Do you want to open an online shop on a minimal budget and without spending all of your initial investment on stock? Dropshipping is the perfect alternative for you.
What is dropshipping? What are its advantages? Why is it so popular nowadays?
We will answer all these questions in this article so you can get started with your Dropshipping online shop.
Definition of Dropshipping: what it is
Dropshipping is a retail e-commerce sales model in which the wholesaler is in charge of shipping all merchandise and the retailer is only in charge of securing new orders and customer service.
That is to say, if you set up a Dropshipping shop, you would only need to generate sales , since the product and its shipping is taken care of by the supplier.
If you have an online shop, or if you want to have one, you may already be aware of the challenges regarding storage, shipping, and returns. On many occasions, the logistics take up so much of our time that we can’t focus on selling or making the business grow.
This model allows you to stop worrying about the logistics so you can put all your efforts into selling.
For example, these days it is quite popular to connect with manufacturers in China and ship the products through an online shop located in Spain that covers the guarantee of said products.
However, it doesn’t necessarily have to be a product from Asia; you could do dropshipping with a physical shop in your neighborhood.
The key is that the seller never actually has the product in their hands, but rather is in charge of managing the order and providing customer service if any problems should arise.
If in a normal purchase process there are two main characters—the seller and the buyer—we add a third party for this one: the dropshipper or supplier.
Let’s see how they are defined in this model:
- Buyer: Nothing changes for them, at least at first sight. The only thing they may notice is that the packaging in which they receive the product is not the one from the shop where they bought it.
- Seller: They complete the purchase on their website and they are in charge of support and the after-sales service. They don’t touch the product.
- Dropshipper: They receive the order from the sellers and ship the product to the buyer. Then, they invoice the seller.
In this structure, which may seem easy at first, there are a lot of details to hammer out to make sure the relationship flows smoothly.
Let’s see the pros and cons of this model.
Advantages of Dropshipping
There are four undeniable advantages with this sales model and all of them are related to stock and the necessary investment amount.
Want to know what they are?
1. Limited Investment
The risk involved with creating an online shop from scratch is much smaller with Dropshipping than with a traditional online shop.
Online business requires a smaller initial investment than physical ones—well, with this model the investment is even lower.
The investment that you must put forth is limited to creating the shop, communication strategy, and different techniques that you utilize in order to generate more sales.
There are no inventory costs, storage costs or shipping costs.
There are also no losses, nor out of fashion products, nor any type of storage risks (floods or any other type of damages). You only need to worry about sales, sales, and sales.
2. Unlimited Stock
While the investment is “limited”, the stock is “infinite”. Your supplier, so long as they are reliable and of considerable size, will always be prepared to respond to and fulfill orders of any size.
Traditional shops have to face:
- Stock management problems
- Launching special offers for products that don’t sell as well (if this is your case, read this post about sales promotions)
- Changing prices in order to sell certain types of products.
You will be able to choose which items to discount with no regard to stock and you will not have to “force” salesof those products which are left behind in the warehouse.
If you are interested in finding out more about similar options, read this post about how to sell without stock.
Imagine that you have an online shop for t-shirts that you make yourself.
What is the scalability of your project? Would you be able to fulfill an order of 50 t-shirts tomorrow and assure that your client receives them within 3 days?
In most cases, the answer is no.
However, with Dropshipping your e-commerce can grow at any rate. It doesn’t matter if a client orders 1 or 20 of your products, the supplier will almost always be prepared to ship out any order and have it delivered on time.
At this point, it is more important to choose a good dropshipper.
This is a main factor for your business and you should be able to trust 100% that they are not going to leave you high and dry.
In order to help you choose one, we created this guide to finding the best suppliers and how to negotiate with them.
4. Use your strengths
At the beginning, it is normal to feel overwhelmed since there are so many things to take into account.
A good way to avoid falling into a bottomless pit is to start by using dropshipping. If you are good at selling, dealing with clients, customer acquisition, and so on, you will be able to focus on your strengths.
By eliminating logistics as one of your worries, you will be able to focus on the core of your business: selling.
The dropshipper does the rest.
So, choosing a good partner is important, but it won’t be the only challenge you’ll have to face. Let’s go over a few more.
Disadvantages of Dropshipping
Not everything can be great with this sales model, right?
Despite its popularity and the relatively attractive advantages, there are a few negative points to consider before creating your own Dropshipping shop.
This is what you have to take into account.
1. Smaller Profit Margins
With Dropshipping, the profit margin is much less than what you could achieve if you controlled the complete sales process.
The profit margin is typically between 5%-15% , depending on the type of product and the supplier that you are dealing with.
This is logical, of course, since the person who creates the product is the one who sets the price and the profit margins they would like to achieve. When you do Dropshipping, you absorb the profit margins that the supplier determines for you.
Also, remember that the percentage will be lower for more expensive products and viceversa.
Your negotiating ability and how visible your e-commerce is are also important factors. Later we’ll see which strategies could be the best fit for each case.
2. Lack of Suppliers
There are certain types of products for which it is nearly impossible to find a reliable supplier.
If you want to innovate and sell something that is not particularly common or popular, it is quite probable that you will have to look for a smaller supplier, which decreases the advantages of Dropshipping, or you would have to sell your own products and leave the idea of Dropshipping behind.
This limitation has its consequences.
The lack of suppliers for certain products means that your shop will be sharing dropshippers with other similar shops.
This will obligate you to be quite creative in order to differentiate yourself, which, at the same time, is a disadvantage. Let’s see why.
3. Lack of Uniqueness
When you create your own shop and your own products, you sell a brand; a “unique” product.
With Dropshipping, you are selling a product that 15 or 20 other shops may be selling and the only unique part you may have is the name of your shop.
You will have to think about differentiation strategies. Your shop should have an advantage that makes users choose you:
You will have to compete for a sales volume that earns enough profits to make it worthwhile, since you will not be able to sell exclusive products that other shops do not have.
Your success will depend on your ability to generate traffic to your shop and convert it into sales, and you need to add a unique value to do it.
- Strategies for Enhancing Your E-commerce Brand
- Unforgettable brand image: how to create it and attract thousands of loyal clients
Steps to start a dropshipping business
The path that we are going to follow in order to analyze the best way to start has two possible directions:
For both options, as for any given business, the first step is to come up with an idea and analyze it.
We are not going to get into details about that part now, but later we will show you some guides to help you decide whether a niche is good for dropshipping or not.
1. Negotiate first and create later
This strategy is about negotiating with different suppliers in order to have that part covered right after you find an opportunity, but before you create the shop.
The main advantage of this method of doing things is that you know your profit margin before starting anything.
With the agreement already in place with your dropshipper, you will have to analyze the other important factors:
- Search volume: How many people look for the product each month?
- Competitor analysis: Do they have authority? Are their websites well designed?
- Trend analysis: A product may be really popular now, but it could be out of fashion in the near future.
- Possibility for ranking: You will have to analyze the results page in addition to the competitors.
Once you have a clear picture of the general environment and you have analyzed the possibilities, you can start creating your website and your launch and visibility strategy.
2. Create first and negotiate later
This option may seem riskier, but it is more profitable in the long term.
The idea is to find a niche, create content and position it with main keywords, and then look for suppliers.
The key point of this strategy is that you have the upper hand when you start negotiating the conditions.
Imagine, for example, that you are able to position a website about leather belts.
If your website is one of the top results when people search for “buy leather belts”, “best leather belts”, and so on, it will be easier to find a supplier for those belts.
Being at the top of the Google results page puts you in a leveraged position when negotiating with the suppliers since you already have something to offer.
If you try to negotiate with a supplier without anything to offer, it is possible that you hear: “OK, show me your traffic data and then we’ll talk.”
Remember that this strategy and some others are well explained in our post about dropshipping suppliers.
Dropshipping through an affiliate shop
We want you to clearly know the differences between an affiliate shop and a dropshipping shop because choosing the latter option will help you to monetize your business from day one.
They are very similar given that you can sell without stock in both cases, but with affiliation you don’t even complete the purchase. Your job is to refer users to a third-party shop that will be in charge of completing the checkout and shipping the products.
It is a step lower in terms of the responsibility scale and, therefore, the commissions are also lower than with dropshipping.
It works by adding your affiliate links to the content you create and position. Once your website gains authority, you can change over to dropshipping. By doing this, you can make money from visitors from day one.
8 tips to get started
Here you have some tips that you should take into account:
- Choose your niche well: The analysis beforehand is essential. Mistakenly choosing your niche will lead to you wasting valuable time. By analyzing many options you will gain the necessary agility to know which to dismiss. Don’t let easy money fool you. There’s no such thing without putting in the effort.
- Train your negotiation skills: Your ability to get a better commission will determine your income for a long time. Indeed, you can improve it.
- Choose the platform that you are going to use according to your needs: Analyze which software you want to use. A CMS? Are you going to need customized development? Don’t use a hammer to crack a nut.
- Analyze the SEO options of the project: With these types of businesses with low commissions, it is impossible to earn a profit if your traffic acquisition relies on paid services. Most dropshipping projects live off of SEO (analyzing main keywords and how strong competitors are). This post about SEO for e-commerce will help you.
- Create content: Start a blog, a YouTube channel, or whatever you are good at, but don’t miss the opportunity to make the most of content marketing.
- Be clear and don’t bite off more than you can chew: Having problems with shipping doesn’t depend on you. Don’t promise things that you aren’t sure you can deliver. It is much better to offer a longer shipping period and then deliver it sooner than to promise times you can’t keep up with.
- Be careful with the conditions: You’ll find companies that charge you a monthly fee for supplying the products, or companies that will make you buy products ahead of time. Carefully review the conditions and have a signed, written contract.
- Be careful with the packaging: If the supplier sending the products doesn’t respect your identity with the packaging, buyers can be taken by surprise. Think about it—surely you’ve bought something online and the box looked nothing like the original website. It is not extremely important at the beginning.
And one last tip, one that we have mentioned many times before:
Be creative when writing product cards—they are even more important in this business model.
Is it advisable to venture into dropshipping?
We are finishing this post with a summary and review in order to help you as much as possible.
Bear in mind that there is no such thing as magic.
Every type of online shop requires time and effort. The positive thing about this model is that you can save on a very important part, which is stock management and shipping.
Think of it as outsourcing that part of your business.
If you are good at selling, customer acquisition, conversion optimization, and similar aspects, dropshipping is a good way to take advantage of your strengths.
However, as good as you may be at selling, if you jump into a niche with lots of competitors, it will be difficult to find success.
It’s not easy to find the open blue sea with few competitors and high margins, but it’s worth investing the time to try to find them.
If, on the other hand, you get yourself into a sea of red, dropshipping won’t permit you the flexibility that you’ll need to differentiate yourself.
Now that you know all about Dropshipping, what are you going to do? Are you going to create your own online shop or will you choose to create a Dropshipping shop?