For many sellers out there, dropshipping is a starting point in their overall business plan, and it works a treat to get you some capital to get you up and running. For some, it's a long-term way of doing what they love doing without taking any big risks. Either way, all the retailers out there could do with some ideas on how to maximize their drop shipping profits, so here are some great tips to get your bank balance's bottom line growing.
Why are dropshipping margins so tight?
Quite simply because it costs a wholesaler more to provide drop shipping services. When you dropship with a wholesaler, they are responsible for storing the products, insuring the products, and other associated costs like paying staff to retrieve, package and process single items.
Wholesalers already operate on very low profit-margins and rely heavily upon large volume purchases to make a decent profit, so when these additional costs are added, the wholesaler really has no option but to increase the price of individual items.
Reason number two is when you go to list your item, you will need to ensure you are competitive with others who are selling the same product, even the big boys of eCommerce. This means that your profits will take a dip.
When drop shipping, you can expect most wholesalers to add around US$2 – US$5 per item, so if the wholesale price is around $4 for the item (like it is for pet brushes say), then the drop ship fee adds an extra 50% to your wholesale cost! Exactly how much extra you pay per item depends on:
- How long the item takes to package
- How much packaging is involved (is it a large, fragile item that requires a lot of bubble wrap?)
- Whether your supplier has an up-to-date inventory list of their products. Some wholesalers offer this information so that retailers can see if stock is currently available for them. This helps to avoid dreaded back order issues, but is a time-consuming and costly service to provide.
"In my experience, I'll say 2 things make drop shipping margins tighter," explains Lester Love, a dropshipper that has scaled multiple monthly 5 figure stores. "The type of product being sold, and the cost of shipping. Yes, shipping cost from suppliers to customers eats up most of the margins but some products just can't be sold at higher prices for higher margins, and that's usually most low ticket products. However, If you can raise the value of the product to the customer through great imagery, and good compelling copy, even for a low margin product, you can do wonders."
Keep in mind when you add up the extra costs involved with drop shipping some of these fees are the costs in time and storage space that you yourself would incur if you were buying in bulk from a wholesaler and managing your own orders. So rather than thinking of these costs as being associated with drop shipping, they should instead be considered as costs associated with online selling in general.
So how can I maximize my dropshipping profits?
Don't drop ship what everyone else is dropshipping! This is the most obvious one but can be easily overlooked in retailer's research. To avoid overcrowding an already competitive product market, take a good look through eBay's listings (both current and completed) to ensure that you are not just another retailer trying to sell the same product with no point of difference.
Here's a list of the most profitable dropshipping products we have found:
- Sleepwear & Underwear dropshipping
- Pet Care Supplies
- Outdoor Furniture & Accessories
- Phone Accessories
- Active Wear
- Bluetooth Speaker
- Kid’s Formal Wear
For a more comprehensive list, check out this article: 30 of the Best Low Cost, High Profit Products to dropship.
To check how many people are selling the item, enter search keywords for the product you are researching into eBay's search toolbar and take a look at how many listings come up. If you see pages and pages of unsold items with auctions that are about to finish, it is fair to assume the supply exceeds demand. To check for demand, eBay PowerSellers can use eBay's InDemand tool which gives retailers information about specific products that are in high demand and low supply on eBay.
"Start by sourcing products that solve the need of a particular demographic, market, or niche, and can be sold for 3-5x the original cost of goods," advises Love. "Build a credible branded looking store with quality images, have a solid offer, connect with the customer emotionally using good copy, and through that make the customer believe that they need and can't do without the product being offered. If you can do that and show how the product solves a customer's problem or how it improves the customer's quality of life, they're 9 out 10 going to make that purchase regardless of the price."
But hey, we are not all Powersellers here, so for a more user-friendly system, check out SaleHoo's own Research and Analysis Lab. It's a handy tool for calculating the potential success rate you can have with specific products. It can even do clever things like tell you about related niches you can explore, and which international eBay sites are lacking in supply for a particular product.
Make sure you check out a few different selling platforms such as eBay, Amazon and Bonanza as each will have unique buyers and sellers to the site and while one site may be highly competitive, another could have a market void ready and waiting for you!
Avoid back orders. It's the most dreaded, costly and stressful part of drop shipping. A back order occurs when your supplier runs out of stock for the item you are selling and leave you unable to fulfill the sale, and with some serious explaining to do with your awaiting buyer. Back orders can mean a loss of sale and bad feedback. They waste the time of the supplier, you the retailer, and your buyer. To help avoid these tricky times, follow these tips:
- Stock a couple of the items you are selling at home. That way, when back orders do occur, you are prepared to fulfill the order. When your supplier is re-stocked, have them send the item direct to you to replenish your back-up supply
- Consider looking for a secondary supplier. They may not have as great a deal as your regular supplier, but they might just save you from a customer service nightmare.
- Be honest with your customers from the start. Sites like eBay require retailers to inform potential buyers of the location of the product they are bidding on. This lets buyers know that delays in shipping are a possibility. If you are running your own eCommerce site, make it a policy to inform buyers of your product's whereabouts. While this may not prevent back orders from occurring, it will help you avoid getting negative feedback from disgruntled customers.
"I never really had to deal with back orders because products are almost always available," explains Love. "There may be the occasional delay with processing but I have email sequences which go out to customers letting them know we're still processing orders. So eg. if an order is not marked as fulfilled within the first 24-48 hours, there's an email which informs customers that their order is now in processing. After 3-4 days, the next email goes something like 'our quality assurance team is making sure all ordered items are correctly packed without damages' - something along those lines. If still not sent by day 5, the next email will make the customer aware that due to higher volumes, we're experiencing delays. But usually by day 3, all orders are marked as delivered."
Niche it up a little. Everyone wants to sell the common products out there like iPods, mobile phones and gaming systems. Dropship retailers will rarely be able to compete with other bulk-buying retailers out there so why not get creative and turn a popular seller into your own little niche? Want to get into mobile phones? Why not look into selling cute cases and skins for teenagers, or heavy duty ones for handymen on the go? Finding a great niche is all about doing your research and really tapping into what buyers need. Contrary to what many think, you will be much more profitable if you target a small group and meet their needs, rather than trying to appeal to everyone.
Make dropshipping work for you by using it to buy new products to complement your existing inventory or to test our new niches. If you are looking at getting into a new range of products but aren't yet ready to take the final leap and place your order, tell your supplier you are interested but first want to find out how customers will respond by doing a few drop ship orders. This will give you a clear idea of the market demand before you go risking any cash.
Remember that dropshipping doesn't have to be the be-all and end-all of your online selling plan. Think of it as a great way to supplement your existing business and expand your product range.