Want to start selling online but don’t really have the capital? Or maybe you’re not sure whether it’s for you and you want to test the water first?
If you answered yes to either of these, then a dropshipping business may be the answer. It’s an excellent gateway to online retail that requires less financial input than a regular online store, plus you don’t need a warehouse to get started.
So, how exactly does dropshipping work? What are the advantages and disadvantages of using this eCommerce fulfillment method? Where can you find a dropshipping supplier? More importantly, how can you profit from it?
Throughout this article we will answer all of these questions, as well as some considerations to take into account when operating a dropshipping business on Amazon, eBay and other online marketplaces.
What is dropshipping and how does it work?
Let’s start with what dropshipping actually is.
Dropshipping is a method of retail where the store never physically holds the products it sells. Instead, when the retailer sells one of the products it stocks on its website, they buy the item from a third-party supplier who then ships the item directly to the end customer.
So, the online seller never actually sees, holds or ships the item, they are effectively advertising it for the supplier and marketing up the price of the product so they can make a profit.
How does dropshipping work?
To break it down, here’s how the process flows:
1. The retailer “stocks” products on their website or marketplace
2. The retailer doesn’t actually hold these products, they are held by the supplier or wholesaler (who could be anywhere in the world). These products may cost £1 per unit from the supplier, while the dropshipper lists them at £3 each (making a profit of £2 from the sale).
3. When a customer orders a product from the dropshipper’s website, the merchant receives a notification. The merchant then forwards that order to the supplier, either manually or automatically.
4. The supplier fulfills the order and ships it directly to the customer under the dropshipper’s name.
Advantages of a dropshipping business.
Like any other business model, dropshipping has its pros and cons, it’s just a case of weighing them up and deciding whether they have the right balance for your circumstances and needs.
Easy to get started.
It’s relatively easy to get started with a dropshipping business. While starting an eCommerce business is never easy per se. Think of all the research, planning, budgeting, website building and multitude or other activities you need to do before you even begin selling
So, if you want to take the fast-track to becoming an online retailer, then starting a dropshipping business could be the way to go.
This is mostly because dropshipping doesn’t require the initial resources needed to start a conventional online store, such as capital, office space, warehouse space, commitment, etc.
As we mentioned before, starting a dropshipping business is as simple as finding a supplier and choosing a marketplace (or building a website, which is easier than ever with the amount of site-in-a-box services available today). You don’t need to pay for a warehouse, pick and pack shipments, or manage stock levels.
Little to no investment.
Perhaps the best thing about the dropshipping business model is that you don’t have to purchase and hold the stock you sell. You only buy the stock once you’ve made a sale and the customer has paid you.
This is great, because it means that:
- You don’t need capital to buy stock in the first place
- You don’t need to physically hold stock and pay for it to be housed
- If the goods aren’t selling, you aren’t out of pocket because you haven’t invested in 500 units that are then left gathering dust if there are no sales
These factors make it possible to start a successful dropshipping business without having to invest thousands in stock upfront.
Dropshipping is flexible.
Flexibility is key to a lot of modern retailers who start their businesses as an experiment alongside their existing jobs. You could run a dropshipping business from just about anywhere with an internet connection, making it a an excellent option for those seeking flexibility from their eCommerce venture.
As long as you can easily communicate with suppliers and customers, you can run and manage your business.
In fact, many successful dropshipping businesses are run from home. You may not even need to quit your job to start you own store as you can often balance it around current commitments.
More choice of products.
As you don’t need to stock up on or store the products you sell, there’s a lot more choice of items you can offer.
There’s also no need to concern yourself with the upfront cost of the products or the cost and space required to house those products, meaning that you can choose to sell anything from hair products to speedboats.
Scalability.
The reality is, it’s far easier to grow a dropshipping business than a traditional online store.
As your order numbers increase, the work falls to the supplier rather than you, allowing you to grow the business without the costs of hiring extra staff to help with the work incurred by the extra sales. This lets you scale easier and quicker than traditional eCommerce stores.
Disadvantages to starting a dropshipping business.
Now, it wouldn’t be fair to only list the advantages of dropshipping, so let’s look at the downsides too:
Less competitive pricing.
The key to a successful drop shipping business is making a profit on the difference between the price of your products and what your dropshipping partners charge you.
While dropshipping is great because it means you don’t have to bulk-buy products, this also affects your pricing – that is, no more bulk pricing. You’ll probably end up paying more for each individual item, meaning your prices won’t be as competitive.
Stock reliance.
You’ll quickly learn that dropshipping is a bit of a double-edged sword.
While the model allows you to react and adapt to consumer trends, it also means you’re susceptible to sudden stock shortages.
Think about it. An overnight surge in popularity of a product could be a blessing for a traditional retailer who has stocked up on that product and a curse for a dropshipper who has suddenly found their supplier is out of stock of a product they normally sell.
Highly competitive.
Dropshipping is a viable business model for many because of its low barriers to entry, however this means a lot of people are doing it.
Competition is stiff and it’s harder to make a name for yourself.
Low margins.
Low margins are perhaps the biggest disadvantage of starting a dropshipping business.
It’s very difficult to compete for paid advertising space, meaning that you’ll have to make a lot of effort building SEO content, delivering excellent service – anything to set yourself apart and sell more to make a decent profit.
How to find profitable, high demand products to dropship.
Picking the right products to sell is only half the battle. After all, if you choose a poor product, you won’t get many sales and your dropshipping venture is unlikely to succeed.
Thankfully, there are millions of options to choose from when it comes to picking a product to sell. It’s just a case of figuring out the best option for you.
Once you’ve chosen a profitable product to dropship, you’ll be ready to start selling, but how do you go about finding these profitable and high demand products in the first place?
Find out what’s trending.
Selling products that are currently popular is one option.
In fact, you don’t need to know a huge amount about the product or your audience, just the the product is hot right now.
It’s also pretty easy to identify which products are trending and because of their popularity, marketing costs should be low.
Amazon and eBay both have a lot of product data available, you just need to effectively mine it to identify which products are in demand. The best place to start is with the search bar, as this will suggest items that are currently getting lots of searches.
For example, as you type a word into the eBay search bar, you will be presented with a list of related keywords based on search frequency. Google Trends, Kickstarter.com and Wish.com are also fantastic resources for identifying current trends.
Identify gaps in the market.
After conducting some research on trends, you should have a good understanding of which products are in high demand. You can now start to look deeper into where the real money-making opportunities lie.
One of the most effective methods of generating these insights is by reviewing sold items through eBay’s advanced search feature.
From here, you can compare these results with products that are being searched for to identify gaps in the market.
This will help you assess whether there are products that have high search volumes but aren’t being catered for by any other merchant on the marketplace, or perhaps aren’t being sold at the right price.
Niche products.
Catering to a specific product niche can be a great way to help your dropshipping business grow and generate revenue.
Instead of a scattergun approach of simply selling whatever is currently popular, you’re looking at a much more targeted strategy, scoping out products with a smaller, more loyal, and potentially much more profitable audience.
You can use Google Trends to research niches with high potential – these could be good options for dropshipping products. This approach will be less competitive as you will be targeting a smaller audience, making your marketing efforts much cheaper.
This method is also great because it doesn’t limit you.
Targeting a niche doesn’t mean that you can’t expand into different areas later on. When you’ve established your store as a leader in that niche you can add related products which you current customers may take interest in, helping you branch out and gain new customers.
Perhaps our best advice when it comes to finding products to dropship is to try and look for items you can sell for at least £10 more than the price you’re sourcing them for.
For example, if you’re sourcing a handbag for £15, then try to sell it in your store for £25. This ensures your sale will cover the price it cost you to source the product and the cost of your marketing efforts, leaving you with a decent profit margin for each sale.