Understanding Dropshipping

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Dropshipping is an exciting business model, something that entrepreneurs have dreamed about for years. But do you know the fundamentals behind dropshipping? If not, you're in the right place to find out!

Pick a question to jump to that section:

What is drop shipping and how does it work?

Drop shipping is a business model where you send your customers’ orders to a manufacturer or wholesaler, and they send the products directly to your customer. You never see or touch the products.

If you’re into videos, here’s a quick 7-minute explainer video from Shopify explaining what drop shipping is and how to start a drop shipping business:

Drop shipping works like this:

  1. Your customer places an order on your online store.
  2. You send the order to your supplier.
  3. The supplier ships your order directly to your customer in your name.

Here’s a visual representation to help you understand:

Benefits of drop shipping

Drop shipping is a great business model because of its many benefits:

  • Easy to get started. For someone who has never created an online store before, getting started with drop shipping is fairly easy. You just need to find a supplier, create a website and start selling.
  • Low startup cost. The biggest cost to starting a retail operation is purchasing inventory to sell - you don’t have to buy any inventory. Your only expenses are the costs of creating your website and applying for a tax ID.
  • Low overhead. Since you don’t own any inventory you don’t need to rent a warehouse space. Being an online store you also don’t need a physical space. Your only fixed costs are what it takes to run your website, which can be as low as $30 per month.
  • Huge product selection. You’d be hard pressed to find a product that can’t be drop shipped. There are drop ship suppliers for almost anything.
  • Low risk. Because you don’t have to worry about your inventory selling, a drop shipping business is extremely low risk. If you don’t sell, you don’t lose anything!
  • Location independence. A lack of inventory means you can run your business from anywhere with a laptop and internet connection. I had my own store while traveling the country in an RV!
  • Easy to scale. For traditional retailers, three times the sales meant three times the work ordering, packing and shipping product. With drop shipping, it just means you place three times the orders and your supplier handles the rest - leaving you time to continue growing your business!

Disadvantages of drop shipping

Of course, like anything, drop shipping isn’t perfect. It has some cons as well:

  • Lower margins compared to wholesale sourcing. While this isn’t true across the board, many suppliers charge a higher price for drop shipping, which leaves you with less profit.
  • High competition. Because it’s such a great business model, a lot of people are doing it. However, you can avoid the competition by choosing a niche - or very specific segment - to sell to. (Selling pug lovers jewelry, for example!)
  • Tough to manage inventory. With a massive product selection, and often times no direct knowledge of your suppliers inventory, it can be easy to lose track and have to place orders on backorder or even cancel them. This problem gets worse as you grow your business to sell on multiple channels. That said, there are software solutions to help you keep track of your inventory, once you have the extra income to pay for them.
  • Shipping complexities. If you’re selling products from multiple suppliers, it can create some issues with shipping costs. For example, if your customer orders three items you get from three separate suppliers, you have to pay shipping independently on each one. Passing these costs on to your customer can lower your conversion rates, so you may have to eat the cost, lowering margins further.
  • Supplier errors. If your supplier makes a mistake, it’s on your head. Customers don’t care if it was your suppliers fault, they bought from you, so you are solely responsible. This is one of the many reasons it’s wise to choose your suppliers carefully.
  • Low level of brand control. This is, perhaps, one of the biggest disadvantages to drop shipping. Because your supplier is shipping your packages, you don’t have the ability to use custom packaging or include extra freebies or hand written notes. However, some suppliers may be willing to do these things for you if you ask them to.

The Difference Between a Manufacturer and Drop Ship Wholesaler

With all the different terms thrown around in the world of online selling, it can be confusing what means what. Often the terms are used interchangeably, but they don’t mean the same thing.

A manufacturer is the actual creator of the product. Sometimes they have a drop shipping program, which is ideal for you as the buyer. Because there is no middle man, they can give you the best prices on the products so you can make the most money.

A drop ship wholesaler is a third party dealer who buys items at the lowest prices from the manufacturers, then drop ships them for a buyer like you.

A third kind of supplier is a drop ship aggregator. A drop ship aggregator is a wholesaler who buys from tons of different manufacturers to offer you the widest possible range of products from one place. This cuts out your risk of shipping complications I mentioned above, but it also lowers your potential profits as they typically take a higher cut.

How much money can you make with drop shipping and is it profitable?

Drop shipping margins typically average around 20%-40% on average, however some niches like jewelry, clothing, and electronic accessories can be as high as 100%

However, as I said above, that can vary greatly depending on which suppliers you work with. Buying direct from manufacturers can give you much better margins.

So, how much money can you make? Well, let's look at a few success stories:

Who is drop shipping for?

Drop shipping is an awesome business model for:

  • First time sellers - You’ve never run an online store before, but would like to try it out. It’s a low-risk, low-investment way to begin selling products online.
  • People wanting to test the market for a new product - You already have a store, but want to test a new product to see how well it will do before you commit to buying inventory.
  • People who want to add products without investing lots of capital - You can simple add a few extra drop shipping suppliers to your lineup to increase your product offerings.
  • People who want to sell a ton of different items without carrying them all - Essentially, you want to be the WalMart of the internet. This isn’t a method I’d recommend to start with, but it is possible if you’re interested.

Who isn’t drop shipping for?

Of course, this business model isn’t for everyone. Drop shipping isn’t for:

  • People wanting to grow their brand to the next level - Since drop shipping margins are typically low and you have limited control over your brand experience, if you’re looking to grow your brand you may want to go to manufacturers or try print on demand.
  • Sellers who want the absolute best margins - The only way to get the best profit margins is to go straight to the source. Drop shipping won’t help you there.
  • People who don’t want to compete with their supplier - While not always the case, some suppliers who drop ship (and even manufacturers) sell direct to consumers for extra profit. You need to be creative to compete with someone who has lower costs than you.

Is Drop Shipping a Dead Business Model?

You may have heard that drop shipping is a dead business model. I’m here to tell you that’s absolutely not the case. You can still create a very healthy drop shipping business.

That said, the market has become very saturated and it’s more necessary now than even to find a great niche to compete in to avoid competition. In addition to being highly focused in your product offerings, you should also try to work directly with manufacturers whenever possible, as opposed to working with drop ship aggregators.

Also, customers are now demanding a greater brand experience, which can be difficult to provide. if your supplier isn’t willing to go the extra mile for you by using your custom packaging or adding your freebies to your packages, you may have a harder time competing.

Does Amazon, eBay & AliExpress allow drop shipping?

Yes! You can drop ship while selling on any of these platforms.

Here is Amazon’s drop shipping policy:

“Drop shipping, or allowing a third party to fulfill orders to customers on your behalf, is generally acceptable. If you intend to fulfill orders using a drop shipper, you must always:

  • Be the seller of record of your products;
  • Identify yourself as the seller of your products on all packing slips and other information included or provided in connection with them;
  • Be responsible for accepting and processing customer returns of your products; and
  • Comply with all other terms of your seller agreement and applicable Amazon policies.

Examples of drop shipping that is not permitted:

  • Purchasing products from another online retailer and having that retailer ship directly to customers; or
  • Shipping orders with packing slips, invoices, or other information indicating a seller name or contact information other than your own.

Failure to comply with these requirements may result in the suspension or removal of your selling privileges.”

Here is eBay’s drop shipping policy:

“Selling using a product sourcing service is allowed on eBay as long as the seller can guarantee that the item will be delivered to the buyer within 30 days of the end of the listing. Sellers who choose to sell using this method are responsible for the item and their buyer's satisfaction just like any other eBay seller. If there is a problem, it's the seller's responsibility to work it out with the buyer.”

AliExpress is a place where you can purchase products from overseas, mainly from China. They do have suppliers who are willing to drop ship (and at a great price, too!)

Pros of AliExpress:

  • A huge variety of products to choose from.
  • Very inexpensive to source your products.
  • You can white-label packages.

Cons of AliExpress:

  • Potentially low product quality.
  • Can have long shipping times (sometimes up to a month or more). However, if you look for ePacket shipping, you can get it in less than one week most of the time.
  • Language barriers.

How can I be successful dropshipping?

The most important part of having a successful drop shipping business is finding a great supplier to be your partner as you launch and grow your business. Not your legal business partner, but the person or company you rely on to get your products to your customers on time and in one piece.

The second most important piece of the drop shipping puzzle is marketing your business. Simply putting your products on Amazon, eBay, or your own website isn’t going to drive sales.

SaleHoo has tons of marketing tools to help you succeed, such as coupons, an email marketing system, analytics software, and more. I also recommend you bookmark this marketing calendar to keep as a reminder of upcoming holidays you should run sales for.

Finally, don’t forget to leverage social media marketing tactics; Especially Instagram, since 93% of buying decisions are made based on visual appearance.

Now you have a firm understanding of what drop shipping is and how to use it to make money for your business!

The next step in creating a successful drop shipping business is to find something to sell.

Head to the next section to learn the do’s and don’ts of finding, vetting, and selecting a great product.

Additional Resources

Here are two AMAs (ask me anything) posts on reddit. They are very informative and should be essential reading for new dropshippers:

I make over $100k per month running Drop-Ship product websites (proof inside). AMAA
I make over $1 million / year in revenue with my eCommerce drop shipping business (proof included). AMA.

But having a theoretical understanding of dropshipping is only the beginning. The truth is, nothing will help you if you select the wrong type of product.

Want to know more about product selection? Click on through to the next lesson!


About the author
Simon Slade
CEO of SaleHoo Group Limited

Simon Slade is CEO and co-founder of SaleHoo, a platform for eCommerce entrepreneurs that offers 8,000+ dropship and wholesale suppliers, 1.6 million high-quality, branded products at low prices, an industry-leading market research tool and 24-hour support.

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