Dropshipping is an order fulfilment method that does not require a retailer to keep products in stock. Instead, the retailer sells the products from a brick-and-mortar or online shop and then transfers the sales order and the customer’s shipping details to a third-party supplier.
That third-party supplier can be another retailer, a wholesaler, or the product’s manufacturer, who then ships the order directly to the customer. The dropshipping retail model allows the retailer not to handle the product directly, and the majority of dropshipping businesses make their profit on the difference between the wholesale and retail price minus any shipping fees. Nowadays, dropshipping is the fulfilment model of choice for more than one-third of online stores.
Benefits of dropshipping
The main benefit of embarking on the dropshipping ship is the fact it is relatively easy to get started with, and the risk is significantly lower than other retail business models. Running an e-commerce dropshipping business requires less capital than different types of retail, for without the need to purchase inventory and manage and maintain a warehouse, the overhead expenses are relatively low. All you have to invest in is the associated costs of setting up and running your dropshipping business website, your marketing campaign, and your customer support team. Additionally, you don’t have to worry about packing and shipping your orders, handling returns, or managing stock levels, as your dropshipping suppliers will take care of it.
Sales increases always bring additional work on your doorstep but compared to traditional retail and e-commerce business, it is easier to scale a well-established dropshipping business. Your business model won’t change much as your business grows, and costs do not skyrocket as you scale up. Nevertheless, you need to find the right dropshipping suppliers and wholesalers capable of processing the additional orders and adjust your marketing strategy and customer support accordingly.
Source: Google Trends
Disadvantages of dropshipping
The benefits mentioned above make dropshipping a particularly attractive model for retailers who are just getting started with an e-commerce store, or for those looking to expand their existing business model. But like every approach, dropshipping has its downsides, too.
The small investment required to start an online dropshipping business and the relatively low business risk, make dropshipping an incredibly competitive business model. Unsurprisingly, a very competitive environment translates into low profit margins, at least at the beginning, and that is why dropshipping relies on a fair amount of sales to be profitable. Since profit is mostly determined by traffic, it is imperative to build a strong client base and to build it fast. That is obviously something that can be quite challenging if you are building your e-commerce brand from scratch.
Additionally, your online dropshipping business is essentially just a storefront. As a result, you have minimum control over orders going wrong, inventory shortages, shipping issues, etc. And unfortunately, it is you who has to take the blame even if it is the supplier’s or carrier’s fault. On top of that, you must always take into consideration possible delays in communication as you have to go back-and-forth between your customers and your suppliers regularly.
All of the above eventually make customer service extremely challenging. And since customer service is paramount in the e-commerce world, you have to have an exceptionally competent customer service team in place that is always on top of things. Even the slightest transgression nowadays will send your customers right into the hands of the competition.
The right approach to dropshipping
Select the correct niche
The first step is finding your niche. Almost all successful dropshipping businesses have one thing in common: they specialise in a specific product or product category. Specialising allows you to communicate more efficiently with your customers, stand out more easily from the competition, and compete against fewer businesses in an already highly-saturated environment.
Identify your product’s demand
Then you have to measure the current demand for the product or product category you have chosen. By using a keyword research tool like Moz Keyword Explorer or KWFinder to examine how your product’s keywords are ranking on a monthly basis, you will get an idea of how many people are searching for your product in search engines every month, and it will give you a general idea of what the demand is like for that product.
Ideally, you are aiming for keywords with monthly searches in the thousands if you plan on building a profitable business around it. Be certain that the competition will be high in that case as you will not only compete with other dropshipping businesses but also with retail giants like Amazon and Walmart. A riskier but less competitive alternative is to find a product that people may not search much for it yet, but it serves an emerging market.
Perform competitor research
The third step is to research who your competitors are and how they engage with the market. Carefully examine your competitors' websites, social media platforms, their presence on marketplaces like Amazon and eBay, and pay close attention to the number of ratings, reviews, comments, and overall engagement that they receive.
Analyse their marketing strategy and see if you can find any opportunities where your competitors are not meeting the market’s expectations so you can go ahead and fill that gap. Again, there are several tools available like Moz or SEMrush that allow you to get some insight into your competitors’ ranking, domain authority, and more and identify where their traffic is coming from by using merely their website’s URL.
You can even take it as far as order a product from your most successful competitor’s online store to get an idea of how their process works. That way, you will be able to identify what sets them apart and apply it on your own business. On the other hand, you can examine their flaws so you can work to improve them on your own customer experience.
Find the right supplier
The next step is to find the right suppliers for your online dropshipping business. As we mentioned above, every dropshipping business is often at the mercy of its suppliers when it comes to product quality, proper and timely shipping, returns policy, and sometimes even legal compliance. Therefore, it is of the utmost importance to choose them very carefully.
It is good practice to sample your suppliers’ products before you partner with them. By placing test orders with them, you can ensure that their products are as advertised and make sure their fulfilment process meets your criteria and standards. Long shipping times can be unappealing to your customers so aim for suppliers that ship their goods within 48 hours and are using a shipping platform that allows access to the best international carriers.
Before you sign on to do business with a certain supplier you should always make a lot of questions to clarify things like what is their returns and damaged goods policy, what is their average fulfilment time from sale to delivery, do they offer order insurance, what kind of profit margins can you expect from them, etc.
You can find a comprehensive list of the most popular dropshipping suppliers available on the market today here.
Build your e-commerce website and create a customer acquisition plan
Even if you do not have the technical background to do it yourself or the budget to hire a web design and development company or a freelance developer to create a custom website for your online dropshipping business, you can always employ an easy-to-use e-commerce platform like Shopify or BigCommerce, at least at the beginning. These platforms are user-friendly, have plug-and-play options like specialised templates, many available plug-ins and apps for integration, and in general, are ideal for people with minimal website-designing experience. You can always explore more customised website options when your business is more established, and capital is available for that purpose.
The next step is to drive traffic to your site; when operating in such a competitive retail model as dropshipping, the need for an effective marketing campaign is crucial. That can be something quite challenging at first, especially when you have a small budget or you are bootstrapping your business. Following your site launch, you need to dedicate the majority of your time on marketing and Search Engine Optimisation (SEO) for at least four to six months.
One of the most effective ways to promote, advertise, and generate traffic to your website is through social media. Ads on social media channels is a very efficient way to reach your target audience right into their social media feeds and Facebook Ads, in particular, is the best way to connect with potential customers on the world’s largest social network.
There are numerous different approaches to digital marketing depending primarily on the type, size, and budget of your company, with behavioural advertising being one of the most popular ones. Nevertheless, if you are not experienced in marketing and SEO, or your company does not have a dedicated marketing team, we strongly recommend starting with various quality resources and blogs available online like the Moz and HubSpot blogs.
Dropshipping can be a very profitable business model if it is done correctly. It can be your first e-commerce attempt, or it can work equally well as a complement to an existing e-commerce business. It doesn’t require massive capital to get started, involves minimal risk, allows much experimentation, and you don’t have to worry about inventory management, warehouse maintenance, and shipping, among others. That makes it easier to invest most of your money and time into generating traffic to your website and promote your business. Nevertheless, like every business model, it has its disadvantages too, as we demonstrated above.
Do your research, evaluate your options, and if you believe that dropshipping is the right business model for you, the next step is actually to get started building your business.