The most frequent query I continue to receive after more
than ten years in the eCommerce industry is, \”What is dropshipping?\”
The solution isn\’t that difficult.
Follow along as I go over the specifics of this business
concept!
Dropshipping: What is it?
This is dropshipping in 4 steps, which is as easy as
possible.
·
You make the product from the supplier available
for purchase on your website.
·
The customer makes a purchase from your online
store.
·
You place an order with your supplier for the
exact same thing the consumer paid for.
·
This product is shipped straight to your
customer by your drop shipping supplier. Thus, the thing that your consumer
requested from you is delivered.
To further explain, the first step is to create your own
eCommerce store and list products on your website. I advise using Shopify to
create this store and tailoring it to your target market.
But whose goods are you offering for sale? These goods come
from many providers and brands. Why these businesses don’t sell their goods
directly, you might be asking.
The problem is that some businesses solely concentrate on
creating innovative products and rely on retailers to market and sell them.
As a drop ship retailer, you will be selling for these
brands who don\’t sell to the general public in that situation. They seek out
individuals who will buy their wares, bring in cash, and expand their business.
One of these retailers is you.
You should concentrate on becoming authorized to sell for
these various businesses. You will add their products to your Shopify store
once you have been approved. After that, you\’ll advertise to draw customers
into your shop.
Following a customer\’s purchase, you get in touch with your
suppliers. After that, they send the goods straight to the consumer. No
inventory is being purchased by you. You are only entering into a contract with
the drop shipper to sell their goods on your website.
Your website offers their products for sale after you obtain
their pricing lists. You make the order with the provider when someone
purchases. Once the consumer has paid you, only then do you order the thing.
Once that is done, you will tell the supplier to \”send item XYZ to
customer ABC.\” They ship it after which you are charged.
The net profit is the difference between your retail price
and the amount you give your supplier. According to my observations, if you
drop ship properly, your average net profit will be between 25 and 30 percent.
In other words, you make $250 if you sell a $1,000 item. In
my experience, that is the average. That is a nice target to aim at, though
sometimes it is higher and other times it is lower. It\’s a reasonable goal to
have.
If you\’re thinking \”Is Dropshipping Legal?\” there
is one more thing. Of course the answer is yes! You should be aware of some
legal issues because they apply to every business.
Drop Shipping\’s Benefits and
Drawbacks
I\’ve answered the query, \”What is drop shipping?\”
now. I want to discuss the advantages and disadvantages of running a drop
shipping company.
When it comes to your options, transparency is vital to me.
You will then be able to make an informed decision about
whether you want to develop a drop shipping firm or if you would rather use one
of the other business models.
Benefits of Launching A Dropshipping
Business
1. You don\’t Care Where You Are
Being location independent is drop shipping\’s initial
advantage, and it\’s certainly the one that matters most to me.
I\’ve recently lived in Thailand, South America, and Vietnam.
You may genuinely work and live wherever you want with a drop shipping company.
2. No Stock Costs
The lack of inventory costs is another perk. So you don\’t
spend any of your money on inventory when you first start drop shipping.
In actuality, your largest expense as a traditional store is
your inventory. To sell something, you need to physically possess it, but with
drop shipping, you don\’t.
To have products, only supplier clearance is required. There
are no storage fees; you only pay for items when you sell them.
I discussed how I got started in eCommerce by importing in
the preceding section. I therefore had to pay for this inventory and
warehousing when I first started. I was paying a fortune each month to store my
goods.
However, if you operate your organization using the drop
shipping model, someone else is responsible for covering these costs.
Each of your suppliers has a warehouse of their own, and
they all pay to keep these goods there. As a result, it\’s another expense that
isn\’t your responsibility and something you won\’t have to worry about when you
first start off.
3. No Taking Back Returns
Not having to deal with returns is another advantage of drop
shipping. To be clear, you must still send your customer the return slip from
your supplier if they choose to return an item.
But none of these things are coming to you. You won\’t get
returned goods at your home if you run a drop shipping company.
They will be returned to your supplier, who will either
issue you a refund or send the customer a replacement item in accordance with
their policies.
How to discover suppliers with low return rates is one topic
I cover in depth in the Drop Ship Lifestyle course. Therefore, in a perfect
world, dealing with emails about refunds won\’t even be necessary.
4. Compile information while being paid
The collection of data when you are being paid is the next advantage
of drop shipping.
Assume you wish to market your own chandeliers or lighting
fixtures by developing a brand in the niche of chandeliers. Let\’s also imagine
that you want to import products and create your own product line. We\’ll add
that you currently have the resources to invest in it.
However, before you invest money in an import company, have
goods made, and then try to sell them… You should still launch a drop
shipping company in that market first, in my opinion.
You will discover what sells as you drop ship. Finding out
what your customers want will enable you to develop resources for your own
product line. While also earning money. In essence, you\’re testing the market
and generating money at the same time.
You\’ll discover the product categories that do the best
business, the price range at which you make the most profit, and the attributes
that your target market values most.
Once you\’ve achieved success in that market sector, you can
use all of that information to create your own brand with an import operation.
5. It Can Be Scaled Easily
The ease with which a drop shipping firm can grow is yet
another fantastic advantage.
For instance, it\’s relatively simple to construct more drop
shipping stores with results that are comparable if your single site generates
$100,000 in sales annually. The nice part is that you can repeat this process
endlessly.
I always advise beginning with one drop shipping business so
that you can fully understand, go through, and master the process. But after
you\’ve done it once, it\’s quite simple to repeat the action.
6. You\’re Constructing A Marketable Asset
The next incredible advantage of starting a drop shipping
company is that you\’re creating a true asset.
However, I was unaware of the importance of drop shipping retailers
when I first started this business.
Many customers are searching for profitable eCommerce
businesses, particularly drop shipping businesses.
Because these customers might essentially just plug
themselves into your company and start producing money the next day. All of
this without having to take control of your warehouse or your inventory.
Here is an illustration of what a dropshipping company might
sell for:
Let\’s assume that, on the low end, you construct a drop
shipping company that generates $1,000 in profit per month.
That sum is really reasonable and doable, and I believe that
everyone could comprehend it. That shop can be worth up to $20,000.
Drop shipping is one of the best methods to earn money
online, and I mean that in large part because you\’re creating a real asset.
Disadvantages and Drawbacks of Drop
Shipping
Let’s now discuss some disadvantages of running a drop
shipping company vs running your own brand.
1. Decreasing Profit Margin
The margins are smaller, to start. Profits will be lower
than if you produced your own products because you are selling someone else\’s
goods.
You can negotiate better prices for the product if you
manufacture your goods in China. That\’s because you\’re working much harder and
shouldering far more responsibilities. However, your profit margins will
increase.
Therefore, profit margins with drop shipping are typically
lower than those with own brands. I will discuss the precise margins later in
this book, but generally speaking, I strive for 25% profit margins with my drop
shipping stores.
2. Lack of inventory management
The fact that you have no control over inventory is another
drawback of drop shipping, and in my opinion it\’s the largest one.
Consider a scenario in which you have a single supplier
whose merchandise does well on your website and you are profitable with them.
What transpires, therefore, if that supplier runs out of stock? What happens if
your drop shipping vendor runs out of those products?
Although you won\’t be able to fill these orders, your
clients will still want to place orders with you. In that case, you\’ll lose out
on possible revenue. All because you have little control over the inventory, or
possibly because your suppliers don\’t do a very good job of controlling
inventory and maintaining a constant supply of each item.
Great providers know how to handle this situation.
Regardless, if you want to launch your own drop shipping company, you\’ll
probably encounter it at least a few times.
You\’ll encounter suppliers who don\’t manage their
inventories well and who frequently run out of stock, which results in missed
sales.
In a subsequent section and in greater detail in my course
Drop Ship Lifestyle, I go over how to identify dishonest vendors.
3. Increasing Competition Risk
The greater danger of competition is the last thing I could
truly think of as a drawback to drop shipping.
Let\’s return to the chandelier niche and say you make
\”Anton Chandeliers\” as your own brand to sell online. Your business
and brand are \”Anton Chandeliers,\” therefore nobody other can start
making them.
We sell other people\’s brands that are seeking for retailers
when we drop ship. And it\’s conceivable that additional rivals will locate the
same supplier and open their own stores.
It is therefore competitive, but if it weren\’t, there
wouldn\’t be any money to be made. It would imply that there is no market for
that niche and that it would be unwise to enter it.
These are the advantages and disadvantages I see with drop
shipping. But despite these disadvantages, I constantly advise starting a drop
shipping company.
It\’s what I\’ve advised to family and friends, and I teach it
to others because it\’s effective.
It\’s an excellent way to start a business that doesn\’t
require a physical location, costs minimal money, and has the potential to
generate enormous profits.
Questions and Answers
Now that we\’ve discussed some of the most common errors
brand-new drop shippers make, I\’d like to answer any queries you might have.
How long and how much work is required to create a
dropshipping store?
Again, I\’ve been developing drop shipping websites for
years. To get to the very basic stage when I begin contacting vendors, I could
complete it myself in about a week. Therefore, it took me about a week to
actually set up the shop.
Because it varies so greatly, this question can be
challenging to answer.
I currently own stores and have had stores in a variety of
markets. I\’ve worked with hundreds of suppliers, and there have been instances
where a 15% profit margin is acceptable to me. Additionally, I work with
several vendors where my profit margin exceeds 50%.
Therefore, I\’d estimate that my profit margin from drop
shipping is roughly 25% on average, possibly a bit higher. Keep in mind that is
net profit.
This means that on average, you may anticipate to make
roughly $250 profit on a $1000 transaction after paying for the item from your
dropship provider, deducting your advertising expenses, paying your merchant
account fee, and shipping fees.
In conclusion, those are about the margins you can
anticipate, and it\’s one of the reasons I advise selling pricey things so that
each sale is genuinely worthwhile.