eCommerce Blog / Cost of Drop Shipping

The True Cost of Drop Shipping: 16 Top Questions Answered!


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.

How Much Capital Do I Need to Start a Dropshipping Business?

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:

  1. Your online store. If you use a selling platform such as eBay or Amazon, you’ll need to factor in listing and sales fees. Running your own store lets you avoid these fees, but in exchange you’ll need to pay for hosting and any extras such as website themes or add-ons.
  2. Supplier fees. Some suppliers might charge a fee to use their dropshipping services. Choosing the right dropshipping supplier can save you time and money in the long run.
  3. Marketing costs. These costs can vary depending on the scale and methods you choose for marketing your online business. Social media, blogging, and email marketing are a few ways to market your products.
  4. Other business expenses, such as obtaining a tax ID, business credit cards and local business licenses. Be sure to check with your local laws to make sure you have everything you need to start your dropshipping business.

Is It a Profitable Business Model?

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.

What Are the Benefits of Dropshipping?

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.

What Are the Disadvantages 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.

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.

What Kind of Profit Margins Can I Expect with Dropshipping?

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.

How Much Does Selling Dropshipped Products Cost?

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.

Do Dropshippers Provide Customer Service and/or Talk with My Customers?

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.

How Do I Submit Orders to Suppliers?

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.

How Do I Pay My Supplier?

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.

Who Pays for the Shipping Costs on Orders?

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.

How Do I Account for Dropshipping Costs for Ecommerce Sales?

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.

Volume-Based Charges

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.

Flat Fee Shipping

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.

Free Shipping

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.

How Do I Get Tracking Information for Orders?

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.

Do Orders Appear like They Came Directly from My Company?

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.

What Is the Turnaround Time for Fulfilling a Dropshipped Order?

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!

How Do Returns from Customers Work?

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.

Who Pays for the Shipping on Returned Items?

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!

 
 

Comments (20)


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Brooks Morgan on 20:02 3 May
Your also forgetting the price of shipping to get ranking at the top of Ebay you have to offer free shipping. I sell lot of things on Ebay but none are drop shipped. It also depends on the market up of the product some manufacturers tell you in order to sell there product you have to use there price guide lines or you won't be able to sell there items
Orville Bumgardner on 20:07 3 May
The comparison is simplistic. There is no mention of the extra shipping costs "both ways" for items bought at wholesale. Some drop shippers get volume discounts for shipping that are not available to the average Ebay Merchant and pass at least part of it on to their customers. At best, there are some additional packaging costs if you stock and ship your own merchandise.
Sergio Zavalla on 20:23 3 May
En realidad la compra al por mayor si que conviene , ya que podemos incrementar nuestras rentabilidad, en el caso de mi pais Argentina es muy difícil por las restricciones existentes, muy buen artículo , los felicito muchas Gracias un abrazo Sergio Zavalla
Kenneth Iversen on 20:51 3 May
Thanks for the article. Now, what percentage markup is applied by wholesalers? For example, let's take the 'Remote controlled helicopter'. (Drop ship price: $39.41 , Wholesale price: $29.97) If this is being sold by wholesalers at, say $40, then drop shipping is not viable. However, if wholesalers are selling for $60, a 100% markup, then it would still be worth selling these via drop shipping at, say$50; leaving about $10 in near pure profit. Or not?
Orlando on 20:57 3 May
I can see you can have more profits buying wholesale rather than dropship . Can you show examples of the profits after shipping costs for the items listed. Some items look like it's a break even proposition after shipping.
eddie knight on 21:30 3 May
very interesting this is good stuff,l have tried dropshipping programmes and tried to get a website running only to find out later l was so ripped off, l have also studied prices on ebay too and found you can't buy cheaper than what a lot of sellers are selling for so where's the excitement of running your own show anyway l will follow you a bit more now thanks eddie
Richelieu Hoff Jr on 21:48 3 May
I am currently a drop shipper because I cannot afford to wholesale.
Carlos Akira Higuti on 23:12 3 May
Hello, Alice! The system dropship is still the best option for those who will start or is a novice seller. See wholesale buying for the future, when getting enough profits for purchases of larger lots. Or not longer be a dropshipper, but an e-commerce retailer. But anyway thanks for the article because there is a difference between good profits, depending on each product. And I think it very interesting! Thank you for the post!
Howard Ford on 23:52 3 May
Very useful information to make note of.
Brian Fox on 1:59 4 May
In many cases in order to get wholesale prices, you have to buy bulk quantities. This means you have to carry inventory, which costs money. This can be costly. Much more costly than drop shipping. As for fees, many companies do not charge a drop ship fee.
Pete on 3:13 4 May
While it is true that drop shipping in certain cases can eat into your profit, not all drop shippers charge for their service. It does take some research to find a good drop-shipper that does not charge for drop shipped orders, but they are out there. Even if a drop shipper does charge a small fee, it may be worth the trade off. The biggest problem with the drop ship supplier is low inventory on "Hot" items. You may list an item for sale that is not any longer in stock when you get an order. For this reason, selling on your own web site is an advantage. If you sell an item on eBay that you can't fulfill, you won't last long on eBay. Buying wholesale and stocking inventory does give you better control, but it has it's drawbacks too. With buying wholesale you will also have shipping cost to pay just to get it to your facility. This adds to the cost and can quickly eat up the difference between having the item drop shipped and shipping the item yourself. With buying wholesale you also have to do your own shipping. This means buying boxes, tape, shipping peanuts, shipping lables, etc. Not to mention the time it takes to package, run to the PO or UPS. If you do your homework and ask a lot of questions, both methods can be profitable. Wishing you success. Pete....
Robert Dionne on 16:01 4 May
You comment on a $10. Savings when buying wholesale lots which is significant, but what is the cost of wharehousing, insurance and capital on held inventory, handling and shipping. This doesn't cover the cost given or accounted for , with the ability to travel and have a smaller permanent foot print when drop shipping. I am still in the infant stage of my business plan, but am wondering if the extra ten dollars in expense may be justified in some business scenarios. For me, time will tell.
paul Cost on 2:16 6 May
Yes agree with all above points the other danger with buying wholesale is even though it saves you money, but if that product suddenly stops selling you are stuck with the stock, where as with drop shipping is not your problem
petter kristiansen on 8:28 6 May
I live in Hawaii. Dropshipping seems to be the only realistic way to go for me. If I buy wholesale, I have to pay shipping from the mainland to Hawaii and then when I sell something, pay to ship it back to the mainland from Hawaii. I am beginning to wonder if it is even worthwhile it try to do this from Hawaii.
JERRY GAN on 20:19 25 May
Dropshipping is the Best of all Business Have you ever used the words “drop ship” or “drop shipper” in a sentence before? These words have both become extremely popular in terms of the online business worlds. Why? There are now thousands of small e-commerce retail websites starting up each day that follow the stockless retail business model. However, Dropshipping is the Best of all Business in their process. There is a very strong relationship between dropshipping and doing work from home. In dropshipping a retailer can do the work from home if they are running an online business. With the dropshipping method a retailer or a seller can successfully work from home running the online business by opening a website which has all the details and images of the products are that are available. An online business retailer usually does work from home due to the low overheads and flexible working conditions. By running an online business using the dropshipping supply chain process the online business just needs to concentrate on attracting customers to order goods from the website. As the marketing increases, so too does the number of orders increase due to the growth of customers and profits will rise. By doing their work from home, the online business retailer has fewer overheads enabling the business to make more profit from the dropshipping business. With the dropshipping process the online business does not require any shop, any workers, any lighting or other major expenses, and they don't even require a warehouse to store the product. The online business can easily manage all the various aspects of the business by fulfilling his/her responsibilities all from a desk . There are lots of opportunities available with dropshipping, for example with the internet there is now better information on product description and the prices available with just a few clicks, and the latest product updates and availability are all available at wholesaler's online store. But getting success from dropshipping, you have to look for a company which will give you proper opportunity , Though it is very simple and easy way to make money home, some company will not give you proper opportunity. So you must be careful selecting a company. I know about a company who will give you better opportunity than any other dropshipping companies . It has not taken membership fee, dropship charge and there is not middleman . It supplies the products to your customer directly and is not any minimum order quantity ,It can be big or small . But in other dropshipping companies, you will not find such opportunities. Therefore, I strongly recommend you to get sign up in http://letusdropship.com
John on 16:33 8 Jun
I think it's unfair to say that buying wholesale always results in higher profits. As mentioned in some of the comments above, there are a lot of factors that you have to consider when making this argument. For instance, two shipping charges incurred before reaching the customer when you're buying wholesale versus just one when using a dropshipper. Also, consider the extra work and added responsibility that dropshipping takes off your back. You don't have to worry about packaging, shipping, lost or stolen items, etc... If and when your store grows very large, you'd have to hire staff to help you with these tasks and pay them hourly. With dropshipping this cost is factored into your dropshipping fees and remains relatively constant. I would recommend reading more about our guide on how to choose between going with a wholesaler or dropshipper to source your products here: http://www.dropshipcritic.com/whats-right-for-me.html
Kris (manufacturer) on 8:00 20 Nov
Another reason for the higher prices for the dropship is the manufacturer and/or distributor take all the risk. They build/buy the products, store, warehouse and carry insurance for the product, ship, warranty and accept returns on the product. When I have dropshippers I must stock enough product for extremes, they might not sell 10 between all of them or sell 1,000s and I have to be able to ship next day or they complain that their customers are upset.Dropshippers have no skin the game as if my product isn't selling the best or they choose not to market it for whatever reason, I'm stuck with no sales and all the exposure. When a retailer gives me a PO for a set amount of units and have terms to pay for said product, I can figure my cost down tight and offer them a better price because there are way less variables. Plus I will cut deeper into my margin for someone who is willing to commit to the sales of my product by investing their money with the wholesale purchase. And for John the post above me, you don't even make any sense. That first shipping is almost always either comped because they bought a minimum amount of product to make my numbers work and all the reasons you listed as why people shouldn't wholesale doesn't go away because they don't do it. It means I have to do it for them. Now think about this because I'm going to stay in business no matter what; if you do those things listed in house you don't pay my overhead. You will pay for all of those things to happen and you will pay my overhead too, I guaranty it!
Widmaer Moise on 5:31 25 Mar
That was very informative. One question, should i ask suppliers for their wholesale price or their drop shipping price?
Justin Golschneider on 12:49 28 Mar
Hi Widmaer! There's no harm in asking for both prices if they offer both services.
Widmaer Moise on 5:32 25 Mar
Also, what is the differences between getting products at wholesale price and drop shipping prices?
Justin Golschneider on 12:52 28 Mar
The wholesale price is only offered if you buy in large lots, and generally allows for large profit margins. The dropshipping price is what you'll have to pay to dropship a single item at a time and it's typically much higher than the wholesale price.
Dave on 12:54 21 Jul
Hi, What are the benefits for a manufacturer if he provide drop shipping service for his retailer
Justin Golschneider on 14:02 21 Jul
Hi Dave! A manufacturer might want to provide dropshipping services for a number of reasons. The most obvious reason is that it helps them boost their sales. They can also sell the items at a much higher per-unit cost than they would normally charge, giving them higher profits.

However, a manufacturer has to weigh these advantages against the disadvantages. Providing dropshipping services is very time-consuming, and most manufacturers can make money faster by simply pumping out tons of goods and selling them in bulk.

 

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