eCommerce has become a major business, so it’s no surprise you’re considering joining the 7.9 million online businesses that sell products via the web. Research published by Statista in March 2021 showed revenue from eCommerce in the United States reached $431.6 billion in 2020 and is expected to reach $563.4 billion by 2025.
Dropshipping can provide a route into online selling. It’s a business type that minimizes risk and allows you to operate a business remotely without needing to manage stock. In this guide, you’ll learn the pros and cons of starting a dropshipping business as well as how to start a dropshipping business in five steps.
What is dropshipping?
A dropshipping business is an online business that purchases the inventory it sells from an external manufacturer or distributor who then fulfills and delivers the order directly to the customer.
Your role as the dropshipping business is to market the products and manage the customer and sales process. Your dropship supplier will handle the inventory, packing, and delivery.
Sounds good so far? Here’s what you need to know before getting started.
What are the benefits of dropshipping?
Low startup costs and less risk
One of the biggest attractions to the dropshipping business model is its low capital intensity, as you don’t need to purchase inventory up-front. This means you can start a dropshipping business with relatively little investment at the start, other than to create your website and start marketing.
If you’re starting a business on a low budget, then dropshipping could be a viable option for you. The startup risk is significantly less than a traditional eCommerce business that manufactures, purchases, and stores its own inventory prior to sale.
It goes without saying that success is not a guarantee. You still need to invest significant time and effort into creating your website, refining your sales funnel, and marketing your business. All of which can become expensive, and may take time to see results.
Simple to start
Dropshipping is an incredibly popular business model for those looking to start an eCommerce business. In part, this is due to the low barrier of entry, and relative ease of operating a dropshipping business — most of which can be done remotely.
As you won’t need to store or handle physical products, you won’t have any need for storage facilities. You also won’t need to:
- Pack and post orders
- Handle returns (other than customer service)
- Manage inventory for products stored
This removes a lot of the complexity of the operational side of the traditional eCommerce business model, which enables you to focus on effective sales and great service.
As you won’t be holding stock and most likely won’t have a retail premises, your dropshipping business can operate from anywhere in the world with an internet connection.
Most of your time will be spent working on your website, marketing, and delivering customer service (mostly by email). Because of this flexibility, the dropshipping business model has become incredibly popular.
As your business grows, the dropshipping business model can be scaled to allow you to meet customer demand and expectations.
Whereas with a traditional eCommerce model, you would be required to scale your warehouse, sales, and service operations to meet this increase in demand. With a dropshipping business, your suppliers handle the ‘heavy lifting,’ so extra resources may not necessarily be required for your business (such as staff and packaging).
Drawbacks of dropshipping
Tight profit margins
As it’s so easy to get started with dropshipping, it has become the typical ‘back bedroom’ business model for the masses, hoping to make a quick buck for little work. This has created fierce competition.
In an attempt to compete and win business, many drop shippers have engaged in a race to the bottom with their pricing strategy, squeezing their margins in order to win the sale by being competitive with price.
Because of this, many commodity-type products that are easily available to drop shippers have saturated the market, swamped online marketplaces like Amazon, and reduced profit margins.
Inventory and supplier problems
Dropshipping businesses tend to have a lack of control, as your inventory is being managed by a third-party supplier.
If communication between you and your supplier breaks down, or there is no app or system in place for keeping track of inventory, the supply chain may break down. This may cause delays for customers, or even the wrong items being delivered.
Be cognizant of possible delays due to public holidays if using a supplier from a foreign country, as it may cause a backlog of orders and affect your customers’ experience of your brand.
Shipping and delivery issues
This is a common problem for any online business, whether it’s a traditional eCommerce business or a drop shipper that uses an external supplier. Unless your business only operates locally, it’s highly likely you’ll use a courier or postal service to deliver your orders.
You need to be aware that shipping costs may increase and delays may occur at busy times of the year. Your customers will hold you responsible for this, as they’ve ordered from your brand. Make sure you have customer service processes in place to keep communication with your customers open.
Success is not a guarantee
Whilst there are no official figures to show the success or failure rate of dropshipping businesses in the US, those who have experienced drop shipping failures attribute it to the following reasons:
- Selecting the wrong niche — resulting in high competition or low margins
- Lack of investment — not having sufficient funds for effective marketing
- Wrong platform — for marketing their products (such as Facebook or Google ads
- Poor customer service — causing refunds and a negative reputation
- Delayed shipping — either by the courier or the drop shipper, resulting in refunds
- Unattractive website design — resulting in low sales volume and a high bounce rate
How to start a dropshipping business in 5 steps
Now that you’re aware of the pros and cons of starting a dropshipping business, and what it takes to be successful, here’s how to get started in five simple steps.
1. Identify your product niche
We now know that selecting the wrong niche can be devastating to a new business, and is one of the common causes of failure.
It’s vital that you choose the right niche for your business. When deciding this, go back to business basics. What’s the gap in the market you want to fill? What problem does your business or product solve? What’s the unique value proposition?
Furthermore, you as the founder and business manager are going to need a huge amount of enthusiasm for the product. Operating and growing a business is exhausting and incredibly demanding. You’re going to need to select a niche you understand and won’t be bored by.
You’ll also want to make sure you consider the following when choosing your niche:
- Viable profit margins. Ideally, aim for over fifty percent as an absolute minimum.
- Shipping costs. Larger heavier products will cost more to deliver, which may affect your margins or the price the customer pays.
- Is there demand? Using tools such as Google trends will help you figure out if people are searching for what you want to sell.
- Competitors. Is your market already oversaturated? Check what’s available on Amazon, Etsy, Wish, eBay, and other websites by checking search engines. Look at prices and the quality of the products on offer, as well as shipping services.
2. Find your supplier
Working with the right supplier is crucial to the success of your business. You don’t want your customers to receive products that are damaged or arrive late, as this will reflect negatively on your business and damage your brand.
Blaming the supplier is not going to be acceptable to your customers, you will be held accountable.
When choosing your supplier, make sure you perform due diligence. This can take the form of asking questions and checking certification before you place an order.
Make sure you check:
- Quality assurance and product safety certifications required for the country and market you will be selling to.
- Lead times to manufacture and deliver the product to the customer.
- Refund policy for damaged, incorrect or late orders.
- Samples. Make sure you order a sample of the product for quality testing before you start selling. You need to make sure the items are as described.
- Production capabilities for when your business scales.
Some of the most common dropship suppliers and websites for connecting with manufacturers include Alibaba, AliExpress, and Oberlo.
3. Create your website
Your website will be the most important part of your dropshipping business. It will be your online store where customers browse, consider, and hopefully order products, as well as making payments.
As we discussed earlier, poor website design is a factor that causes business failure.
Choosing the best website builder for your new dropshipping business can be confusing as there are so many and the differences may seem subtle.
When choosing a website builder, make sure you consider:
- Ease of use for designing, updating, and processing orders.
- Marketing features including customer service features to automate the process, such as email order confirmations.
- Choice of website templates: You want your website to be clear and effective at showcasing products and making them easy to buy.
- Try before you buy: Start a free trial to see how you get on with the website builder before you build your entire site.
Popular choices include Shopify, BigCommerce, WordPress, Magento, and Weebly. Monthly costs and sales commissions vary, as do the transaction fees. Make sure you compare before choosing which to use, as an expensive platform will eat into your profit margins!
4. Market your business
Once your suppliers are in place and your website established, all your effort should go into attracting customers and making sales. The best way to do this effectively is to create a customer acquisition plan that takes into account your budget for marketing spend.
You should take a two-pronged approach to market your business; short-term and long-term.
- Pay-per-click adverts on search engines, such as Google and Bing.
- Social media adverts, Facebook and Instagram for example.
- Remarketing adverts.
- Digital marketing adverts, such as banner placements on digital publications.
- Website search engine optimization (SEO).
- Consistent email marketing to keep in touch with your customers, gain repeat business and grow your brand recognition.
- Engaging social media content to grow your brand and connect with customers.
5. Track everything and optimize
In order to optimize your website for sales conversions, understand consumer behavior, and market effectively, it’s important to track and analyze customer metrics.
The five most important metrics you should track on your website are:
- Cost per acquisition: How much it costs to gain one new customer.
- Conversion rate: The percentage of website visitors that make a purchase.
- Average order value: The average sale (or basket) amount.
- Customer lifetime value: The average amount a customer spends during the lifetime of their relationship with your business.
- Cart abandonment rate: The percentage of visitors that add items to their cart, but don’t complete the purchase.
In order to track your metrics, you can use data from your website shopping cart, web hosting provider, and platforms such as Google analytics.
With this knowledge in hand, you can edit your website design, marketing content and update product listings or pricing to streamline your sales funnel and increase your conversion rate (sales).
Should you start a dropshipping business?
It may seem popular, even easy to start a dropshipping business, but don’t be fooled by the amount of work involved to make it a success.
Business basics still apply. In order to succeed, your business must meet an unmet need, solve a problem, or provide a product so amazing that people can’t help but talk about it. Don’t think you can simply start selling anything online and become successful with your business. You can’t, and you won’t. There’s much more to it than that. Before getting started, ask yourself this — will my business do the following?
- Solve a problem better than anyone else.
- Meet an unmet need or demand.
- Have a unique value proposition.
If the answer is yes, you’re ready to follow the advice in this guide and start your new dropshipping business. Good luck!