It’s lonely at the top, but you don’t want to hit rock bottom… why not aim for the middle? Dropshipping sets you up as the middleman so you can connect dropship suppliers to customers and make everyone happy — especially you. But how effective is it? Is it profitable? In this article, we discuss how to dropship, and whether or not the model will work for you.
What Is Dropshipping?
Let’s start by addressing the question “what is dropshipping?”
To put it simply, dropshippers orchestrate the sales and delivery of a product between the manufacturer and customer. For ecommerce, you start by partnering with one or multiple dropship suppliers and then sell their product(s) on your online store.
Dropshippers don’t have any actual inventory to manage — their only responsibility is selling others’ products on their site and taking their share of the purchase. The dropship suppliers will handle the rest.
Because most suppliers aren’t household names, they’ll gladly give you a cut in exchange for extra exposure. Ecommerce stores receive special discounts and ample commissions on “assisted” sales, so much so that they can utilize this business as a main source of income… depending on how much they sell.
Is Dropshipping Profitable?
Dropshippers’ main duty is marketing. Their job is to sell products from lesser-known manufacturers to the masses. If the manufacturers are well-known or already established, then they don’t need the middlemen in the first place and probably won’t participate.
How much profit you’ll make depends on how well you know ecommerce. For example, it’s not as easy as opening up a store and filling it with other people’s products. If you want to turn a healthy profit, you need to build your site using the best practices for ecommerce design (especially the checkout), tap into a large social network to draw in shoppers, and use ecommerce analytics to continually sharpening and optimize your design choices. Those digital marketing services are essentially what dropship suppliers are paying you for.
Ian Atkins, an analyst and staff writer for Fit Small Business, presents these estimations to help you calculate how profitable dropshipping is. Keep in mind these are estimations based on average figures.
- 20% commission
- 2% conversion rate
Using Atkins’s figures, you can calculate your projected profits if you know your traffic and the average order value:
(Traffic x 0.02) x (Avg order value x 0.2) = Profit
Dropshippers earn more money when they already have a reliable flow of traffic; however, you can always start from scratch and build your community from the ground up. The most important part is applying the fundamentals of ecommerce: social media/digital content marketing, online store design and ecommerce analytics.
Dropshipping Business Pros and Cons
If you think selling other people’s products sounds like easy money, think again. The dropshipping business has plenty of advantages, sure, but it also has its fair share of disadvantages. Take a look at the lists below to see if it is right for you.
- Minimal Starting Investment. Launching your own dropshipping business requires very little startup — pretty much however much it costs to design and host your site. You don’t have to pay for manufacturing, shipping, or housing inventory.
- Low Overhead. Once your store is up and running, you still pay a low overhead. You can even work from a home office to further conserve expenses.
- Easy to Manage. Because the dropship suppliers handle the logistics of shipping and inventory, you’re free to focus all your energy on improving the site itself.
- Flexible. Most of your work is digital, so you can earn money from anywhere in the world and choose your own hours.
- Wide Product Ranges. Because dropshippers don’t have actual contact with the products, they’re free to offer a wider range of product lines. This holds a lot of potential for specializing online stores (i.e., winter sports gear) or presenting an all-in-one department store style.
- Experiment with Products Risk-free. With the wide product ranges, store owners can experiment with new or untried products. There’s very little risk since you don’t lose money by featuring a flop; your only loss is the screen space used to promote the product.
- Low Margins. Not making much per sale is the other side of the “low overhead” coin. You may not be putting much money into the business, but you’re not taking much out per sale. That’s why you need a lot of sales to sustain yourself.
- Selling Unfamiliar Products. It’s a lot easier to sell a product you’ve held in your hands than one you’ve only seen in pictures. This isn’t always an issue, though; you’re free to choose which products you sell and which you don’t.
- Complicated Shipping Issues. Most dropshippers sell products from multiple suppliers. If a single customer buys products from different suppliers in the same order, the shipping costs will vary. You have two options: eat the extra shipping charges yourself to keep the customer happy, or pass on the extra charges and calculate the total price manually.
- Delayed Updates. The degree of separation between you and the dropship suppliers means an additional step that can delay updates. For example, if an item goes out of stock, you may not be notified until after a customer tries to buy it.
- Dependability of Suppliers. Like any business venture, you have to be careful whom you partner with. Some suppliers are more reliable than others, and if you choose the wrong ones, you’re stuck explaining to your customer why their shipment is late.
How to Dropship in 5 Steps
As we mentioned above, one of the main advantages of dropshipping is that it’s easy and inexpensive to start from scratch. Here are the first 5 steps to breaking into the dropshipping business.
If you already have an online store and want to leverage your existing customer base, you’ve probably already taken care of most of the steps below. In that case, focus all your efforts on Step 2, Select Your Products.
1. Choose Your Ecommerce Platform.
The first part of any ecommerce business is choosing the right platform to build your site on. There’s no “one size fits all” platform: your individual situation determines which platform will serve you best.
For example, Shopify works well for beginners and ecommerce owners who want to invest minimal effort — it also has some excellent options for dropshippers (see the next step). On the other hand, ecommerce platforms like Magento are for more ambitious, hands-on store owners who don’t mind putting in more work.
2. Select Your Products
This is the heart of your dropshipping business, and many dropshippers all have their own ways of choosing products. Here are some common methods to help you get started.
- Dropshipping Directories. We don’t have space to compile a list here, but you can check Watchman Advisor’s List of Verified Dropship Suppliers, up to date as of January 2, 2017. Each of these directories lists out a variety of suppliers to pick and choose from.
- eBay. If you check to see a regular product’s sales rate, you can determine with relative ease how well it would sell on your site.
- Contact Wholesalers Directly. Maybe you’d prefer to be more hands-on and reach out to wholesalers directly. It’s more work, but it pays off if you can get exclusive access to a manufacturer.
- Oberlo. If you’re using Shopify, Oberlo is the smartest choice for dropshipping. This app allows you simply click on items you like in AliExpress to add them to your store, much like online shopping itself.
Once you have your product range, you can build the actual site.
3. Design Your Ecommerce Store
Your site design will directly affect sales; customers are far more likely to complete their purchase if the user experience matches what they’re looking for. However, the actual designing varies depending on which platform you use.
Shopify has an easy interface, but it’s limited in customization options. Magento offers complete customization if you know HTML, but has an enormous learning curve. If you’re familiar with WordPress and like its interface and theme & plugin libraries, the WooCommerce plugin allows you to turn any WP site into a functioning online store.
4. Spread the Word with Digital Marketing
Digital marketing is one of the core responsibilities of dropshippers. A main reason suppliers allow others to sell their products is so they don’t have to worry about this aspect — just like dropshippers don’t want to worry about inventory and shipping.
The more traffic you have, the more sales you get. Digital marketing is a central method for attracting more visitors, so don’t skimp here. Having an on-site blog not only provides content to attract like-minded readers, but also greatly improves your site’s natural SEO. Similarly, a regular social media presence that’s engaging and entertaining spreads brand awareness and directly brings in visitors.
5. Optimize Your Site with Analytics
An ecommerce manager’s work is never done. Once your site is up and running and your digital marketing avenues are flowing, you still need to worry about continually optimizing your site. Ecommerce analytics reveals the statistics you need to make informed business decisions.
For example, is your Google AdWords generating more sales than your Facebook Ads? Knowing the Return on Investment for such things, allow you to allocate your marketing budget wisely and efficiently.
Analytics also helps with pricing. Figures like Average Order Value can help you determine the perfect price and even inspire promotional deals such as package offers or free gifts.
Dropshipping is not the perfect, get-rich-by-doing-nothing model it may look like on paper… but neither is a failing industry. The dropshipping business is somewhere in the middle — true to form! At the end of the day, how well you do depends on how well you understand ecommerce in general. If you take one thing from our guide, let it be this: stick to the basics like digital marketing and analytics, and you’ll survive just fine.