DropShipping Business Model Explained | How Much Does It Farrow?

person Tom Kormos
calendar_today August 21, 2020
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Introduction

If you’re thinking about starting an online business, dropshipping might be a good choice. Ecommerce sales hit nearly 3.5 trillion dollars worldwide in 2019 and the trend is rising. The current Covid-19 pandemic also contributed to the growth of online sales. So, starting an online business seems to be a profitable option now.

Drop shipping is a special kind of Ecommerce trading. The Customers order the product from the webstore run by the Retailers and pay for it. The goods are directly delivered to the Customers by the Suppliers. The greatest advantage of this model is that the Retailers don’t have to pay upfront for an inventory and the costs of getting started are relatively low. For beginners in online trading it might be an ideal option.

In this article you’ll be explained what a dropshipping business is and how to start it. You will also be given tips to find good dropshipping business ideas and all essential information you need to know about drop shipping.

The drop ship business model

There are 3 parties in this business model:

Suppliers
Retailers
Customers

How does it work?

The Customers place an order from the webstore run by the Retailers under their own brand and pay for the product. The Retailers pass the order on to the Suppliers giving them all packaging and delivery instructions. The Suppliers deliver the goods directly to the Customers. The Retailers pay the wholesale price to the Suppliers once the goods are shipped in order.
The Retailers will order and pay the wholesale price for the product to the Suppliers not before the Customers have settled the purchase price with the Retailers. So the Retailers don’t have to pay upfront for the goods ordered and invest in inventory. The Retailers’ role is to source profitable products for sale, find trustworthy suppliers, maintain a classy webstore, do efficient marketing and provide for excellent customer service.
It’s the Suppliers’ role to manage inventory, replace and restock damaged products, take care of storage, suitable packaging and timely delivery.

Pros & Cons of Dropshipping

Pros

Dropshipping Startup Budget

Minimal start-up costs
No inventory – no upfront payment for stock
Basically no overhead costs
More freedom and flexibility in work schedule and location - laptop lifestyle. You can pursue your business from anywhere and anytime it suits you. You will only need a laptop and a well-functioning internet connection.
Low risk – You can test your products before sale without spending a fortune on inventory.

Cons

Tight competition - Challenging buyer acquisition and sales. Dropshipping is very popular because of its simplicity and cost-effectiveness. There are always undiscovered sales opportunities. Hard work, thorough market research, finding the right products and niches, well thought over and implemented marketing strategies can make your business profitable.
Lower profit margins - You can get higher margins for shipments from China, but at the end of the day you might be worse off because of inferior quality, late shipments resulting in more refunds and goods replacement. On the other hands partnering with US and European suppliers – though the margin might be lower – but you will get quality goods and fast delivery resulting in much less claims and happy customers who can also be retargeted for repeat orders.
Difficulties in monitoring inventory with wholesalers - Since the supplier delivers to several retailers, their inventory to be closely monitored by the Retailers and an efficient system is to be put in place (app). It might take extra time and efforts from the Retailers.
Problems of shipping logistics and costs - Shipping is a complex issue. All sorts of problems can prop up regarding multiple shipments, branding and packaging. The Retailers are out of control. Shipment fees are a crucial part of the profitability of the product. Can make or break the deal.
The physical product is not touched by the Retailers. They cannot control quality. Solution is to order test products before sales.
Retailers are responsible for damaged goods, replacements, refunds, late shipment - Though quality and shipment are out of Retailers’ control they are responsible to the Customers for quality claims, refunds, replacements, late shipment. Trial orders and selecting trustworthy suppliers can reduce the risk.
Longer shipping times (shipment from China) - It can take 3-4 weeks for shipment from China. Partnering with US and European suppliers can bring it down to a few days or a week. It gives the Retailers and also the Customers peace of mind, Customers will be happier as a result and ready for repeated orders.
No huge bulk discounts. Since suppliers get orders from the Retailers mostly for individual products it’s not in the interest of the supplier to give huge bulk discounts.

How to start a dropshipping business?

How to Dropship? 16 Dropshipping Tips for Beginners

1.Outline a business idea

Evaluate your idea

Tools you can use - Google Trends will show you the trend of your idea and product. Is the product in demand and selling hot or is the demand for it declining?

On Twitter, Facebook and Instagram – from the conversations you may figure out people’s passion for the product.

Prepare a business plan

2. Decide to run a General Store or a Niche Store

Choose your niche(s) – Look for sub niche(s)

Make a product search
Purchase price in drop shipping is crucial, since margin is small
Search for trending products at competitive prices
Tools to find your niche - Google Keyword Planner for keyword research

Google Trends
SimilarWeb
BuzzSumo

3. Competitor analysis

Check out your competitors on Google

Spy on their traffic on Alexa and Similar Web

BuzzSumo will display your competitor’s pages with most shares.
Check your competitors’ engagement on their Facebook and Twitter pages.
You may check out on who.is the age of their domain.

4. To find the right supplier is not easy. Look for the products you want to sell and get in touch with the manufacturer or wholesaler. To have a trustworthy wholesaler is key as quality of goods, warehousing, packaging and shipment times are under their control.

Another way to find suppliers in UK TopTenWholesale

https://www.esources.co.uk/signin.php

https://www.salehoo.com/
https://uk.banggood.com/
https://www.thewholesaler.co.uk/suppliers/dropshippers/

For best US and European products https://www.spocket.co/

Build your brand and website

Best platform for ecommerce https://www.shopify.com

Their #1 free website theme https://debutify.com/

Free online courses

Shopify Academy
https://www.shopifycompass.com/learn/getting-started-with-shopify

Shopify Helpcenter

Shopify Community

5. Market your online store and products

SEO – Search Engine Optimization
Organic Traffic and Paid Search
Social Media Marketing Free – to build your brand
Facebook, Twitter, LinkedIn, Instagram, Pinterest etc.
Paid Advertisements – Facebook ads, Twitter ads, etc.
Email Marketing
Content Marketing – blog, Facebook Live, You tube Video
Influencer Marketing
Test and optimize always for better results!

Conclusion

So now you have got the idea of drop shipping. Can it be profitable for You? Absolutely! But bear in mind the following:

You have got to work hard especially when getting started, be consistent and committed. Don’t quit!
Work out an efficient marketing strategy
Do your research while sourcing products, check out the competition
Search for trustworthy wholesalers
Don’t try to sell the cheapest goods
Maintain a classy website
Give value to your customers, pursue their needs, give them an excellent customer service and cater for a positive buying experience

Dropshipping resources:

DropShipping Business Model Explained | How Much Does It Farrow?

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