The Dropshipping Business Model ExplainedBy Jamie Toyne
You might have heard the term ‘dropshipping’ if you are interested in online business. But what exactly is it and how does it work? A dropshipping business is a bit like any ecommerce business, where the owner sells products online. But with one major difference. Instead of producing or stocking the items themself, a third party takes care of manufacturing the products, and shipping them too!
This means that the dropshipping model is a fairly easy and low-maintenance way to make money online, but comes with some hefty downsides too. In this article we will dig into everything you need to know about the dropshipping model, whether you are thinking about getting started with the business model, looking to improve your dropshipping site, or even considering buying or selling a dropshipping business.
How Does Dropshipping Work?
So how does dropshipping actually work? A dropshipping business sells various products through a website, but uses a third party supplier to manufacture, stock and ship the physical products to the customer. The business owner need never come into contact with the physical product at all.
To do this, the owner will find one, or a selection, of suppliers or wholesalers to supply them with products for their website. They will then market and sell these products online. When someone places an order, the supplier will package and ship the product to the customer, and the owner earns a portion of the profits from that sale. Sounds easy right?
Yes, but the problem is, as the supplier is the one doing all the production, storing AND shipping, they are also the ones taking home most of the profits. The owner will earn a percentage of each order, but this is not typically very high. In fact, the dropshipping model is a little bit like the commission-based earnings of Adsense or affiliate businesses.
Therefore, a dropshipping owner may need to sell a large variety of products or corner their niche to make the business model worth their while. That’s not to say it can’t be done successfully though. In fact with ecommerce and online shopping growing more than ever, there is money to be made using this business model. Dropshipping can also be a great way to complement an existing ecommerce business or content business. But more on that later.
The Pros and Cons of a Dropshipping Business
So the dropshipping business model has some huge upsides like no inventory or storage of physical products. But there are also some significant downsides to consider before deciding if it is for you. We have summed up the pros and cons here, which we then delve into in more detail.
- Easy to get started
- Low upfront and overhead costs
- Fairly easy to run
- Easy to test new products
- Easy to scale
- Low profit margins
- Costs of paid advertising
- No control over the supply chain
Easy to get started
A great thing about dropshipping is that you can set up your business quickly. As all the inventory and storage will be taken care of by your supplier, set up just involves selecting your products and suppliers, and getting them added to your site. This could be done in as little as a week!
Low upfront and overhead costs
Given you don’t have to fill your stock with inventory or pay for storing it in a warehouse, there is no big monetary investment up front with dropshipping. So if you don’t have big capital to invest in an online business, you may still be able to embark on dropshipping. This also means it is a low risk business model.
Once set up, you also do not have to spend time and money packaging and delivering the products. This leaves you to focus on getting more sales.
Fairly easy to run
Running a dropshipping site is fairly straightforward and low maintenance as you do not need to focus on any of the logistical side of stocking or selling products. As your earnings rely on customers placing orders, you will need to take care of marketing your products and driving sales. Therefore marketing and SEO skills could come in handy, but these are skills that can be picked up, and in fact dropshippers mostly use paid methods to direct people to their website anyway.
You can also run a dropshipping site from pretty much anywhere in the world. With no physical assets to take care of, all you really need is a laptop.
Easy to test new products
If you own an ecommerce or an FBA business, there will have been a lot of careful research and testing that went into choosing which products to sell. A big advantage of a dropshipping business model is that you have a lot more freedom to experiment. You can test out products with no risk to see how well they sell. If they are not working, move onwards and upwards.
Easy to scale
In an ecommerce business, scaling the business to make more sales involves predicting and stocking the right amount of stock every month. Growth also requires you to increase storage space, labour and costs for packing and shipping etc. With a dropshipping model however, if you make more sales, the supplier takes care of the rest. And you can add as many products and different suppliers as you like to your website.
Low profit margins
A big downside of the dropshipping business model is that often the profit margins are very low. As the supplier takes care of the heavy lifting, unfortunately that means they also take home most of the profits. The commission you earn for each sale can be determined and negotiated with each supplier. But to get an idea, you might expect up to around 20%.
Prices are also often controlled by the suppliers, leaving you with very few options to mark up prices, or offer special marketing deals. If you feel like giving a discount, it will eat into your commission.
Costs of paid advertising
Most dropshippers use paid methods to drive traffic to their websites and increase sales. Although this can be very effective, it also costs money. So along with small profit margins, if you are not careful this ongoing cost can significantly eat into those profits.
No control over the supply chain
Another big downside of dropshipping is having no control over the supply chain. If sales surge, will your supplier be able to handle the demand? If they can’t and orders are not fulfilled, you may be left to deal with unhappy customers and a damaged brand reputation.
Also, different suppliers can perform differently. If you use various suppliers or try out new ones, you may find there are issues with the supply chain that are out of your hands.
As dropshipping is such a straightforward model, it means there are lots of other people doing it too. Therefore it can be hard to compete with other sellers and stand out from the crowd.
Examples of dropshipping businesses
BlueCrate is an example of a successful business that uses the dropshipping model. They sell a huge variety of gifts, gadgets, novelty items etc. What do they do well? They create their own eye-catching and creative product images to sell the products on their site, as well as having a successful Facebook page.
Mooshe Socks is a niche dropshipping store in an interesting niche… socks! Yes, Mooshe Socks has a pretty basic business model, where they dropship socks from suppliers on AliExpress. What do they do well? Their website and Instagram page are both clean and creative. They present the images of the socks in interesting ways and gain a lot of traffic through Instagram. They also run ‘free socks + shipping’ promotions to gain more customers which is very successful.
How to find Dropshipping suppliers
So we have talked about needing suppliers to provide, stock and ship your products for the dropshipping model. But where do you actually find them? Well, there are various ways that people find dropshipping suppliers. Let’s have a look at some of the most common ways below.
- Using supplier directories – supplier directories list different suppliers which you can browse and are generally trustworthy. Be aware that you do often have to pay a fee to access these. Some examples of directories are SaleHoo and Worldwide Brands.
- Shopify – if you create your site with Shopify you can use the Oberlo app to find products and suppliers and link them straight to your dropshipping store.
- Online search – if you dig deep on Google you can unearth some great suppliers. You can also search your chosen products on some authority suppliers like Alibaba.com and Aliexpress.com.
- Finally if these methods aren’t working, a little trick posted by Shopify could help. They suggest that if you spy a competitor that you think is using dropshipping for their products, place a small order with them, and when it arrives, Google search the return address to discover the supplier. Smart!
Making sure your supplier is legitimate
It is worth noting that when you choose a dropshipping supplier, you run the risk of them not being legitimate. Make sure you do your research before jumping in. Here are a couple of red flags to look out for with suppliers:
- Suppliers that charge monthly fees
- Suppliers that sell directly to the public with their ‘wholesale prices’
- Difficult to place orders and hard to reach staff
How to get customers to visit your site?
Ok, so you’ve got your site and you’ve got your suppliers. Now how do you get people to visit your site? You need a customer acquisition strategy. You can use organic methods to boost your traffic but most dropshipping businesses mostly rely on paid traffic methods which could include:
- Facebook Ads
- Google Ads
- Influencer marketing
How to Improve a Dropshipping business?
Now let’s look at how you might go about growing and improving your dropshipping site? Well, there are a variety of ways that you can improve your business to generate more traffic, sales and revenue.
Build your Brand Reputation
There is a lot of competition out there and so building a trusted brand reputation and loyal customers can help you stand out from the crowd. Choosing how to brand your products is important as shoppers will buy from their favorite sites first. You may consider creating an email list to develop a community of repeat customers and think about developing marketing promotions.
SEO and Organic Search
Make the most of organic traffic. As discussed earlier, many dropshipping businesses rely mainly on paid web traffic, which costs money. Therefore if you can generate organic traffic by using SEO to optimize your site and rank better on search engines, you can lower your overheads and increase profit margins.
Social Media is also a great tool that you should be leveraging if you aren’t already. Growing your communities on Instagram, Facebook, Twitter and Pinterest can help create brand awareness, build your reputation and send high levels of traffic through to your site! It is also a great place to publicize promotions.
Create useful content
Creating useful content is a good way to build brand reputation and convert customers. Helpful content on a blog, for example, can bring in more traffic and help you become an authority in your niche. Creating buyer guides and circulating them to your email lists, may be able to convert subscribers into paying customers.
Upgrade your business model
A big leap, but sure-fire way to multiply your profit margins is to start sourcing and supplying products for yourself. Your dropshipping business will have served as a form of market research to see which products sell well. You may be able to begin sourcing these and this can be a great next step for some people to increase revenue.
As well as this, you could also look into selling your products through Amazon and upgrading your business into an Amazon FBA model. This involves you sourcing the products, and Amazon storing and shipping them. This can provide another avenue through which to sell your products as well as a way of gaining new traffic.
Buying or selling a Dropshipping business
Starting from scratch is not the only way to get into the dropshipping business. Perhaps you are thinking about buying an established site, but don’t know where to start. Alternatively, if you are thinking about selling your established dropshipping site, what do you need to know?
What makes a good investment when it comes to buying a dropshipping business?
What is the seller’s relationship with their supplier?
Everything from how the current owner finds and chooses their supplier, to the deal they have agreed with them, can indicate how beneficial purchasing the site will be to you. Find out which method the seller uses to find their products and suppliers. Is this something you can easily replicate? Find out if their current suppliers have lists or information about their best-selling products for example, that you could make use of going forward.
Some lucky dropshipping sites that sell enough, may also have also negotiated an exclusivity deal with a supplier. Meaning they would have a huge advantage in the market. Find out if this is the case or if it is something you may be able to negotiate in the future.
What products do they sell?
When purchasing a dropshipping site, think carefully about the products you will sell. Is there any product you might be able to source yourself down the line? If so, this could be a good way to increase profits in the future.
Can you improve the business?
Choosing a successful site is one thing, but choosing a site with potential is even better. See if you can spy ways to diversify your traffic, improve marketing or boost sales.
Who should buy a dropshipping site?
So are you considering buying or starting a dropshipping site but are still not sure if it is right for you? A dropshipping site would be a good match for the following people:
- Experienced website flippers – if you have the skills, a dropshipping site can be a good business type to buy, improve and sell on for a profit.
- Multiple site owners – if you already own a number of sites that are fairly passive and low maintenance to run, such as Adsense or Amazon Associates sites, dropshipping could be a good business model to add to the selection.
- To complement other sites – If you have several content sites in a niche for example, dropshipping can be a good way to make the most of your current targeted traffic and corner your niche. If you have an ecommerce business already, dropshipping can also be a great way to supplement and back it up (see more on this below).
There are also some important things to consider if you are selling a dropshipping site as well as ways to improve your chances of a sale.
Be open and honest
It can actually be helpful to openly discuss issues you have faced with the business with potential buyers, along with how to solve them. This will help buyers understand what the suppliers are able to handle, and allow them to make realistic estimations of earnings each month. If you think that the newer buyer is looking to increase sales and that the supplier’s limitations could put them off, perhaps you could help them negotiate with the supplier for a higher earnings percentage or even an exclusivity deal.
Buyers will always be more comfortable if they can see the proof of earnings in front of them. Make sure you have solid records to show as well as proof of using the same supplier or suppliers for a long period of time. Even better if you can provide a list of backup suppliers so the buyer can breathe easy with a contingency plan for any unexpected emergencies.
Make the handover as easy as possible
If you can offer a simple handover process and outline ways that the new buyer can replicate your success, it will be easier to make a sale. Offering training and support through the handover process is a good way to do this and will put the new buyers at ease.
Dropshipping to supplement an ecommerce business
Finally, as mentioned above, the dropshipping business model can be a good way to supplement an ecommerce business. Due to its limited profit margins, it can be difficult to make dropshipping lucrative on its own. However, it can prove incredibly useful in this context. Let’s see how.
Test how products sell
Dropshipping allows you to experiment with selling new products without any risk. Identified a new product you want to sell? Find a dropshipping supplier, list the product on your site and see how it sells. If it does well, taking the leap to source the product yourself is a lot less risky! It will also help you define how much stock you need to buy and predict its sales.
Use as a backup supplier
Using a dropshipping supplier as your backup supplier can protect you from any hard-to-predict sales trends. Instead of overstocking your inventory for ‘just in case’, if you have any unexpected swings in sales, your dropshipping partner can pick up the slack.
Reach difficult shipping locations
As your ecommerce business grows, you may find requests to deliver in more difficult areas that are costly or incur taxes or fees. In these cases it may be cheaper and easier to drop ship these products. You could also use it to test out new areas.
So there you have it, dropshipping explained. With all its pros and cons, one thing is for sure: it is certainly an exciting business model. For people in the online business world, or looking to enter it, dropshipping can be a great option for many. Wherever you are in your dropshipping journey; considering the model, looking for suppliers, improving your dropshipping site, or buying or selling, you should now be armed with what you need to take the next step. Happy dropshipping.