Nov 2, 2020
 in 
Ecommerce

What Is Dropshipping? The Ultimate Overview

I

f you're interested in eCommerce or learning how to make money online, then chances are, you've heard the word 'dropshipping' before. But what is dropshipping? In this article, we will be going over what dropshipping is, how it works, why people use it, and how you can start a dropshipping company today.

The only way to make any progress is to get started!
There's a lot to learn for dropshipping. But "the journey of a thousand miles begins with a single step".

What Is Dropshipping?

Courtesy of the Merriam-Webster online dictionary.

Dropshipping is a business model where one business markets and sells products that are supplied and shipped by another business. What makes dropshipping different from the traditional retail business model is that the business who markets and sells the products never physically touches them.

When you start a dropshipping business, you are setting up an arrangement where your supplier will take care of manufacturing, warehousing, and shipping the products to your customers. As the dropshipper, this takes a lot of work off your plate. This means that you don't have to spend a dollar on inventory, packaging, or shipping for products that aren't already sold. The supplier takes care of all of those logistics for you. All you need to do is build a customer-facing brand, market the products, and let your supplier(s) know when/where they need to ship the orders.

Why Would Someone Want to Start a Dropshipping Business?

Starting an online business is like planting a money tree.
Starting a business is like planting a money tree. You need to give it attention if you want it to grow to its full potential.

As any entrepreneur will tell you, starting a business is not easy. It takes a lot of work just to get to the point where you are ready to start selling, and even more work to grow your sales.

Dropshipping provides you with an avenue to start your business quickly. Rather than taking several months (or years, depending on the industry) to take a product to market, you can focus on marketing products that already exist and are ready to be shipped. You don't need a warehouse, an office, or even employees. All you need is a laptop, an internet connection, and usually, a credit card.

As for why you might want to start a dropshipping business, there are tons of reasons why you might be interested in it.

You might be looking to earn some side income. You might be looking to find a way to make some money while working from home (or wherever you'd like). You might want to eventually replace your full-time job. You might want to monetize another project that you've been working on, like a Youtube channel or blog. You might be looking for a hobby. Or, you be looking to build an empire.

Whatever your reason may be, they're all valid. You don't need to justify yourself to anyone. Regardless of your circumstances, it is perfectly acceptable to want to create something of value for yourself or your loved ones. This ties in nicely with the next question, which is how dropshipping business actually provide any value.

Are Dropshipping Businesses Actually Profitable?

Stacks of cash that dropshipping can help you earn
Nobody said that dropshipping would be easy, but it can definitely be profitable!

As with any type of business, dropshipping can be profitable if executed correctly. Not everyone is going to have the mindset or skill set to be successful with it, but there are definitely thousands of people (or more) who are making some great profits through dropshipping.

The path to profitability in dropshipping is relatively straightforward. You want to find a product that can be sold for a high enough price that you can cover all of your expenses and still turn a profit. Once you figure out your formula, then you can scale it and take your profits as high as you can. We'll cover more about how this is done later on in the article.

According to Grand View Research, the global dropshipping industry was valued at approximately $102 billion USD in 2018 and is estimated to be $149 billion for 2020. There's no doubt about it, this industry is growing quickly. The only question is whether or not you want to be a part of the action.

Why Would Someone Buy from a Dropshipping Store?

If you're wondering why someone would buy from a dropshipping store instead of the original supplier, that's a great question. This question has led to a lot of skepticism towards dropshipping. However, dropshipping is is a perfectly legitimate business model.

There are main two reasons why customers buy from dropshipping stores:

First, many customers will buy out of convenience. Convenience has become bigger driver of consumer behaviour in the 21st century than price (within reason). According to the National Retail Federation, 9 out of 10 consumers are more likely to buy from a brand that ensures a convenient experience. People don't want to shop around forever just to potentially save a few dollars. They would prefer that the experience emphasizes convenience, even if it costs a bit more. As the dropshipper, you are the one marketing to them and presenting them with solutions to their problems. That will be good enough for 90% of buyers.

The second reason is because they don't know or care if you are the supplier. When you buy from Walmart, you know that most products are made by other companies. But, Walmart trusts them, and that's good enough for you. Customers are used to buying from distributors, retailers, and marketplaces. They don't mind if you're not the supplier. What they care about is that you stand behind the products, and that you deliver on the promises you make. Your customers want to be able to hold you accountable if something goes wrong. They want to trust you, and know that they are in good hands.

Pros and Cons of Dropshipping:

As with any business model, dropshipping has both advantages and disadvantages. There are always going to be trade-offs in life, and if you're going to be investing your money, time, and energy into something, you should at least know what they are. Let's jump in.

Dropshipping has some advantages and disadvantages.
Life is all about trade-offs, and dropshipping is no exception.

Advantages:

  • You can work from anywhere: Okay fine, anywhere with an internet connection. But the point is that you can run your business off your computer from anywhere you can reliably access the websites you need. This means you can work from home, from a coffee shop, or even while traveling. You are completely location-independent.
  • Low start-up costs: When you're starting a dropshipping company, your start-up expenses are pretty minimal compared to most other types of businesses. You don't need to pay for an office, a warehouse, product development, or even inventory. Once you get your website set up with products and register your business (later on), you're ready to start selling. This can allow you to become cash-flow positive (i.e. profitable) pretty quickly, since you minimized your investment.
  • Low scaling costs: When you start a regular business, and it takes off, you'll be hit with all types of expenses related to your growth. You might need a bigger office or retail space, more staff, more inventory, and more. Scaling a dropshipping business, on the other hand, is a lot less expensive and time-consuming since everything is online.
  • Fewer logistics to manage: Imagine working in a warehouse as you unexpectedly receive 5x as many orders as you were expecting. Sounds stressful, doesn't it? Dropshipping makes things a lot easier since you don't have to take care of the order fulfillment or inventory management yourself. You can set up most of your logistics to be automatically taken care of so that you can focus on developing the business rather than working in it.

Disadvantages:

  • Less control over inventory: One of the most noteworthy disadvantages of dropshipping is that you don't have much control over inventory. If your supplier runs out of stock on an item, you have to wait for them to replenish it. If they choose to discontinue a product you were selling, you don't have much recourse. It's their choice, and you have to deal with it. This is why it is important that you have a trusting relationship with your supplier, and can hold them accountable.
  • Less control over shipping: When you're working with a supplier who fulfills your orders for you, you won't have as much control over shipping. They will be the ones packing the item, handing the order off to a shipping company, and providing you with the tracking information. While this usually goes well, you won't always have the latest information if your customers ask about it.
  • (Often) lower margins: When you are working with a dropshipping supplier, they get to set the price they charge you for the item. Some niches are very competitive, which leads suppliers to offer low prices, but some are not. If you controlled all aspects of the supply chain, you might receive higher profit margins because you would be taking more risk. However, since you are not taking much risk when dropshipping, your margins are usually lower.
  • Less opportunities for branding: When you manufacture your own products, you can brand them however you'd like. When you are dropshipping someone else's products, they are already designed, and probably already branded. You can still brand your store, but you won't be able to brand individual products. You're essentially acting as an online distributor (e.g. like Amazon or Walmart) for brands that already exist.

The Two Major Product Sourcing Options:

There are two main methods of sourcing products for dropshipping.
There are two main methods of sourcing products for dropshipping.

There are two general methods to get started with dropshipping.

  1. The first option is to set up your own relationship with a supplier, or several, and establish your own agreements. This is the do-it-yourself (DIY) method, and it takes a fair bit of work to get established. The benefit of this approach is that you'll be able to set up your own systems and work with suppliers from around the world, but the downside is that you'll have to manage the relationships by yourself. This might involve negotiating contracts, terms, and more. Due to the depth of this topic, we'll cover it more in a later article.
  2. The second option is to use a dropshipping network like DropCommerce to handle the supplier relationships for you. DropCommerce makes it super simple to find products to sell on your online store. We have hundreds of suppliers that have already agreed to dropship, integrated their catalog, and set their prices and shipping terms. Everything is streamlined for you so that you can get things set up in a matter of a few days. Also, all of our suppliers are located in North America, meaning you'll never need to worry about low-quality goods or slow shipping times.

How to Start Dropshipping:

#1 - Pick a market niche to focus on

Always focus on a niche when you're dropshipping. It helps you build a brand and stand out to your customers!
One of the biggest mistakes you can make in dropshipping is not focusing on a niche!

When you're getting started, the very first decision you'll have to make is what market niche you'll want to focus on. A niche is essentially a sub-category of a bigger industry. For example, fitness products is an industry. Crossfit equipment is a niche. Jewelry is an industry. Cat jewelry is a niche.

Picking a niche is important because it shapes nearly all aspects of your business. It is the common denominator between all your products. It gives you an angle for your brand. If you try to sell a bunch of unrelated products in your store, then your customers are unlikely to remember you when thinking about your related categories. To succeed in dropshipping, you need to focus on a small, identifiable niche of customers, and become their favourite brand in the space. Ideally, it should be a niche that you're interested in. Otherwise, you'll eventually get bored with it, and you won't want to work on it any more.

A good niche needs to be more than something you enjoy. You need to do some research on the niche to see if it is actually a good fit for you to get involved with. Some niches are super competitive, and it will take you tons of effort to get noticed. Other niches are less competitive, and you'll be able to become a leading player in a short amount of time.

Your first idea for a niche might not be the best one. It's usually best to compile a list of 3-4 that you think would be a good fit so that you give yourself some options. Once you have a shortlist, you can then begin to do some research and determine which of them is the best fit. If you want to learn more about how to select a niche, then check out the article we wrote on the subject.

#2 - Research Competitors, Keywords, and Trends

There are plenty of online tools that can help give you a feel for how much potential there is in a niche. You basically want to find out how competitive the niche is, and if there's enough demand for products in the niche to justify you getting involved.

Once you have some ideas, one of the best tools to determine demand is Google Trends. Google Trends allows you to how many people are searching for a keyword or phrase in relative terms (i.e. compared to all-time highs, or other keywords). As you'll see below, the keyword "Cat Jewelry" is set to receive a lot more traffic over the next two months. As we look at the last five years of search data, we can see that traffic always spikes in the lead-up to Christmas.

Google trends is great for seeing search volume for potential dropshipping ideas

We can also add a second search term, and see how the two compare. In the next example, we'll compare search volumes for "cat jewelry" and "dog jewelry". As we can see from the graph below, dog jewelry is the more popular of the two.

You can also use Google Trends to compare two different search terms.

You'll want to pick something that has consistent, or predictable demand. If your Google Trend results look like the following picture, you don't want to get involved. Fidget spinners are a great example of a fad that isn't going to return in a meaningful way anytime soon.

If your search query on Google trends looks like this, then you'll want to stay away from that product idea.

To research your competitors, another great place to start is Amazon. You'll be able to get a pretty clear idea of who the major players in the market are, what their brands offer, and whether you'll be able to compete with them. If that doesn't work, then pretend to be a customer searching for those kinds of products. What would you do to find them? Chances are, you would start off on Google and take it from there. Try that, and get an idea of what most people in your shoes are doing.

#3 - Find a Supplier (or Multiple)

Once you know what type of products you're looking to sell, you'll need to make sure you can find dropshipping suppliers that offer them. If you decide to use DropCommerce, you'll have access to 300+ suppliers and 24,000+ products. Also, you won't need any elaborate software, since all of your products and orders can be managed from your DropCommerce dashboard. We even offer a risk-free 14-day free trial so you can browse our selection and see if its a good fit without making any financial commitments.

DropCommerce app interface

#4 - Set Up Your Online Store

Setting up your online store is a tedious but fun part of the dropshipping process
Your store's design will play a massive role in determining how many sales you're able to get.

To set up your online store you'll want to use an online eCommerce platform so you don't have to code everything yourself. Our favorite platform for online stores is Shopify. Shopify allows you to build and customize your online store without knowing a single line of code. It also allows you to integrate applications like DropCommerce, so that you can add features and functionality to your store with a few clicks. They even offer a 14-day free trial (risk-free) so that you can set up your store and play around with the features without spending a single penny or giving them your credit card number. It's a no-brainer.

Once you have your Shopify store registered, and you have added DropCommerce, you'll want to choose a theme and do some customizations. This is a huge topic that we'll go more in-depth on in a later article, but you can find plenty of online guides and Youtube tutorials on how to approach this. We also offer prebuilt Shopify stores at DropCommerce if you want us to take care of building the store for you. Each store comes with 50 niche-specific products and a 3-month subscription to our Professional plan (valued at $237).

#5 - Build an Audience and Marketing Plan

"If you fail to plan, you are planning to fail!" - Benjamin Franklin

Once your store is established (or even before) you'll want to start developing your game plan for making sales. In general, it is usually a good idea to build an online audience so that you can make some sales without spending money on advertising. By building an audience ahead of your launch, you will have a group of customers waiting to open. Social media is a great place for this, and we went over how you can use Instagram to make sales for your online business in an earlier article. Your audience is a group of people that are following your business, care about your updates, and can't wait to see what you do next.

As for marketing plans, this is your opportunity to get creative. It is also one of the most important parts of dropshipping. Without an effective marketing plan, you will have trouble getting any traction or sales, so it's important to know what you're trying to achieve. Facebook advertising is the most commonly used advertising platform, but you're going to want to develop a more in-depth strategy. You'll definitely want to optimize your website for SEO at some point as well, so that you can begin to see organic search traffic from Google over time.

Marketing is much too broad of a topic to cover effectively in this article, but again, there are many resources available on Youtube or other websites that can help you develop your game plan.

#6 - Launch your Business

It's time to launch your dropshipping business!
Opening an online business is different than a physical business. You need to let people know!

This part is fairly self-explanatory, but it's the period where you open your store for business. You'll want to do whatever you can to get sales as early as possible. We recommend that you find a way to have an audience waiting for you before you launch, if possible. For more information on how to test your ideas and generate pre-launch buzz, you should check out The 4-Hour Workweek and The Lean Startup on our list of Must-Read Books for Entrepreneurs. When you see that you are getting sales, that will motivate you to keep developing your business. Failing to get sales early will likely cause some frustration, and could lead you to abandon your store before you even get started.

Dropshipping is 10% set-up and 90% problem-solving. There will be issues every step of the way. You'll have problems getting traffic, then you'll have problems getting your traffic to purchase, then you'll have trouble getting your customers to return. It will feel like one problem after another because it is. But, the payoff can vastly outweigh the frustrations if you stick with the business until it is successful. Your business is like an engine. You need to get it running before you can get anywhere, but once it starts, the hardest part is over. Then, it's all about maintenance and optimization.

#7 - Analyze, Optimize, Analyze, Optimize

Analyze and optimize your data to make the best decisions on how to run your dropshipping business.
Analytics are your best friend when dropshipping. Learn how to use them!

I once heard someone say "first you make it work, then you make it work better", and that is exactly the attitude you'll need to have for dropshipping.

Once your business is up and running, you need to keep it healthy and improve it. But you won't always know what what needs to be done. The best way to get a sense of how your business is doing is through experiments and analytics. Shopify has analytics built in, but you can also easily integrate Google Analytics to collect even more data. Google Analytics is free, and extremely powerful. The more data, the better.

Data allows you to make informed decisions. You might think that customers love or hate certain aspects of your website, but your data will show you the reality of the situation. Data allows you to understand how customers are reacting to your business, and how your optimizations change your metrics. Metrics are another giant significant subject, so we will leave that for another post.

You want to analyze your data and test changes. Keep trying new things. Keep optimizing. Never get complacent. You can always be receiving more traffic, converting more to customers, and making more money. The sky is the limit.

Wrapping Up

By now, you should have a pretty good idea of what dropshipping is, how it works, and why people choose to use it.

In order to truly succeed at dropshipping, you'll need to employ a growth mindset. You need to believe that you can succeed if you apply yourself, and always continue learning new things. One of the best places to learn more about dropshipping is through the DropCommerce blog, where we cover all kinds of topics on the subjects.

If you're ready to give DropCommerce a try, act now to get your free 14-day trial completely risk free. It's the best decision you can make if you want to unlock your dropshipping potential.

If you liked this article, then make sure to check out the following:

How to Choose a Dropshipping Niche

One Product vs General Stores

30 Free Online Resources for Dropshippers and Entrepreneurs

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