Blog

What Is Dropshipping?

Dropshipping is a hot business opportunity right now. If you’ve been searching online about starting a business, then you’ve probably seen some things about dropshipping. Maybe you’ve even seen “rags to riches” dropship stories.

While dropshipping is a great opportunity for a lot of reasons, the truth about dropshipping is that it’s not easy. Just like any business, it takes hard work and dedication.

You need to find good products ideas with good suppliers behind those products. You need to understand how to create effective marketing campaigns. And you need to know how to manager your numbers.

What Is A Dropshipping Business?

Dropshipping is a business model that takes wholesale items and sells them as part of your store for a profit. You don’t make the items, you don’t ship the items. You are responsible for branding and marketing the items only, and generating sales.

This is a popular method for starting an online business for many reasons:

  • No inventory risk
  • No need to create your own product
  • Requires very little startup money
  • Access to lots of software to help the research and marketing process

The model is simple in it’s most basic form. You find products from a wholesale supplier, and then you place those products on your store with your own branding. Once you have a store with products, you choose which products you want to market using either free or paid traffic strategies.

Print On Demand is a form of dropshipping. The big difference between the two is that Print On Demand suppliers print custom designs on the wholesale products you want to sell. Dropshipping you are just selling the product as the manufacturer makes it.

Dropshipping Seems Simple, But Is It?

It’s clear why dropshipping is so popular. And there are many successful dropshippers that make it sound so simple. However, don’t be fooled. Dropshipping is simple, but not easy.

The challenge that most people have is choosing the right niche and understanding how to find products. You cannot create a competitive edge without figuring this out.

Choosing a Niche 

Starting with a niche helps develop your brand and create a loyal following of customers that know what to expect from your store.

A niche is just an audience of people. Say, for example, people who love cats. There are products for people who love cats. For example, cat beds, cat toys, cat grooming, shirts for cat owners, etc.

Niche selection is challenging. You want to find a passionate audience that will actually spend money on the products you sell them. Here are some niche guidelines:

  • Large audience size
  • Easy to target on social media
  • Existing competition

These are just niche guidelines, not product guidelines. Choose a niche large enough to make money, easy to reach on social media, that has existing competition to prove market demand.

It doesn’t need to be more complicated that that. Dating, Yoga, Cooking, Gardening, Gaming- these are all examples of large niches that anyone could enter.

This is just the first step. You identify a niche, then you start researching product ideas.

Finding Product Ideas

Product research should be methodical, not a guessing game. This is where most people mess up. They don’t put enough time into their product research.

There are plenty of methods out there for product research, but here are three true guidelines:

  • Passion
  • Problem
  • Pride

People buy things they are passionate about. People buy things that solve problems. And people buy things that boost their confidence or ego.

Your product does not need to fit all 3, but it should be focused around satisfying at least one.

Dropshipping is generally about products that solve problems for people. Print On Demand is generally about products that speak to people’s passion or pride.

Either way, most people don’t get it right the first time. Winning with dropshipping requires consistency. You need to constantly be searching for unique product ideas from big sites like amazon.com and aliexpress.com.

One Product Stores

A one product store combines the niche and the product into one cohesive storefront. This is a great way to start a dropshipping business.

You don’t need to have a lot of products or look like a big store to win. If you can find one unique product that solves a problem for people, then you can create an entire store around that one product.

To find good ideas for one product store, look at Google Trends and Google Adwords. See what types of things are trending, and what people are searching for in Google. Then go look through suppliers to find if there are any innovative product ideas you can market.

People search Google when they have a problem or want to know/buy/do something. So Google can give you a lot of great insight into good product ideas.

Creating a Competitive Advantage

The problem with dropshipping is everyone has access to the same products. If everyone is selling the same item, what makes yours different?

You need to find a unique advantage to win with dropshipping. This is one of the single biggest reasons dropshipping store fail; they don’t give people the right reasons to say yes to buying from them.

There are some technical things to keep in mind:

  • Secure website with reputable shopping cart
  • Great user experience – load speed, page layout, ease of navigation
  • Professional brand

Without any of those, people won’t even stay on your website. But that still isn’t enough to get them to buy.

To create buying desire, you need to be unique. That could be your product, your store, your sales process, your delivery process, etc. There are many ways. Customer service is one of them. Great content is another one.

Product descriptions are one of the best ways to set your store apart. Use powerful and descriptive language, and make sure to illustrate the benefits of your product. Understand the main thing your product does for people, and then use your product descriptions to channel that desire into a purchase.

Another way to create competitive advantage is your marketing. Creating great content, having a well thought out email list, introducing bundle offers, retargeting your visitors with multiple types of ads, collecting reviews- these are all ways you can stand out.

Building A Brand

Remember that your brand is more than your logo, website design, or product. Your brand is the feeling people get when they think about your company and your products. Building a brand takes some time, but doesn’t need to take forever when done strategically.

While branding does start with the look of your website, including colors and images, it has more to do with the user experience. Good branding creates emotional connections to the company.

Think about the companies you use in your own life. Do you love your cable company or do you just deal with them? If someone different came along, would you switch brands?

Now think about the iPhone. People have waited in lines for the new iPhones. In fact, people may not even be able to responsibly afford a new iPhone, and still find a way to purchase it. That type of loyalty and desire is far more than just a phone. That’s the power of a great brand.

Pros and Cons of Drop Shipping

Business owners must always look at both the pros and cons of any business situation before making a final decision. While there are many pros to dropshipping and Print On Demand services, it isn’t a solution for everyone in e-commerce sales.

Pros of Drop Shipping

Consider these pros of drop shipping and print on demand e-commerce solutions:

  • Quick startup: With a Shopify, a PayPal account, a supplier, and a few plugins, you can have an operating business within a day
  • Minimal overhead: Other than the paid website services such as e-commerce platforms, SSL certificates, and hosting, there are no required overhead costs such as utilities or staff
  • Less capital requirement: Without having to buy in bulk and store it, new business owners are able to move products and generate cash flow without major capital outlay
  • Expansive product selection: Suppliers are eager to find great new platforms to sell more products giving e-commerce stores lots of opportunities to diversify product lines
  • Scalability: Growing is contingent on the marketing and fulfillment efforts of the website owner, adding staff or virtual assistants for smart growth

 

Cons of Drop Shipping

Consider these cons of drop shipping and print on demand e-commerce solutions:

  • Reduced margins: Margins are contingent on the cost of buying products on-demand as well as the competition undercutting pricing to capture market share
  • Inventory problems: Tracking the availability of items for sale on your website and confirming that suppliers have adequate stock is difficult and can force refunds of products bought that can’t be fulfilled
  • Dropship Suppliers’ errors: Many products come from overseas fulfilled at large distribution centers where language barriers and inefficient processes lead to the wrong items getting delivered to customers
  • Confusing shipping: Shipping times, durations, vendors, and costs all vary from supplier to supplier which can inflate shipping costs to customers or lead to confusion for dropshipping website owners.

How To Choose Suppliers

New dropshipping website owners need to consider how they choose their suppliers. It may seem easy to jump onto AliExpress dropshipping and go with any of the suppliers in that marketplace. After all, the platform is simple and free to use. However, many “suppliers” on these sites are secondary suppliers tacking on their own markup and extending the time required to fulfill orders because they need to get it from the source.

As you choose a dropshipping wholesale supplier or print on demand company, make sure you are able to connect with a person at the company. Ask a lot of questions about the products, where they are sources, where the manufacturing plant is, and the time frames from purchase to delivery. If you cannot speak with someone before you become a merchant for them, chances are you won’t get any help if a problem arises with a client order.

Considerations when choosing a wholesaler supplier for dropshipping products:

  • How extensive is their product line?
  • Where are the products manufactured? Where is the fulfillment center?
  • How much inventory does the fulfillment center maintain?
  • What shipping services do they use?
  • What are the costs and timeframes for shipping? Are there breaks for multiple items?
  • How long to fulfill orders?
  • Is tracking information for shipping provided? (If so, is this provided to you and the buyer or just you?)
  • What is the return policy?
  • How are order errors addressed?
  • Are the price reductions for hitting certain sales numbers?

Dealing with Supply Chain Problems

It’s always smart to order a few products yourself to test the supply chain before spending a lot of money on marketing. Order the products you intend to sell, and see if what you get is what you expected to receive.

It’s important to find out about poor quality products, lengthy shipping times, and customer service issues before your customers do.

If you took the time to properly choose your wholesale distributor, you will most likely pre-empt major supply chain issues. However, be aware of orders made on your site and where they are in the fulfillment process. Being proactive and contacting a customer when you become aware of a problem such as long delivery time, is better than letting the customer wonder what happened to their order.

Margins and Making a Profit

Making money is the name of the game. When it comes to dropshipping websites and print on demand services, there are those who move a lot of product, thus have a million in revenues who aren’t making any money. This is because their margins are too low as they work to attract buyers from competitors. They aren’t able to make enough on every sale to cover all operating costs including hosting, marketing, and service.

There are two types of margin you have to consider when looking at the markup of any product you sell: gross profit and net profit. Gross profit is the profit on any given item, meaning it is the difference between your retail price or revenues and cost of goods sold (COGS). Gross profit doesn’t consider anything beyond COGS and revenues (excluding sales tax). Net profit subtracts administrative, sales, taxes, and marketing costs from the net profits. If you aren’t considering net profits, you could be turning a lot of product inventory without making money.

As a rough example, think about the cost your wholesaler charges for a print on demand hoodie: $12.99. If you sell the hoodie for $19.99, you have a $7 gross profit on this. However, if your prorated costs for administration and marketing are $3 per item sold regardless of the gross profit, you now have $4 net profit on the hoodie. If you run a sale on hoodies for $15.99, you would have $3 gross profit but a $1 net loss on the sale of each hoodie.

Choosing A Markup Strategy

This is how you price your products. You receive the item at a wholesale cost, and then you add a “markup” to the item for resale on your store. That markup is your profit.

Some new business owners will choose the same markup strategy for every product. But this is not a great strategy. You should price your products strategically.

First, consider the product you are selling. If you only have one product, then that one. If you have multiple products on your store, the one you are advertising. You want your markup on your primary product to follow this formula:

Product Price = Cost of Goods Sold + Target Cost Per Action + Profit Margin

The two variables you know are Cost of Goods Sold (COGS) and your Target Cost Per Action (CPA). Your Target CPS is how much you can spend to acquire a customer with marketing.

Your COGS is the price your supplier gives you. And by looking at similar prices products online, you can determine a reasonable amount you can charge for your product. Just go to Google Shopping.

So if you have COGS of $15 and your product price point is market value at $30, then you have a margin of only $15 for your CPA and profit. To make $5 profit per sale, your target CPA needs to be $10.

You can adjust these numbers however you want. But ultimately you want to find a product with enough margin that will allow you to scale a business, because you will incur other costs as you grow. Like hiring a team.

You also need to consider shipping costs. Will you charge for shipping or give free shipping?

Free shipping on stores just means you have to mark your product up to absorb the cost of shipping on your item. This can be done on small, light items because they are cheap to ship. And can help you sell more because of free shipping.

If your product requires more expensive shipping, but your cost is set by market, then you may have to charge for shipping. For example, a basic t-shirt costs $7 to print and $4 to ship. A reasonable price is $20 to sell. Therefore you have a $9 only, and that doesn’t include marketing costs. So you likely need to charge your customers $4 for shipping to keep your margin, because most probably won’t buy a $24 t-shirt.

If You Make It, You Must Market

You need to market your products. It’s that simple.

If you aren’t telling people to go to your website through conversations or advertising, then nobody will ever buy anything.

You don’t need to spend a ton of money on advertising to get started, but you do need to put time and effort in to make it work for your store.

How to market your dropshippring products:

  • Join groups (online and in-person) and participate: don’t focus on sales in the group as you should focus on being active and become an expert resource.
  • List items on Amazon and Google: help the search engines help you by registering your store and products in the right places
  • Optimize your website and build content: Search Engine Optimization (SEO) requires understanding what your target audience is searching online and building credibility with the search engines that you are the legitimate and best resource
  • Advertise: social media and search engine advertising is highly targeted and affordable

It’s up to new e-commerce website owners to determine exactly how much they want to devote to marketing and advertising. Because this is a low-overhead business entry, many people fall into the trap of thinking it is a no-cost business.

If you don’t want to spend actual dollars at the start, you’ll need to do more sweat equity work. However, if you want things to scale, earmark a designated percentage of revenues to go back into marketing.

One of the great things about dropshipping solutions is the automation that you can incorporate into the entire process. Automation still requires oversight. You are the business owner and the customers expect service from you when things go wrong – and there will be times where things will go wrong.

Return Policies

Returns happen and some of the most successful retailers are known for great return policies. Costco and REI have pretty much anything goes return policies for up to 12 months. While this isn’t likely going to be your return policy, you want to have a clearly defined one.

Your return policy should be written and noted in the sales process through your shopping store so customers have the right expectations. But don’t just set a return policy based on what you think is good customer service. That may be a great policy but not one you can afford.

The policy must align not just with what the wholesale supplier’s return policy is, but also with your merchant services provider. You don’t want to be a retailer with a 60-day return policy when your merchant services provider only offers a penalty-free 30-day return policy.

Your return policy will also be determined by how long it takes for your customers to get their products. The longer it takes to get products delivered, the longer your return policy may need to extend from the point of sale.

When and How to Scale

You’ve got momentum and are generating sales with a good profit margin. The next stage is scaling up as a retailer. While this might seem natural and without problems for a dropshipping business there are things to keep in mind.

First, you can only scale as big as you can afford the time (or hiring) to service orders and fulfillment. You will need to still be on top of the supply chain and maintain a pro-active approach if you don’t want problems to creep into your business.

The second thing to consider when scaling up is whether or not your wholesale distributors can handle the demand. If you are scaling up by increasing marketing and advertising and generate 10 times the sales, will the distributor have the inventory?

If you are scaling with a new product, you’ll need to confirm that the products are in line with the quality and delivery guidelines you’ve already established with your core offers.

The third thing when scaling up is considering the amount per item you are spending with wholesale suppliers. Remember the question about price reductions for larger quantities? This is imperative in the scaling-up process.

Find wholesale distributors who will look at the aggregate number of items you sell and give you a discount based on inventory breakpoints. For example, you may get a breakpoint of $0.10 per item once you sell 500 and $0.12 per item at 1,000. Some distributors will give a limited retroactive breakpoint for all sales in the prior quarter.

Following up with quantity discounts is the easiest way to get more profit for the same amount of work and sales. Don’t let the wholesale distributors ignore your successful marketing and sales. They need you and should provide better pricing for better e-commerce stores.

The Bottom Line

Dropshipping is here to stay. It will evolve as new technology is developed and the marketplace gets even more competitive. Give yourself an edge with a good business strategy that includes branding, marketing, and service. Most of your competitors aren’t doing this and your customers will reward you with the sales because you do.

%d bloggers like this: