Dropshipping Guide: What is Dropshipping & How Does it Work?
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Dropshipping Guide: What is Dropshipping & How Does it Work?

Reading Time: 6 minutes(Last Updated On: July 29, 2020)

What is dropshipping?

Dropshipping is an e-commerce model whereby the dropshipper doesn’t keep the goods they sell at any point, but instead acts as a go-between for the customer and the supplier.

Dropshipping is a simple concept:

  1. Create an attractive funnel to generate customers.
  2. Receive orders from customers.
  3. Forward orders to the supplier (i.e. retailer, wholesaler, or manufacturer) who ships the orders directly to the customer.

 

That sounds easy enough, but there’s a lot more to dropshipping than just those three points. Keep reading to find out what it takes to be a successful dropshipper.

 

How does dropshipping make money?

While it’s true that anybody can get started as a dropshipper, not everyone knows how to make a profit using dropshipping in a reliable way.

In order to ensure that your dropshipping business is profitable, you’ll need to consider the following three factors and come up with the right pricing strategy for your business. Since each business has different characteristics and different strategic goals, there are several pricing strategies that you could potentially make use of. Be sure to take some time to review the array of pricing methods before you get started with dropshipping.

First, as a dropshipper, one of your primary roles is to act as a ‘curator’ for products that your customers will want to buy. Of course, first you’ll have to choose a customer base before you can start picking the products to sell them. And with an expected 2.14 billion online buyers by 2021, marketing plays a vital role, but also comes at a cost.

Second, attracting customers goes beyond just selecting the snazziest goods to offer – you’ll also need to provide great customer service, since they won’t get much (if any) help from your supplier. Great customer service means you’ll likely have to invest a bit in a CRM – or customer relationship management system.

Note: The effort and resources you save by dropshipping should be reinvested in improving your customer experience – that’s where the real value for the customer comes from.

With the costs associated with attracting and retaining customers taken into account, you’ll need to consider one more factor: the original price at which your supplier sells its goods. Dropshippers naturally have to mark up the price at which their suppliers sell their goods, since there are other costs to cover (i.e. marketing and CRM).

 

 

Benefits of dropshipping

  1. Low overhead costs
  2. Less capital to start up
  3. Get started with little experience
  4. Easy to manage
  5. Limitless products

 

1. Low overhead costs

Perhaps the biggest perk of e-commerce dropshipping is all of the money you’ll save by avoiding the costs associated with a normal e-commerce business.

  • No purchasing stock
  • No storing inventory/warehouse for storage
  • No packing
  • No shipping
  • No handling of returns (only the customer support end)

Note: Even with low overhead costs, you may choose to add extra features to your e-commerce dropshipping business. Regardless of what those additions are, business loans can be the answer to your business financing needs.

E-commerce funding comes in many forms, so be sure to review your options first!

 

2. Less capital to start up

Starting a normal e-commerce business would typically require purchasing a whole lot of inventory (potentially thousands of dollars worth) and storing it somewhere until you make sales. That means you’ll not only be taking a gamble by tying up capital buying goods you’re not sure you’ll be able to sell, but you’ll also be paying for the storage of all of those goods.

Dropshipping eliminates those costs and makes it that much easier to get your e-commerce business started without having to break the bank. There’s also less risk involved compared to a traditional retail business, since you’ll only have to purchase goods after you’ve received an order (and payment) from a customer, and that order is packaged and delivered by your supplier.

 

3. Get started with little experience

Even if you’ve never run a business before, getting started with a dropshipping business is totally doable. All you really need is a computer, internet connection, and the desire to learn. There are plenty of free online resources available that can help you build up your dropshipping business, particularly because this is an industry native to the online world.

If you’re ready to take advice and take some chances to grow a new business, dropshipping could be the way to go.

 

4. Easy to manage

The level of flexibility that comes along with running a dropshipping business is one of the biggest attractions for people to enter the industry.

Side note: Flexibility is also a huge reason why customers choose to shop online instead of in a store – 58% of Americans listed the ability to shop 24/7 as the top reason to shop online.

Don’t get it wrong – dropshipping does require devotion in order to be a successful venture. But it doesn’t have to be hard! In fact, many dropshippers work directly from home and can even manage their businesses on the move with their smartphones.

Bottom line: As long as you’re able to communicate efficiently with your customers and suppliers, you’ll have very little trouble running a dropshipping business.

 

5. Limitless products

Since you don’t have to worry about storing lots of inventory, you can offer a much more diverse array of products to your customers. Truly the only limits to what you sell in your dropshipping business come from your customers’ preferences and your ability to connect with the suppliers that sell those goods.

 

 

How to get started with dropshipping

  1. Choose what to sell
  2. See what competitors are doing
  3. Find a supplier
  4. Create an e-commerce website
  5. Develop a marketing plan
  6. Sell, track, optimize, repeat

 

1. Choose what to sell

You can’t sell everything through your dropshipping business, and why would you? Customers will want to feel that they’re buying from someone who knows their stuff and who has selected specific goods to sell based on real knowledge and experience.

Find a niche that you know about and can lend your insight on, one where you can demonstrate your competence to your customers (this is where a good branding strategy also comes in). If you’re interested in high-quality makeup, find a niche like costume makeup. If you love animals, find a niche like high-grade aquarium supplies where customers are searching for very specific products.

The goal here is to find something that people want to buy and that won’t be too costly for you to integrate into your dropshipping business model. Remember, you want to make a profit!

 

2. See what competitors are doing

It might seem counterintuitive at first, but you actually want to aim for the sort of products that are being sold by many competitors. You’d think it would be too hard to enter a niche where there’s a lot of competition, but the reason that there’s competition in the first place is because there are customers.

Don’t look for products that have little competition, because it means that there aren’t many customers seeking those products out. Lots of competition means high demand, a higher likelihood of finding customers who will buy those goods, and a more sustainable business model.

 

3. Find a supplier

While it’s not exactly the same as choosing a business partner, choosing a supplier is a crucial step to building a successful e-commerce dropshipping business. A supplier can make or break your business, so you need to be careful about who you team up with.

Keep in mind that many suppliers are located in foreign countries, which can create several obstacles including time differences, language barriers, delayed response times, and so on. Do your due diligence and if you have any doubts about your ability to communicate effectively with a supplier, search elsewhere.

 

Black Friday Marketing

 

4. Create an e-commerce website

Don’t worry, you don’t need to be a master computer programmer to get an e-commerce dropshipping website up-and-running. In fact, there are several e-commerce store builders that make it super easy to develop an attractive website with your own custom feel.

You can very quickly, easily, and affordably get started with the most basic plan through one of those popular e-commerce store builders and upgrade your plan as your business grows.

 

5. Develop a marketing plan

Your marketing plan is what will bring in your customers and allow you to make sales. If you’re not actively working to bring in customers, your dropshipping business may struggle to remain profitable.

What is dropshipping if not the quintessential internet-based business? That being said, your marketing plan should absolutely include a social media marketing strategy. Explore the different social media platforms and investigate how your products sell there.

The one social media platform that pretty much every dropshipping business should be using is Facebook. More specifically Facebook Ads, which gives e-commerce dropshipping business owners in-depth insights into how campaigns perform and how they can be improved.

 

6. Sell, track, optimize, repeat

This step is fairly self-explanatory. Track your sales, see how your profits look month after month, and make the necessary changes to optimize your sales. This will take lots of trial and error, and even when you do ‘get it right’ you’ll eventually need to make adjustments again to keep up with industry trends. Never get complacent with how your sales look in your dropshipping business. Stay on top of your numbers and stay intent on improving them!

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Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.