ECommerce has become very popular in recent years. This doesn’t only offer more shopping opportunity for people, but also for those who are interested in starting an online business. Imagine the variety of products that you can cash in on. One of the major key players in this industry is dropshipper, but is drop shipping a good business for you to start with?
Well, it depends.
Drop shipping Model In a Nutshell
Just to refresh some knowledge – drop shipping is a product fulfillment that involves 3 parties – the buying customer, the online retailer (that’s you) and the supplier (the drop shipper).
When someone buys a product from you, you would send in an order to the supplier who will in turn, pack and ship the item on your behalf. The difference between what the customer pays and what you pay the supplier in order to fulfill the order is your profit.
These are some advantages of this model for you as a retailer;
- There is no investment in stock management which gives more room to sell numerous products online.
- Since the supplier handles 100% of the logistics, there are no cost of fulfillment (packing/shipping/labor etc.) involved on your side.
- It’s a mobile business that allows you to work from anywhere. For example, you could be based in US while working with a supplier from the Netherlands.
Almost ⅓ of the world’s internet retailers use drop shipping to fulfill orders ranging from common products like clothing to highly priced items like boat motors. In fact, Amazon, Sears and Zappos, all used this model to grow their business empire and it’s becoming increasingly popular over the last 6 years.
So, why am I writing this article if the stats are showing a promising future? Well, like most online ventures, drop shipping has its own set of challenges and you need to know what to expect before dipping your toe in the water.
The Basic Setup
- Whether you are a solopreneur or partnering with a couple of friends, you need to apply for a business entity in order to sell products online. In the case of the US and Canada, this means obtaining a Sales Tax ID and EIN (Employer Identification Number) before you can do business with (some) suppliers.
- Meanwhile, you need to figure out which platform to use for selling – online marketplaces like Amazon, Bonanza or eBay or via a personal online store. Each has its own pros and cons which I will explain in a short while.
- The next thing to think about is finding a supplier. You can search for them on local listings, online research or if it’s necessary at all, meet them in person at their production site.
Even when you have the above in order, the challenges of drop shipping are just about to begin.
(1) The good thing about listing on marketplaces is that you get instant exposure to their existing massive traffic. However, on the downside, hundreds of sellers are also aiming for the same thing so you’ll be facing tough competition in terms of the business numbers, product uniqueness and pricing.
This means, if you are planning to sell a unique black blouse like the one below, good luck in getting found.
While listing on these platforms remove a lot of the technical setups, most will either charge for listing/processing fees OR take commission cuts from your already small profit margin.
(2) Does this mean selling through a personal online store is better? Most definitely as you can customize the storefront while keeping most of the profit yourself. However, you do need to pay for hosting/platform fee and most importantly, learn how to generate traffic to your site via search engines (free) or advertisement (paid). Hence, a bigger startup budget is usually required for this.
(3) In the drop shipping model, you are the customer service, and that’s not a bad thing if your business is backed by reliable suppliers. But, should there be any problem in regards to packaging/shipping, you are also the person who is in charge of communicating with the supplier and process the refund if need be. According to experienced sellers, this type of situations can be very frustrating to deal with.
(4) Dealing with multiple suppliers is a task that not many people see coming, but it is inevitable. How else can you increase profit without diversifying the product range? In fact, working with several suppliers is the norm in this business model.
The challenge is to work and coordinate with them to ensure that the products are always in stock and customers aren’t charged exorbitantly for shipping fee when ordering from various sources on a single checkout. Here’s where finding a reliable supplier could make a huge difference to the entire process.
(5) Understanding a product trend is crucial for any form of online businesses. Some might sell in the beginning of the year, some later and some might not even sell at all.
So no matter how good the supplier is, it’s important to learn the customer’s shopping behavior towards a certain product and plan your marketing around that. At the very least, you want to be generating profit to maintain your cost of operation.
There are various sources to learn about product trends – industry newsletters, analyzing competitors, Google Trend, keyword research and TrendHunter are just some of the methods that I like to use. There’s no single tool that can give you a direct answer and many sellers admitted that it usually takes several trials and errors to find the right one.
So, Is Drop Shipping a Good Business Model for You?
If you have the experience working in retails before such as communicating with suppliers and customers, it would be a lot easier to mitigate the complexity of this business. In this case, drop shipping is probably a great method to diversify your product options and multiply sales.
However, if you are like me who have never been involved in product procurement, setting up the business can be a huge learning curve. In addition, you’ll also need to have a good understanding of website building, SEO and paid traffic knowledge to ensure that your business thrive year after year.
Are All Online Business This Challenging?
Well, not really. Ever heard of affiliate marketing? This model earns you sales commissions whenever you refer customers to merchant sites. You can recommend physical or digital products which, often times, offer more lucrative earnings. Plus, the setup process is way less complicated than drop shipping.
- There’s no need for sales tax ID. If you know how to create a website/blog with WordPress, you are good to go.
- You are not in charge of processing orders or fulfilling products. The merchant handles everything.
- You can focus solely on marketing through various online channels to maximize profits.
In fact, this is the business model that I turn to after finding out that drop shipping is not for me. It suits me well in terms of my resources (time and money) and it is how I made my first dollar online.
If you are also interested to learn more about affiliate marketing, check out the tools and training at my recommended platform to help you get started.
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