to build and run, so this should be factored into your budget.
Let’s look at Shopify, one of the most popular ecommerce platforms for dropshipping. Businesses just starting out are likely to be best suited to their Basic plan, which is only $29 per month. This can go up to $299 per month for their Advanced plan.
Dropshipping platform costs
The cost of dropshipping solutions — i.e., the platforms on which you can find and add products — should also be factored in.
The specifics here will depend on your dropshipping platform. Oberlo’s pricing ranges from $29.90 to $79.90 a month, while Modalyst’s cost starts at $30 per month and goes up to $480.
We’ll discuss these solutions in more detail below. Suffice it to say, it’s important to research various dropshipping platforms to figure out the right solution for your business. Another tip? Test the platform before becoming a paid user. Some solution providers offer free trials so you can take their system for a spin.
Advertising and marketing costs
There are no hard and fast figures for advertising and marketing since every business is different. Your costs will depend on the channels that you’re using as well as your budget and pricing.
When it comes to dropshipping, the most common advertising and marketing channels are Google and Facebook ads.
If you’re looking for benchmarks, DemandJump conducted an excellent study on the customer acquisition costs (CAC) of various industries. For ecommerce, DemandJump found that the average CAC for display advertising is $65.80, while the average CAC for paid search $45.27.
According to WordStream, the average cost per action (CPA) on Facebook is $7.85. Looking at the figures across different industries, WordStream’s research found the following CPA costs for common ecommerce verticals:
- Apparel – $10.98
- Beauty – $25.49
- Home Improvement – $44.66
- Retail – $21.47
Review of dropshipping platforms
Dropshipping platforms make it easy for entrepreneurs to find products and suppliers, automate the process of engaging with them, and even assist with marketing. Here are a few of the most popular dropshipping platforms on the market:
If you’re using Shopify as your e-commerce platform, Oberlo is presented as an embedded Shopify app.
They have a range of hand-picked, trusted suppliers, as well as an option to import from AliExpress, where all of the product images, details, and prices are already there ready to use.
Oberlo’s platform also allows for bulk ordering, where you can place up to 1,000 orders at once, as well as fast shipping.
Modalyst helps businesses to find fast-shipping dropship products across a wide range of categories and price points.
They work with made-in-America brands, international luxury labels, and handmade, unique designers so that businesses have millions of products and suppliers to work with.
In addition to their vast range, they are the only dropshipping platform offering automation, which means the products are delivered to US customers within 3 business days, guaranteed.
Spocket helps businesses identify high-converting products with quick shipping times from a range of suppliers, both in the US and in Europe.
Spocket deals with both inventory and order fulfillment, automating the processes so that you don’t need to worry about them.
Their products also come with a 30-60 percent discount on their standard retail price, so that businesses can enjoy higher profit margins.
Alidropship was created by a team of developers and dropshippers who have a ton of experience working with Alibaba and AliExpress.
Alidropship has a wide range of offerings. Aside from giving you access to 50,000+ AliExpress items, the solution also offers pre-edited product pages. Every item comes with a clear URL, a description, and an image to reduce manual work on the part of the seller.
And if you really want a hands-off approach, Alidropship also offers site building services. You can order a custom store and their team will build one for you.
Dropshipping and customer service
As we have touched on, customer service is one of the more significant challenges a dropshipping business will face. When the products are coming from a supplier, it is difficult to manage the turnaround times and make clear promises to the customer.
It is also tough to decide who looks after the customer service. If a product breaks or is unsatisfactory, who should handle the interaction with the customer?
It will likely require a bit of back and forth with the supplier and if dropshippers are not comfortable having tough conversations there can be a risk that they will feel pressured by the customer and take this out on the supplier. Which, of course, can risk the relationship.
So the scenario usually ends up like this: the dropshipper acts as the middleman between the customer and the supplier. The key is to come up with solutions to keep everyone happy and manage both relationships to a positive outcome.
Here are a few tips to get the best customer service outcomes:
- Get back to complaints/issues immediately.
- Set clear resolution timelines. Tell the customer that you will need to discuss with your supplier and you will come back in XYZ hours/days.
- Set clear expectations with the supplier. Tell them about the issue and let them know that you have promised the customer a resolution within XYZ timeframe.
- Be polite — to both the customer and the supplier. Both relationships are essential to getting a positive outcome.
- Look for multiple solutions. Try to establish standards with your suppliers before the relationship starts so that you know their terms for various issues. This will make it easier to strategize solutions when issues arise. You should also find multiple vendors so you’re not stuck with a single supplier if issues arise.
- Keep everyone in the loop. If resolutions are hard to find, keep setting timelines with the customer on when they can expect to hear from you. If all you can promise is an update, that’s OK, as long as you give it to them when you have said you would.
Starting a dropshipping business can be an exciting venture, but you should also recognize that it is not easy. Like every business, it requires work, it comes with challenging relationships, and it is only going to succeed if you are able to maintain high standards of service, which require strong e-commerce dropshipping supplier relationships.
If you’re up for the challenge and ready to work, dropshipping may be the perfect opportunity to establish an online business with low-overheads and great potential for scale.