At first glance, dropshipping looks like a foolproof business model. Dropshippers don’t keep inventory and they don’t pay for the products they sell until a customer has already bought them. All you have to do is set up your listing, mark up your prices and collect your profits, right?
Not quite! Dropshipping is a great way to start making money online, but it’s not always easy when it comes to balancing costs and profits. In this article, you’ll find answers to some commonly asked questions about the true costs of dropshipping and how to make your dropshipping business profitable.
Starting a dropshipping business is relatively easy and requires minimal financial investment.
There are three core steps to starting a dropshipping business:
Here’s a more detailed guide to starting a dropshipping business - How to start a dropshipping business in 5 easy steps
The biggest perk of dropshipping is that you don’t need to front the costs for the products you’re selling. There will be some startup costs, but you won’t need to invest thousands to start your online business. Here are some of the startup and maintenance costs of dropshipping:
Dropshipping has a few disadvantages, and unfortunately most of these factors will be out of your control.
One of the largest disadvantages of dropshipping is that you won’t get the same discounts that you would from wholesale buying. Suppliers usually aren’t willing to provide you with the wholesale price for items unless you’re buying in bulk, so you can expect dropshipping surcharges in the pricing they give you, up to a few dollars more per item than you would pay wholesale.
In turn, you’ll have to raise your own prices if you want to profit from your sales.
Although, if you're already confident in the business model and want to fast-track and scale your dropshipping business' growth, applying for wholesale financing could also help you get more competitive with your products' pricing.
Another disadvantage is that you will have very little control over customer service. If your supplier is late with shipping, ships out poor-quality items or suddenly disappears, your online business will take the heat. Remember, your customers are expecting their orders from you, not your supplier, and just a few negative reviews can be a death sentence for online stores.
Dropshipping is as profitable as you make it. This isn’t a get-rich-quick business model; drop shipping takes time and effort if you want to have a successful online business.
You will see plenty of Youtube videos and blog posts from people claiming to make a lot of money in a short amount of time. While this is possible, you should be wary of people overselling dropshipping and have realistic expectations. All businesses require time and effort to be successful.
How long is a piece of string? There are legitimate examples of people making millions of dollars from dropshipping. While that is possible, it’s rare.
The amount of money you make dropshipping depends on several factors:
If you’re just wanting to dip your toes into dropshipping to make a bit of money on the side, then you can probably expect to make an extra $1000 to $2000 a month with a good product and store. If you’re wanting to make this your full-time job and have a killer product and the time and money to invest in Facebook advertising and high-quality funnels, then you could make a very respectable full-time income up to six figures or more.
If you’re looking for an easy way to start an online business, dropshipping has a few benefits.
The lower startup costs are the most obvious perk. Without the need to keep inventory, your costs are limited to hosting/listing and other setup fees.
You’ll be able to start and run your dropshipping business anywhere you can carry a laptop, since you won’t need to store your products.
Dropshipping also offers the freedom to explore a wider range of products than wholesale buying. Is one of your product lines or niches not working out? No problem. You don’t have inventory to sell off, you can just find what you want to sell next and make new listings.
Since your “inventory” is unlimited, so you can try out new products whenever you like. If your business doesn’t take off like you hoped, you can walk away with very few losses.
If you think dropshipping offers high profit margins, think again. In truth, the margins for dropshipping are generally low, for a few reasons.
Firstly, you won’t see the discounts on products that you’d enjoy if you purchased your items wholesale from your supplier. Dropshipped items often come with markups.
Secondly, the easy business model that dropshipping provides means there’s plenty of competition out there. You’ll have to keep your prices low to get sales.
There’s no “right” way to price your dropship products. Consider factors such as the MSRP (Manufacturer’s Suggested Retail Price), additional costs such as listing fees, hosting and marketing, and the niche your item falls under. Certain product categories, such as electronics, might sell in higher volumes but with a low profit margin, while other products might have a lower sales volume but enjoy a higher profit per sale.
Thankfully, there are ways to boost your dropshipping profit margins, but overall, tight margins are to be expected.
Yes, absolutely. Dropshipping is still profitable in 2020. You might have seen articles and videos questioning the viability of dropshipping in 2020. This is because dropshipping has received a lot of attention over recent years and the ecommerce space has become highly competitive.
There is a caveat here. It’s definitely not easy to be profitable with dropshipping in 2020, but it’s definitely possible. As with any business, it takes hard work and dedication to succeed.
The main things you’ll need to make dropshipping profitable for you are:
Dropshipping is definitely not a get rich quick scheme. You’ll need to learn how to run ads on Facebook, Instagram and Google. You’ll want to start looking at Influencer marketing and content creation. You’ll need to stay ahead of the curve when it comes to adding new products to your store. And you’ll need to work hard and invest time and effort in building your business.
With all of those ingredients, there’s no reason why your dropshipping business can’t be profitable in 2020.
The cost of dropshipping depends mainly on your sales platform.
The most common method of selling dropshipped products is through a marketplace like eBay. This option comes with perks such as increased traffic and ease of use, but you’ll face heavy competition. You’ll need to account for listing fees, usually a few cents per listing, and a percentage of the final sale price, which can be up to 10% per sale on eBay or even higher on Amazon.
If you’re looking for a more hands-on approach to your dropshipping business, you can choose to build your own online store.
You might have noticed that some of the content promoting dropshipping, especially some of the videos on Youtube, seem spammy. This makes some people suspicious of dropshipping. Also, selling goods online without having to buy any stock almost seems almost too good to be true.
But, don’t worry! Dropshipping is 100% legal if, of course, it’s done legally. Dropshipping is a legitimate business model but you still have to abide by the same legal requirements as any other business. That means you have to describe your products accurately and ensure your products are of a reasonable standard. You also have to pay taxes and fulfill all other financial requirements in the countries you do business.
If you’re a United States resident buying goods from US-based wholesalers and suppliers, yes you need to get a Sales Tax ID. There are only five states that don’t require you to have a tax ID. They are: Alaska, Delaware, Montana, New Hampshire and Oregon.
The Sales Tax ID is important because it lets the government know you’re doing business and it also means you don’t have to pay sales tax on the products you purchase from wholesalers. Instead, you can pass that cost on to your customers.
So while it may seem like a bureaucratic box-ticking exercise, it’s actually of benefit to you and your business.
Usually, no. When you run a dropshipping business online, your business is the face the customers see. Think of yourself as the middleman between you customers and your supplier, with your supplier working behind the scenes.
This means that customer service and all customer interactions are up to you. Finding reliable suppliers for your dropshipping business is very important because of this.
Also read: list of the best drop shipping companies
Talk to your supplier about how they prefer to receive dropshipping orders. For lower sales volumes, submitting an order might be as simple as forwarding the confirmation email containing the order. If you sell in higher volumes, however, your supplier might want you to generate a daily sales sheet containing all the necessary data (item #, shipping address, etc.).
It’s a good idea to keep a list of backup suppliers on hand, just in case your primary dropshipping supplier doesn’t have the right items in stock.
Once your dropshipping supplier has your order, they will enter it into their system and get the order ready for shipment. You might be charged per order, or in daily, weekly or monthly invoices.
Most dropshipping suppliers will charge a company credit card provided by you for all expenses. Be sure to talk with your supplier about how they handle payments and invoicing.
Your dropshipping supplier will have their own arrangements with their local couriers, but they will pass the costs of shipping and handling on to you. It’s up to you to decide how to reflect those added costs in your pricing models and whether to charge for shipping.
Striking a balance between sales and profits can be a challenge. You want to enjoy a healthy profit per sale, but those higher prices might lead to fewer sales. Pricing your dropshipped items can be tricky, but understanding how to account for dropshipping costs can help you raise your sales volume as well as your profits.
Dropshippers will typically price shipping by either weight or volume. Start with a base charge for shipping to cover packaging and handling costs, then increase the cost in increments by either the number of items sold or the total weight of the final order.
This means that the customer pays the same for shipping no matter what they order. This can be an easy method, and it works well if all of the items you sell are roughly the same size and weight. Be careful, though: a high flat rate can drive away potential sales, while pricing too low can lead to losses on high-volume orders.
This method tends to attract more sales, especially in the days of Amazon Prime and their free shipping model.
There are a couple of ways that dropshippers make up for the loss of the shipping fee. You might set up a minimum order threshold to qualify for free shipping, which can increase your average order value. You can also cover shipping by hiding the costs in the listing price.
It will be up to your supplier to provide you with tracking information for each order. When choosing your dropshipping suppliers, make sure you find ones that provide tracking info on all orders and find out how and when that info will be delivered.
Yes! You’ll need to work with your dropshipping suppliers to coordinate how you want your orders to be shipped to your customers. This includes factors such as packaging, shipping labels and item tags, if applicable.
Having your company’s name and logo on your dropshipped items is important to customer satisfaction, because they make the order look like it was shipped directly from you. Customers might wonder why they’re receiving a box from Dropship Co. when they ordered from OnlineStore Inc. Look for dropshipping suppliers that offer customization options.
This will depend on both your supplier and you. One of the keys to having a successful dropshipping business is keeping up with fulfillment to maintain good customer service. Your supplier can’t send orders to your customers if they don’t know about the orders in the first place.
If you’re willing to put in just a few hours each day, you can easily keep up with daily order fulfillment. Stay in touch with your suppliers and make sure they’re shipping out orders in a timely manner. Quick turnaround times make for happy customers!
Return policies will vary by supplier. Some dropshipping suppliers will only accept returns for certain items, while others might not accept returns at all. In these cases, you will need to determine your own return policies.
In order for returns to be handled smoothly, be sure to clearly read and understand all return criteria, and pass that information to your customers accurately. Most suppliers will issue a Return Authorization (RA) number that allows them to identify the item in their system. Once a return is processed, your account will be credited.
Suppliers will have different criteria for who pays for return shipping. Typically, damaged or defective items will be reshipped at the supplier’s expense, with no need for return shipping. If the customer changes their mind about an order, however, or ordered the wrong thing, they should expect to pay to return the item.
Offering free returns is an attractive sales model that might lead to more sales and higher customer satisfaction.
Finding the balance between sales and profits can be tricky, but it is possible to create a profitable dropshipping business online with a little research and understanding of the costs involved. Begin with your setup costs, hosting/listing fees and sales fees, then decide on the best way to price your items and finally create your policies and price models for shipping and returns.
Did we answer your questions about the costs of dropshipping? Let us know if we’ve missed anything!
Alibaba is a China-based online marketplace that sells a huge range of products B2B (business to business). Prices are extremely cheap, but to get the best wholesale prices you have to buy in bulk as most of the suppliers have a minimum order quantity (MOQ). For that reason, Alibaba is best for online sellers who have capital to invest up front to buy bulk stock.
However, many of the suppliers on Alibaba also offer dropshipping services. You simply have to contact the suppliers of the products you are interested in and ask about dropshipping with them. You won’t get the same cheap wholesale prices, but you may find a great supplier to start dropshipping with. When starting out, a lot of dropshippers prefer to use AliExpress as you don’t have to buy in bulk.
You can also use Alibaba for market research to find products and then source them through AliExpress to begin with. Once you have an established business with decent cash flow, you can graduate to buying products wholesale through Alibaba.
So in short, Alibaba can be a good resource for dropshipping, but it’s not the best place to start for beginners.
Yes, you can use the Amazon marketplace to make sales and use dropshipping as your fulfilment method. For example, you could find products on AliExpress and list them for sale on Amazon. When you make a sale on Amazon, your AliExpress supplier will be notified and they will ship the product directly to your customer. Easy, right?
You just have to be wary of the fees associated with Amazon and understand that it’s a highly competitive marketplace. These factors mean the profit margins of dropshipping can be low as it’s easy for your customers to find cheaper alternatives to your products. With the right products, it’s definitely possible to make good money dropshipping via Amazon, but it’s getting harder and requires extensive market research and testing.
Alternatively, you could use the Fulfilled By Amazon (FBA) service, which is kind of like Amazon acting as your dropshipper. This process requires you to buy products in bulk and send them to an Amazon warehouse. Whenever you make a sale, Amazon handles the packaging and shipping for you. Obviously, buying in bulk means you have to spend more money up front, but if you’re confident in your product then this method is likely to make you more money.
You could always start by dropshipping on Amazon via AliExpress to test your products and then graduate to Amazon FBA once you’ve established that there’s a market for what you’re selling.
There are new products coming on the market every week. One of the keys to being successful with dropshipping is anticipating which of these products are going to start trending.
If I were to tell you exactly what to dropship in this article, then hundreds of people could just copy the idea and it would no longer be a good product to dropship.
However, I can help to steer you in the right direction. These are the markets that are always rich in opportunity:
The health market is huge because people are always looking for ways to look and feel good. Health can include beauty products, such as makeup, face creams, teeth-whitening kits, essential oils, sports and fitness products, as well as food products, such as herbal teas, protein powder, herbs, and nutritional supplements.
Fashion includes clothes, shoes, watches, sunglasses, hats, scarves - anything that someone can wear to project a particular image.
Accessories are items that accompany existing product trends. For example, when the Apple Watch first came out, some people made a lot of money dropshipping custom Apple Watch straps. The same goes for smartphone cases and finger holders, selfie sticks, wireless charging docks.
How do you know what to sell? You need to become obsessed with observing trends. Follow influencers on Instagram and see what products they’re promoting. Keep up with technology and think of accessories that can complement the latest gadgets. Follow fashion models or clothing designers and preempt what might be hot next season. Staying ahead of the curve will help you to decide what to dropship in 2020 and beyond.
If you need some extra inspiration, check out this article with 40 Product Ideas for Dropshipping.