Dive deep into the nitty-gritty dropshipping details to bring you up to speed. We’ll kick things off with a plain English definition, then explain how the method works and outline the core pros and cons.
Even the novice e-commerce entrepreneur has heard the term “dropshipping” before. Pundits sing its praise all over the internet these days, from marketing forums to business blogs and even YouTube how-to seminars.
But not every budding entrepreneur has a deep understanding of this novel order fulfilment model, let alone how it works.
We’re here to fix that. In this post, we’ll dive deep into the nitty-gritty dropshipping details to bring you up to speed.
We’ll kick things off with a plain English definition, then explain how the method works and outline the core pros and cons. And as the icing on the cake, we’ll serve up some actionable advice on how to hone your dropshipping game so you can start slinging someone else’s stock like a boss.
First things first, let’s dish out an easily-digestible dropshipping definition.
Dropshipping is an order fulfilment method where the retailer doesn’t keep their own products in stock.
When a customer purchases a product online, the dropshipper doesn’t dig into their warehouse (or the garage) to find and post the item. Instead, they buy it from a third-party supplier—preferably a manufacturer, but it could be a wholesaler or another retailer—who then mails it directly to the consumer.
The dropshipping merchant doesn’t handle the physical product at any point. In many cases, they’ve never even seen it firsthand.
So how does this clever supply chain management method work?
It’s a three-step process:
1. A customer buys a product from an online store.
2. The retailer purchases the product from a third-party supplier.
3. The third-party supplier packages the product and posts it straight to the customer.
For dropshipping to be profitable, the retailer must skim money off the top. Although margins vary, most charge the customer about 20% more than they paid.
While the crafty concept began as far back as the 60s, dropshipping exploded with the onset of the e-commerce boom. Robust software suites like Shopify allow the retailer to automatically place an order the moment a customer hits the “buy” button—a time-saving hack that slashes admin costs.
When done right, dropshipping has the potential to earn enormous profits. Here are some of the key benefits of the approach.
Compared to the traditional retail model, dropshipping requires a small investment to get into, and that’s the primary driver behind its popularity. As the entrepreneur doesn’t need to purchase any inventory upfront, it’s possible to get started on a small amount of capital.
The dropshipping retailer doesn’t need to allocate funds towards research and development, rent and product warehousing (that’s the single biggest inline expense), wages for packaging and shipping personnel, and shipping. All these expenses—which add up to a sizable sum—fall under the supplier’s responsibility, making the dropshipping model lean.
However, note that in order to stand out from the competition, the dropshipper will need to allocate extra money towards digital marketing.
As the retailer doesn’t hold any inventory, they don’t have to spend time organising it. Inventory management is a crucial function of any successful ecommerce store, including dropshipping. While it is complex and only grows with your business, it doesn’t generate revenue. And that gives dropshippers the crucial advantage of being able to focus on growing the business in other ways.
The absence of in-house warehousing lets the dropshipper offer a limitless product selection. As you don’t need to purchase and store stock, you can sell as many different items as you like. It’s an agile model that lets you stay on top of emerging trends and tweak your catalogue without clearing out old stock.
A dropshipping retailer operates entirely online, letting you run your business from anywhere in the world. Ever yearned of kicking back on a picturesque beach while working remotely on your laptop? It’s the digital nomad dream—and dropshipping lets you do just that!
Got a hunch a particular product will sell like hotcakes in your store? With dropshipping, you can add it to your existing catalogue risk-free. As you don’t purchase the item until it sells, you won’t be left out of pocket should your brilliant idea turn out to be a dud.
If your sales start skyrocketing, you won’t have to rush out and hire more staff or lease extra warehouse space—the supplier bears the burden here. Although you may need to dedicate additional resources towards customer support, dropshipping generally scales better than traditional models.
While there’s plenty of enticing benefits, dropshipping comes with a myriad of drawbacks, too. Consider both sides of the story before diving in.
Making money through dropshipping is all about volume. As there will be stacks of other vendors selling identical wares, you’ll need to reduce your margins to remain competitive. And if you’ve got a long supply chain—i.e., various intermediaries cutting a slice of the pie—you might find it difficult to earn a profit.To overcome this obstacle, consider contracting a reputable sourcing agent that can help shorten your supply chain.
Every e-commerce entrepreneur and their dog is dabbling in the dropshipping game these days. As the model has a low entry barrier (virtually zero capital required), you’ll be competing with endless other dropshipping retailers in any given niche. And that’s the main reason why margins tend to lower.
If your supplier isn’t up to scratch, as is often the case, then your dropshipping business is bound to fail. Low-quality products, botched deliveries, slow communication, and reluctant returns will all wreak havoc on your reputation. The worst bit? It’s largely out of your control.
When you’re stocking your own merchandise, you can personally address customer complaints concerning quality or shipment speed. But with dropshipping, your third-party supplier takes responsibility for postage and returns, and they’re not always up to the task. To make matters worse, communication slows to a trickle when you must relay information between the supplier and consumer.
Postage becomes a big headache when you’re not stocking your own inventory. When customers purchase several unique items, for example, you’ll need to get them sent from multiple suppliers. That means numerous separate shipping fees, which you’ll have to pass onto the customer or cover out of pocket. COVID-19-related postage complications make dropshipping from overseas even more of a headache.
With the right software, it’s relatively easy to keep track of the inventory you store. But when a dropshipping business sources products from multiple suppliers—who, in turn, sell them to several retailers simultaneously—the process becomes a whole lot more complicated. Real-time inventory management software can help, but problems inevitably still arise.
The dropshipping model doesn’t give you any control over the actual product. Your third-party supplier will design, manufacture and brand the merchandise—you don’t get any say in the process. If you sense consumer demand for something unique, you’ll need to ditch the dropshipping model because custom-designed products require a high Minimum Order Quantity (MOQ).
As the products you’re selling don’t feature your brand name, it’s tough to build a reputation in the e-commerce game. Online shoppers tend to take more interest in the product itself than where they bought it.
Now you’re well versed in the pros and cons, let’s examine how you can make this unique order fulfilment method work for you.
Finding a suitable third-party supplier is the most crucial step towards dropshipping success.
· The more middle people in your supply chain, the slimmer your profit margins will be. Always aim to source stock directly from the manufacturer rather than a wholesaler (or worse, another retailer).
· Crunch the numbers to determine whether your profit margins make dropshipping worthwhile. Remember to factor in handling fees plus your customer service and marketing expenses.
· Contract suppliers who ship with a tracking number to keep anxious customers content and steer clear of any who don’t offer returns.
· Some suppliers will charge instantly on each purchase, while others will send a monthly invoice. Opt for a supplier whose payment terms align with your capital and cash flow.
If you’re selling through an online store, you need to make the shopping experience as enjoyable as possible. Sleek design, engaging copy, captivating photos, and a user-friendly interface will help you stand out from the competition. Ensure it looks shmick on every kind of device.
If you’re selling via an online marketplace, your feedback score is everything. Respond to each customer enquiry promptly and offer a generous refund policy to avoid negative reviews.
Just because you can sell every conceivable product under the sun doesn’t mean you should. Conduct thorough market research to pinpoint the most in-demand items in your niche. Factor in shipping logistics and local availability.
And remember: dropshipping is a great way to test the waters with an innovative business idea. Flipping new products comes with an inherent risk—but not if you’re dropshipping.
There’s no obligation to go all-in on dropshipping. You may find the model only works well for items that are expensive to store—too big, fragile, or heavy. Consider dropshipping strategic products while retaining your tried-and-tested favourites in-house.
The high volume that dropshipping entails equates to endless admin work. If you’re struggling to keep up, hire an employee to deal with customer complaints and the numerous links in your supply chain.
Finding suitable suppliers is the most critical and challenging step in the dropshipping process.
At Epic Sourcing, we can put you in touch with thousands of pre-vetted suppliers throughout Asia. By shortening your supply chain (cutting out the middle people), we can help you obtain top-quality products from trustworthy suppliers at a reasonable rate.
Our Supplier Prospecting Program is the perfect way to get connected with the right Asian supplier for your dropshipping project. Get in touch with TK today to see how we can help—you’ve got nothing to lose because your first consultation is free.
