Defining dropshipping
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.
The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.
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How does dropshipping work on Shopify?
Two of the most common approaches for dropshipping on Shopify are to seek out a supplier located in North America, or anywhere else in the world, using supplier databases or to seek out a Shopify app that connects you and your store to thousands of suppliers.
For the latter, we recommend Oberlo, a marketplace developed by Shopify that helps independent business owners find products to sell. With Oberlo, you can browse AliExpress and import the products that pique your interest directly to Oberlo—which is connected to your Shopify store—with the click of a button.
Once a customer buys a product, you’ll be able to fulfill their order in the Oberlo app. Fortunately, Oberlo automates this process. As the store owner, all you have to do is check that the details are correct and click the “‘order”’ button. The product is then sent directly from the AliExpress supplier to the customer—wherever in the world they may be.
Benefits of dropshipping
Dropshipping is a great business model for aspiring entrepreneurs to start with because it’s accessible. With dropshipping, you can quickly test different business ideas with limited downside, which lets you learn a lot about how to choose and market in-demand products. Here are a few other reasons why dropshipping is such a popular model.
1. Less capital is required
Probably the biggest advantage to dropshipping is that it’s possible to launch an ecommerce store without having to invest thousands of dollars in inventory up front. Traditionally, retailers have had to tie up huge amounts of capital purchasing inventory.
With the dropshipping model, you don’t have to purchase a product unless you’ve already made the sale and have been paid by the customer. Without significant up-front inventory investments, it’s possible to start sourcing products and launch a successful dropshipping business with very little money. And because you’re not committed to selling-through any inventory purchased up front, like in a traditional retail business, there’s less risk involved in starting a dropshipping store.
2. Easy to get started
Running an ecommerce business is much easier when you don’t have to deal with physical products. With dropshipping, you don’t have to worry about:
- Managing or paying for a warehouse
- Packing and shipping your orders
- Tracking inventory for accounting reasons
- Handling returns and inbound shipments
- Continually ordering products and managing stock level
3. Low overhead
Because you don’t have to deal with purchasing inventory or managing a warehouse, your overhead expenses are quite low. In fact, many successful dropshipping stores are run as home-based businesses, requiring little more than a laptop and a few recurring expenses to operate. As you grow, these costs will likely increase but will still be low compared to those of traditional brick-and-mortar businesses.
4. Flexible location
A dropshipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.
5. Wide selection of products to sell
Since you don’t have to pre-purchase the items you sell, you can offer an array of trending products to your potential customers. If suppliers stock an item, you can list it for sale on your online store at no additional cost.
6. Easier to test
Dropshipping is a useful fulfillment method for both launching a new store and for business owners looking to test the appetite customers have for additional product categories, e.g., accessories or wholly new product lines. The main benefit of dropshipping is, again, the ability to list and potentially sell products before committing to buying a large amount of inventory.
7. Easier to scale
With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work.
Sales growth will always bring additional work—especially related to customer support—but businesses that utilize dropshipping scale particularly well relative to traditional ecommerce businesses.
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Disadvantages of dropshipping
All the benefits we mentioned make dropshipping a very attractive model for anyone getting started with an online store, or for those looking to expand their existing product offerings. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a price. Here are a few shortcomings to consider.
1. Low margins
Low margins are the biggest disadvantage to operating in a highly competitive dropshipping vertical. Because it’s so easy to get started, and the overhead costs are so minimal, many competing stores will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins.
Typically, these sellers will have low-quality websites and poor (if any) customer service, which you can use to differentiate your business. But that won’t stop customers from comparing their prices to yours. This increase in fierce competition will quickly hurt the potential profit margins in a niche. Fortunately, you can do a lot to mitigate this problem by selecting a niche/vertical that’s well suited for dropshipping. We’ll discuss how to do exactly that in Chapter 4.
2. Inventory issues
If you stock all your own products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change on a daily basis. Fortunately, these days, there are a handful of apps that let you sync with suppliers. So dropshippers can “pass along” orders to a supplier with a click or two and should be able to see in real-time how much inventory the supplier has.
Oberlo also lets merchants take automated actions when a supplier’s stock hits zero. For example, when a product is no longer available, you can automatically unpublish the product, or keep it published but automatically set the quantity to zero.
3. Shipping complexities
If you work with multiple suppliers—as most dropshippers do—the products on your online store will be sourced through a number of different dropshippers. This complicates your shipping costs.
Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these calculations can be difficult.
4. Supplier errors
Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway?
Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments, and low-quality packing, which can damage your business’s reputation.
5. Limited customization and branding
Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, the product dropshipped is designed and branded by the supplier.
Some suppliers can accommodate your business’s product changes, but even then, the supplier has the most control over the product itself. Any changes or additions to the product itself usually require a minimum order quantity to make it viable and affordable for the manufacturer.
Common questions about dropshipping
Throughout the rest of this book, we’ll cover all of the necessary steps to start a profitable dropshipping business. But before we continue, it’s worth answering a few common questions we receive about what dropshipping is and how it works.
How much do I need to invest to start dropshipping?
Though it’s hard to predict the exact costs for any individual business, there are a few items every dropshipping business will need to spend money on in order to get started. Here’s a quick summary of the essential costs.
Online store
Estimated cost: ~$29/month
You’ll need to find an ecommerce platform or website builder in order to create and host your online store. We obviously recommend starting a Shopify store. You’ll be able to effortlessly sync with the Oberlo marketplace to source products, and you’ll get access to our full selection of themes and free branding tools so you can get your business up and running quickly.
Domain name
Estimated cost: $5-20/year
It’s hard to build trust with customers without your own domain name. While there are a number of top-level domains available (e.g., example.shop, example.co), we recommend looking for a .com that fits your brand, if one is available. Use our domain name generator to get started, or learn more about how to come up with a catchy business name.
Test orders
Estimated cost: Varies
Although dropshipping lets you have minimal involvement with handling your overall product catalog, you should set aside money, as well as a little bit of time, to test out the products you plan to sell. If you don’t, you risk listing a product with too many shortcomings or defects, which will result in unhappy customers and a lot of time spent dealing with returns.
Online advertising
Estimated cost: Scales with your business; we recommend budgeting at least $500 to get started
Every ecommerce business should look for ways to reduce their average cost to acquire a customer through organic channels like content marketing, SEO, and word of mouth. But to get started, advertising is usually an essential channel for most product-based businesses. The most common channels include search engine marketing (SEM), display ads, social media ads, and mobile ads.
How do dropshippers make money?
Dropshipping businesses act as product curators, selecting the right mix of products to market to customers. Remember, marketing is a cost you incur, in both time and money, helping potential customers find, evaluate, and buy the right product. You’ll also have to include the cost of providing customer support whenever there’s a product or shipping issue. Last but certainly not least is the original price that your supplier sells the product for.
With all of these costs to account for, dropshipping businesses mark up individual products in exchange for distribution. This is why suppliers are OK having dropshippers market their products for them—dropshipping stores drive additional sales that the supplier would have otherwise missed out on. In order to make a profit with your dropshipping business, it’s a good idea to find out how much it costs for you to “acquire” a customer, and price your products with that in mind.
Is dropshipping a legitimate business?
Dropshipping is merely a fulfillment model, one used by many global retailers, and is perfectly legal. Like with any business, satisfying customer expectations and building a brand that resonates with the right audience is still key to long-term success.
This question usually comes up due to a misunderstanding of how dropshipping works. Most retail stores you shop in are likely not selling products they personally manufacture. Dropshipping takes this curated approach and turns it into a fulfillment model fit for an online business.
There are, of course, the more fundamental things you need to do in order to run your business legally. Consult a lawyer who specializes in these matters to ensure you’re conducting business legally in your region.
So, is dropshipping worth it in 2020?
As we’ve mentioned, dropshipping isn’t a perfect, stress-free way to build a successful online business—hard work is always required to start a business. The model has some definite advantages, but comes with a number of built-in complexities you’ll need to address.
We’ll be examining these challenges, and how to best address them, in future chapters. The good news is that with some careful planning and consideration, most of these hurdles can be resolved and need not prevent you from building a thriving, profitable dropshipping business.
Next chapter: Dropshipping Fulfillment: Understanding The Supply Chain
