What is dropshipping and How to have a successful dropshipping business model?
What is it?
If you google “how to make money online”, the first suggestion you come across would be dropshipping. Is it really that simple? Maybe not. It is important to understand what dropshipping is before arriving at any conclusion. Let’s start with what it means in the eCommerce world and we will gradually walk you through the making money part of it, later in the article.
In a dropshipping business model, the retailer directly purchases products from a third party to fulfill a customer order. This way, the drop-ship business owner has zero inventory holding costs. This differentiates dropshipping from the traditional retail model since the seller doesn’t stock the inventory themselves.
Dropshipping vs traditional distribution models
As we delve into the world of online product selling, one question that often comes to mind is: which distribution model should I choose for my business? With so many options available, it can be daunting to make a decision. We'll explore two popular distribution models - dropshipping and traditional retail - and provide a detailed comparison to help you choose the one that best aligns with your business goals.
How to make dropshipping models successful?
- Sell Something Unique
Ensure that the products are well-recognized by the customers and unique. Most dropshipping business products are impulse purchases and are generally priced moderately. So whenever a customer comes across a unique or desirable product in this range, they are likely to buy the product on an impulse without wasting hours in doing product research.
Your dropshipping business models should provide a distinct value-add to your customers.
Few examples of value adds are:
- Products with repeat purchases
- Healthcare products
If you are interested to know more dropshipping ideas, check out this list of best dropshipping products you can sell in 2021.
- Online Store
Another strong contributing factor to the success of a dropshipping business is its online store. An easy-to-use UI can go a long way in improving the shopping experience, and in turn, guarantee repeat purchases from the customers.
The online store should give customers an impression that they can stop thinking about their worries for a minute or two and treat themselves or their loved ones to a well-deserved gift. This helps business grow in the long run by increasing repeat purchases even at a higher price.
- Set Up your Shop from a Long term Perspective
Many businesses fail or reach a stagnant stage if they weren’t established while keeping a long-term perspective. Long term growth for your dropship business will require consistent commitment and investment towards your business idea.
The Legality of Dropshipping
A low-risk, easy-start model does sound too good to be true, which is why the legality of dropshipping often comes up. The straightanswer is that dropshipping is a legitimate business model, and there is nothing inherently illegal about it. However, there are certain legal requirements that you need to comply with to ensure that your dropshipping business is operating within the law.
Misconceptions about the Legality of Dropshipping
There are a number of misconceptions about the legality of dropshipping that need to be cleared up.
1. Dropshipping is a Scam
Some people believe that dropshipping is a scam or a get-rich-quick scheme. This is not true. Dropshipping is a legitimate business model that can be profitable, but it requires hard work, dedication, and patience.
2. Dropshipping is Illegal
Another misconception is that dropshipping is illegal, which is also untrue. Dropshipping is legal, but there are certain legal requirements that you need to comply with to ensure that your business is operating within the law.
3. Dropshipping is Unethical
And finally, there are people who believe that dropshipping is unethical. This is more subjective, but the official take on it is that it is ethical as long as you are honest with your customers and comply with all legal requirements.
Legal Requirements for Dropshipping
The legal requirements for drop shipping will vary depending on where you are located, so be sure to consult with a legal professional to clear the air .
1. Business Registration
Before you can start your dropshipping business, you will need to register your business and obtain all necessary licenses and permits. This will depend on the laws and regulations in your country or state.
As a drop shipper, you will be responsible for paying taxes on the profits you make. It is important to comply with all tax laws and regulations in your country.
In most states, you're required to collect sales tax on sales made within the state. This can be a bit tricky for drop shippers since you're selling products that are shipped directly from the supplier to the customer. However, this doesn't mean you're exempt from collecting sales tax.
To ensure that you're in compliance with sales tax laws, it's important to consult with a tax professional. They can help you determine what your obligations are and how to collect and remit sales tax. Failing to collect sales tax could result in fines or legal action, so it's not something to take lightly.
3. Product Safety and Compliance
You are responsible for ensuring that the products you sell are safe and comply with all relevant regulations and standards in your country. This includes labeling requirements, safety standards, and any other regulations that apply to the products you are selling.
In conclusion, dropshipping is legal, but there are a few factors you need to consider before getting started. Make sure you're not infringing on any intellectual property rights, consult with a tax professional to ensure you're collecting sales tax correctly, and be prepared to deal with the issue of fraud. If you take these factors into account and put in the work to build a solid business, dropshipping can be a great way to make money online.
Dropshipping in Action
Dropshipping Supply Chain has 3 key players: Manufacturers, wholesalers, and retailers.
They sell the products in bulk to wholesalers and retailers. Advantages of buying from manufacturers? Well, it is the most affordable way to buy items for reselling. However, there is a minimum stock level that needs to be purchased from manufacturers.
Usually, procure products from manufacturers in bulk and sell them to retailers at a markup. They don’t hold purchasing minimums but when they do it’s generally much lower than those required by a manufacturer.
Retailers sell directly to businesses in general.
Drop Shipping Challenges to Combat
Dropshipping is not without its challenges, and some common ones encountered by drop shippers include
- Product discovery: The average lifespan of most drop shipping products is 5 years, by which time drop shippers should constantly keep an eye out for new products before the existing line hits that saturation point. They’d also have to keep stock of trending products that sell based on social popularity (for example, an Instagram influencer using a certain product can surge up demand for said item which needs to be available beforehand in sufficient quantities.
- Warehousing: given that inventory isn’t stored on site, the dependence on 3P suppliers to ship products straight out of their inventory hinges on shipping timelines and available stock which vary from supplier to supplier.
- Payments: payments to suppliers for fulfilling orders can get blocked or delayed if the shipping is done from places that restrict payment processors (this is a major reason why picking a supplier presents the biggest hurdle in drop shipping!).
- Difficult customer support: when inventory isn’t in a retailer’s direct control, accountability blurs when customers complain. Claims of non-deliveries/non-receipt, receipt of defective, damaged or erroneous products will need to be worked out with a third-party seller in order to reach a conclusion and close the complaint, which creates more management overhead.
These challenges can be overcome through continuous market research and a/b testing to determine product performance. Through eCommerce automation, drop shippers can access report panels on SKU performance to distinguish bestsellers from underperforming products, thereby investing more energy and funds in the right places. eCommerce businesses can also use “smoke testing” as a method of gauging reactions and responses to product designs from images before greenlighting manufacturing. This way, the product undergoes a trial for performance to predict sales movements.
Working with local suppliers can be the answer to minimizing warehousing and fulfillment challenges. By local, we mean suppliers who are accessible and rated favorably for their credibility by other stores. Keeping local stock can reduce store-to-door delivery timelines and support the endeavor to provide customers with a satisfying ordering experience.
Advantages and Disadvantages of Dropshipping
Many businesses have adopted dropshipping business models because of the numerous benefits it offers to the entrepreneur. To start with, the dropshipping model allows entrepreneurs to test new business ideas without investing a lot of capital.
The key reasons for dropshipping business model popularity are:
- Low Capital Requirement
Zero inventory holding costs helps businesses start adropshipping eCommerce store at a very low cost. This also significantly reduces the risk involved in starting up a dropshipping store.
- Easier than a traditional business model
As dropshipping businesses don’t have to hold up inventory, it becomes significantly easier for them to manage their business as they do not have to worry about:
- Warehouse Management
- Return Management
As the dropshipper is free from managing all the above-mentioned activities, this also reduces their overhead costs. Certainly, as the business grows the overhead expenses will increase, but they will still be significantly lower when compared to the traditional offline store or even traditional online business costs.
Another strong factor that makes a dropshipping model easier to implement is the fact that you can start a dropshipping business from literally anywhere in the world. To start with a dropshipping business, you just need to have a stable internet connection to ensure that you can smoothly communicate with your suppliers and customers.
- Wider product category and Product Testing
Zero inventory costs enable you to sell a wide range of trending and desirable products to your potential customers.
If we talk about a traditional retail business, three times the number of orders imply having to do three times as much work. However, in a dropshipping model, most of the work involved in processing additional orders is borne by the suppliers. This allows dropshippers to expand their business with less incremental work. c
Like all business model approaches, dropshipping also comes with its own set of disadvantages. Here we have listed down the major disadvantages of dropshipping that you should consider before starting out with a dropshipping business model.
- Low Margin Level
Unarguably, having a low-profit margin is the biggest disadvantage for any business. Since dropshipping is easier to implement and has a lower overhead cost than a traditional retail business, it faces a lot of competition from other dropshippers. Hence, in order to retain customers and grow their revenue, dropshippers sell their products at a very low price.
2. Inventory Management
In dropshipping, you will be sourcing your inventory from multiple suppliers, who are also fulfilling orders for other retailers. This makes keeping track of inventory a difficult task.
To help dropshippers cope with this, dropshippers can send orders to their supplier using software and track the supplier’s inventory on a real-time basis.
3. Supply chain complexities
Dropshippers products are sourced from multiple suppliers. This makes the entire supply chain a complex procedure.
How? Let’s say a customer has placed an order for four items. Now all these items are sourced from different suppliers. This means for a single order, you will have to communicate with 4 different suppliers, ensure that they deliver the goods timely, and manage costs since the dropshipper will have to incur shipping costs 4 times. Now you can not pass on these costs to the end customers, since you might lose out on your customer base due to high competition.
Moreover, dropshippers will be held responsible for any fulfillment mistake by the supplier, like wrong shipment, low-quality packaging, etc.
4. Limited customization and branding opportunities
Since products are directly purchased from a third party, it limits the business’s control over the product. Product customizations or tailor-made products to meet your brand image are not easily possible.
There are a few Alibaba dropshipping suppliers that can accommodate your business’s product changes, however, this comes with 2 conditions:
- The supplier enjoys maximum control over the product.
- Product modifications are only possible when there is a minimum product order quantity received from dropship owner
Finding the best Suppliers for Dropshipping
Practicing dropshipping in any capacity essentially requires partnering with a business. In order to do it right, you must consider the following things while choosing a supplier.
- Product Quality
- Timely Delivery
- Legal Compliance
For one thing, make sure that the products are as advertised, but also make sure that they fit the shipping criteria. Outside of the product quality, there are always certain concerns regarding how your supplier conducts business. Here are quick reference check-list questions for you before partnering up with a business for dropshipping:
- How are their online reviews and references?
- Do they offer order insurance?
- How long does it take for them to fulfill orders?
- What do they do about fraud protection?
- Is their customer support responsive?
After cross-checking everything on your checklist, you can proceed to get on board and begin your dropshipping career.
However, it is not that easy finding an ideal supplier if you are a beginner. You can start with well-known businesses and make your way upwards into the dropshipping business. Here is a list of 10 popular suppliers that you can check out.
10 Most Popular Suppliers for Dropshipping
While there are a lot of suppliers available in the eCommerce industry for you to get started with the dropshipping business, it is important that you do a little homework before associating with any of them. Here, we have covered a few renowned ones to save you some time.
Spocket is a dropshipping marketplace that provides retailers with a platform to scale their digital stores. It connects retailers with suppliers globally.
To help businesses grow, they provide subscription plans, including a free dropshipping subscription.
AliExpress is a popular wholesale and dropshipping platform offering a wide range of different products.
3. Suppliers Data
At Suppliersdata.com, lists out trusted US-based suppliers to take your dropshipping business up a notch. The site also enables you to save the suppliers to a watch list and contact them later.
SaleHoo connects dropshippers to suppliers. It includes suppliers in a variety of niches that serve the United States, UK, and Australia.
Doba is a marketplace that compiles manufacturers and suppliers into one place. It allows you to search through products and consolidate them into custom lists.
Wholesale2B allows you to choose from 1 million productssell them across sales channels, like eBay, Amazon, BigCommerce, Shopify, or a custom website.
7. Worldwide Brands
Worldwide Brands is a comprehensive directory of dropshippers and bulk distributors.
8. Wholesale Central
Wholesale Central provides a free directory of wholesalers and dropshippers.
9. Sunrise Wholesale
Sunrise Wholesale is a general wholesaler and dropshipper that offers 15,000+ products in different categories including home decor, sports and fitness, jewelry, garden decorations, and more. This platform is able to be connected to eBay, Amazon, BigCommerce, Shopify, and more. You can take a membership at $29.95 a month or $99 a year.
MegaGoods is a distributor and dropshipper for goods like kitchen appliances, clocks, cameras, televisions, Bluetooth products, and other home decor and electronic devices. Their regular service fee is $14.99 a month.
A Single vs Multi-Product Dropshipping Shop
After having identified a reliable supplier and the right products, it is time to start your very own dropshipping shop. Before moving forward with that, you have to make one more fundamental choice-
Create a single-product shop or a multi-product shop?
Both business models have their own set of advantages and disadvantages. Let’s analyze the benefits of choosing either option.
Single product shop
A single-product store is built around a single item that represents the brand in its entirety. This dropshipping choice may seem limited, but it has remarkable benefits and is ideal to get a start. One of the greatest advantages of a single-product store-based model is resource optimization.
If the product appeals to a larger section of the audience, you can scale a single-product store with strategic use of resources and marketing tactics.
However, not all products are winning and that results in a short life span of a number of single-product stores. The end goal of such stores is to achieve sales volumes that make direct arrangements with the manufacturer so as to get your logo and custom packaging for the units produced.
A multi-product store, instinctively, keeps more than one product for sale. When dropshipping was introduced, this business model was very popular and people would host a plethora of unrelated products under the same brand name. While this idea might have worked in the past, it is not as appreciated today.
Handling a multi-product store comes with a great deal of responsibility. The more suppliers you are dealing with, the more is the accountability.
And, in the process, the dropshippers loosely handle refund requests, seldom replace damaged goods, or offer support over emails. This kind of shop gathered a legitimate sense of distrust over time.
In today’s time, a successful multi-product shop is one dedicated to a particular niche. Building an ideal ecosystem for a specific group of audiences can be an extremely profitable strategy. Additionally, having more products requires more marketing material, higher starting capital, and a complex order management system. If you are just starting with eCommerce, you don’t want to follow these steps without prior experience. In short, multi-product is not your go-to option.
However, if you have the experience, an established business with a team of professionals supporting you, a multi-product store can be financially rewarding.
Platforms to set up your Dropshipping Storefront
Choosing the right platform to set up your dropshipping store is as important as finding the right supplier and products to dropship. While a lot of new platforms are opening up to support dropshipping stores for beginners and professionals alike, we recommend you play safely at the infant stages of the business. Here are some of the renowned ones that you should consider to kick start your dropshipping career.
WooCommerce is one of the most popular eCommerce platforms worldwide. It is an easy-to-use interface that makes it ideal for non-technical users. The platform can be installed with a single click and can add multiple add-ons for free. An active community of designers and developers is always working to accelerate the popularity of the platform. You can find guides on installation and product support on the internet easily.
This eCommerce platform is powerful, but a bit complex for non-technical users since it requires at least basic programming knowledge. Hence, most dropshippers using Magento either know about Magento store development or have hired developers for the same.
Magento has an official forum where the company officials and team members offer support to newcomers. It also has multiple off-site channels like Youtube channels and blogs that can help users manage their dropshipping store conveniently.
Shopify is one of the most powerful eCommerce platforms for dropshipping. In 2016, Shopify officially acquired Oberlo, a dropshipping plugin that enables sellers to import product data and fulfill orders easily.
BigCommerce is a hosted eCommerce platform. It is best known for its easy-to-use interface and quick eCommerce setup progress. Most of the themes are free and can be easily customized based on your requirement.
BigCommerce offers the same support like Shopify, and is comparatively more affordable since it does not charge any transaction free, and offers unlimited staff accounts.
OpenCart is a free eCommerce platform that offers multiple plugins and themes for dropshipping (free and paid). The platform can be easily set up if you are a little tech-savvy. The platform offers support via its forum, users can also raise tickets and email the support team if they face any problems. When you are done with settling for a platform to set up your dropshipping store, you start looking for suppliers and decide on the kind of products that you want to sell.
Is drop shipping right for you?
The dropshipping industry is expected to reach $500B in valuation in the next 3-4 years.With the rise in niche eCommerce stores offering on-demand products, dropshipping can be right for you as a low-cost model, so long as you’re able to pick the right products to sell at the right prices. Despite initial uncertainties over its long-term potential, dropshipping isn’t dying out anytime soon, but dropshippers are changing the way they work in order to earn a profit while engaging directly with wholesalers. In fact, ~ 27% of online retailers use dropshipping, with profits crossing over $196 million.
Another interesting trend that supports outsourcing inventory is The DFY, or Done For You eCommerce model which is gaining rapid popularity for how it lets entrepreneurs start their online store in a matter of days while slashing the time and funds needed. It frees up business owners to innovate and serve customers with better focus by outsourcing components of the eCommerce chain, including its marketing and shipping. In conclusion, dropshipping can help you experience several mic-drop shipping moments in your eCommerce journey!