Dictionary definition of drop-ship:
Move goods from the manufacturer directly to the retailer without going through the usual distribution channels.
Now while the definition is a little vague with the words ‘usual distribution channels’, it really is that simple. Maybe even simpler!
To anybody new to the online business world and looking for business ideas, the dropshipping process can seem a little intimidating as you effectively become a business owner literally overnight, and while that is an exciting situation to be in, the safety net provided by Amazon and eBay arbitrage business models is not there any more. However, if you follow the process correctly, it will be a much more lucrative and profitable business, with the added bonus that once you are successful and making a continuous profit, you can sell your store for a sizeable fee! The usual going rate for a store is 18 months worth of your average profit. So if you’re making £2000 per month that’s £36,000. Not bad at all!
WHAT IS DROPSHIPPING?
Dropshipping is a business model which allows you to operate without maintaining inventory, owning a warehouse to store your products, or even having to ship your products to your customers. How it works is that you partner up with dropship-friendly suppliers that manufacture and/or warehouse products, package the products, and ship them directly to your customer on your behalf.
In simpler terms, this is how dropshipping works:
- The customer purchases a product on your online store.
- You purchase the product from the relevant supplier.
- The dropship supplier packages and ships the order directly to the customer in your business name.
- That’s it!
The drop-shipping model is extremely attractive as it eliminates the need for you to have a physical business location such as an office space or warehouse – instead, all you need is a laptop and an internet connection. This of course massively reduces your costs and overheads meaning a greater portion of your profit is actual profit!
As a business model, dropshipping has several different aspects that prove to be beneficial:
- Simple set-up process as it essentially involves just 3 steps – find the supplier, set up your website and start selling the goods! To an e-commerce newbie, this business model is relatively easy to understand and implement.
- Set-up costs are minimal. Most traditional business costs are non-existent, from the setting up the retail operations, buying stock, paying for storage space etc. Only set-up costs are website related (site hosting, theme etc).
- Extremely low overhead costs. As mentioned earlier, you don’t need to purchase inventory, and this negates the cost of not only the stock, but the storage space and distribution channels. Website hosting managing and marketing / advertising is all you have to worry about.
- Low-risk. If your products are not selling, you’re not really losing much cost-wise, taking a lot of pressure off while you address potential issues.
- Location independence. Perfect for the digital nomad, your store can be managed from anywhere – no office, no warehouse and no hassles. No physical ties means that you could be sitting on the beach, coconut in hand still making a profit. All you need is a laptop and an internet connection.
- Huge product variety. Drop-ship suppliers exist for almost anything that you would like to sell now, meaning you can rely on one great product, sell several products within a certain niche or go bigger and create a brand covering an entire market – provided you have done your homework and chosen the right products!
Just like everything in life, there are some drawbacks that come with the advantages of dropshipping. Here are a few cons:
- Lower margins. Due to the fact most of your orders will be single item or low volume, your suppliers won’t give you quite as good a price as a traditional retailer buying stock in bulk.
- Liability. The customer is purchasing the product from the you, so any problems, even caused by the supplier, it’s still your fault as the brand is the face of the retail process. This is one of the reasons why it is incredibly important to choose the right supplier.
- Brand control. Customer satisfaction is in the details – personalised packaging, freebies, notes with orders etc – it’s the smaller things that count. With drop-shipping you have less control over this. However, there are some suppliers who may be willing to go that extra mile. Again, find good suppliers!
- Shipping complications. A traditional business will ship from one location, however your store will have multiple suppliers with different lead times. If your customer purchases from separate suppliers, they may be surprised to end up with 2 different deliveries and potentially 2 different shipping fees which of course does not look good. A way around this is offering free shipping, and if it happens just take it on the chin!
- Competition is high: Drop-shipping has been around a few years now, and even high street retailers are getting involved, so there are more and more retailers in every niche. Unless a retailer is catering to an extremely specific segment or niche, the competition could possibly be detrimental.
- Inventory management: keeping track of the stock of the supplier can be challenging. Miscommunications and erroneous stock reports can cause cancellations and on back orders. This can be managed with software, but those usually come at a price and may increase your costs.
Usually drop-ship profit margins can range from 15% – 45% depending on your market. It’s about finding the right suppliers in part, but a big factor is finding a niche that isn’t already overly saturated. A good way to ensure higher margins can be to source directly from a manufacturer instead of just a supplier, effectively cutting out the middleman. As with all business, the shorter the chain the bigger the profit!.
Once the business is off the ground and gains a bit of reputation, it can quickly become a successful, profitable business that only requires minimum input. There are massive success stories out there, with drop-shipping stores having gone from nothing to thousands of pounds a month in just a matter of months. This won’t be the case for every drop-shipping business, but the potential exists.
WHO IS DROP-SHIPPING FOR?
Dropshipping is a great business model for a first timer setting out in the online business world. It’s attractive because it’s a low-risk, relatively low-investment business so doesn’t feel like a huge gamble. Now while you can’t just pluck a product idea out of thin air and expect to start making profits right away, if you really do your niche homework, and follow the tried and tested methods behind niche finding, there are hundreds of potential markets you can go in to.
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