What is Dropshipping?

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What is Drop Shipping and is it profitable?

Drop shipping is a method of retail fulfillment, where the seller or store does not hold or own physical inventory.

Instead they use third party manufacturers and suppliers to source their products. The seller advertises the product, sells it and has it sent direct from the supplier’s warehouse.

The seller does not have any physical contact with the inventory on sale and has most likely never even seen the product in person (though good sellers will order some products to test shipping, packaging and quality).

Traditional retailers and business have their own physical inventory, which is a huge expense for any business. The advantage of drop shipping is you massively on costs relating to running a traditional business – rent, storage, insurance, staff manufacturing etc.

Instead your costs are limited to the setup and maintenance of an online store front, along with fees for the relevant programs that you use.

The Benefits of Starting a Drop shipping Business

The primary benefit of starting a drop shipping business is the low-cost entry point which anyone can access.

You don’t need to pay up front for stock to be sent to you to manage, rents, staff and so on. There is no inventory management, shipping or handling of returns and faulty products.

Which means it is a great way to test different products to see what works for you, and only scale up when it proves to be effective.

Here are the top 3 reasons why drop shipping is a great online business model:

1. Low Cost

Drop shipping is low cost. You don’t need to pay for inventory, rent, manufacturing, staff, insurance, shipping etc. You only need to cover the online eCommerce shopfront.

Traditional stores have to spend thousands of dollars on inventory and the associated costs of having a physical shop front. Which means breaking even, let alone making a profit, is significantly harder.

There is no need to purchase the product until it has actually been sold and been paid for by the customer.

In fact, this is a great business to operate from home as a side business or even while travelling.

2. Low Risk

Drop shipping is low risk because if a product is unsuccessful, you don’t have unsold inventory on your hands. All you have invested is your time in marketing and promoting the products.

This makes it easier to test products and the market demand for certain niches. If the products are successful, you can expand and add similar products. If they don’t sell, then remove them and try something else.

3. Flexibility

As long as you have a stable internet connection, a laptop and a phone, you can operate a drop shipping business from anywhere.

As a side business or as a full-time job, drop shipping when done correctly can be extremely profitable and easily scaled up or down to suit you.

Unlike traditional businesses, your workload doesn’t increase when sales increase. Your workload increases when you choose to expand and add additional products.

Your time is spent setting up your storefront, providing customer support and generating online advertising to drive traffic to your store.

The wider the range, the more varied your advertising. The greater the sales, the greater the time on customer support.

The Downsides of Drop Shipping

Like any business, drop shipping has its disadvantages. For every positive aspect to it, there is a corresponding negative.

Here are the top 4 downsides to drop shopping that you need to be aware of.

1. Low Margins

While you have the benefit of not having to pay for the product or any of the associated costs, someone else does. Which means the margins tend to be low.

Keep in mind that when you advertise a product, and someone buys it, you still need to pay the manufacturer their ‘cut’ for the product. This is the wholesale price. Then you need to factor in processing fees and sale fees depending on the site you sold it on, and the payment methods used.

Think of it this way:

Sale Price – (Shipping cost + manufacturer’s cost + PayPal/credit card fees + eCommerce site sale fees) = Profit

If you are not careful to calculate all the possible fees in the process when setting up your margins (the sale price needs to be reasonable and competitive), you will lose money in the transaction.

2. Lack of Quality Control

The major downside to drop shipping is lack of quality control. You have absolutely zero control over the manufacturing of the product or the shipping & handling.

As you are effectively the face of the product (even if you didn’t create it), the customer will place all blame on you for any issues.

This means that whether you use drop shipping marketplaces or establish your own relationship with a manufacturer, you need to do as much research on the manufacturer as possible and try to establish a strong working relationship with them.

Ideally you might have a local manufacturer who will let you handle the shipping so you can check quality and customise your packaging (at least while it is still small numbers).

3. Fraud & Online Scammers

This is an issue in any online business. Fraud can be negative reviews by either real or pretend customers, false claims for refunds and spam requests.

I know when started on eBay years ago, there were a number of problems with false claims of damaged products and demands for refunds while keeping the product. The downside is eBay and PayPal will always side with the customer until you, the seller, can prove the customer is committing fraud.

I also used to get spam ‘offers’ from customers, they would send through an offer then include a message saying please don’t accept the offer until I have messaged them on Whatsapp. Do not communicate with them offline as this is potentially dangerous. Decline the offer and block them on the platform. Add a message to the decline that says you only communicate through official platform methods.

In another negative experience, one of my father’s friends had a pet store and decided to sell reptile cages on eBay. He became the target of a systematic fraud attack where people were buying the cages, then leaving negative reviews and put through numerous PayPal and eBay claims. He ended up losing several thousand dollars in the space of 3 months and stopped using eBay.

I’m not trying to scare anyone off from online platforms, but just to remind you of the inherent dangers of any online business. Be aware and be prepared.

4. Inventory and Shipping

A system is only as good as the information that is in it. If you suppliers and shipping handlers are not updating their systems regularly, then it can lead to sales of non-existent products or complaints from customers who want to know what is going on.

While most systems are automated, there will always be gaps. You need to be checking all your platforms daily to make sure nothing is missed.

Schedule a time each day to log on and add/remove/reply/process any orders or messages. Check your supplier inventory numbers and make sure they match what you are promoting.

If you are selling items from multiple suppliers, they will all be using different shipping methods. This runs an inherent risk that a customer may purchase several items that are all from different suppliers. The issue here is that you really can’t charge a separate postage fee per item, and it is really difficult to set automatic postage rules for this (especially if the suppliers are based in different countries).

Be prepared for sometimes having lower profits on sales when you need to cover the cost of shipping for different suppliers. A way around this is to minimise the number of suppliers per store front. One of my drop shipping sites only has 3 different suppliers due to the niche aspect of the products.

Also keep in mind where your suppliers are based. If your products are made in China, then there are often issues with long shipping times, so you need to manage expectations regarding that. Especially now with the global pandemic, no matter where your supplier is based, shipping will take longer.

How much does it cost to start Drop Shipping?

The basic set costs of drop shipping are all based on the platform you use. And are generally in USD dollars. Here are some examples.

A domain name

Approx. $5-$20 a month

An eCommerce platform

Shopify: $29pm up to $299pm plus transaction fees (2.4%-2.9% and payment processing fee of $0.30 per transaction

BigCommerce: $29.95 up to $299.95pm (no transaction fees for leading gateways, but there are fees for PayPal)

Drop Shipping platform (monthly fees tend to depend on how many products you want access to)

Modalyst starts from free for the hobby plan to $90pm for unlimited products (plus 5% transaction fee per sale)

Oberlo starts from free for beginners to $79.90pm for advanced

Test Orders

Not compulsory but recommended to check your supplier’s quality and shipping handling. And ensure that what you are promoting is what is being sent out.

Advertising

This depends on the platform and methods you use. Things like SEO, blogging, paid ads, social media ads and search engine marketing all play a part, and all have different costs.

Tax

Each country has its own rules, so check the tax requirements of the country which is your primary place of residence.

For example, Australia has strict requirements that tax must be withheld if you don’t have an ABN.

So no matter where you are, keep a strict track of all expenses and sales, and talk to an accountant to find out what rules you need to abide by.

Is Drop Shipping profitable?

If you have done the research, planning and marketing correctly then yes it is possible to make a profit running a drop shipping business.

Your drop shipping platform will allow you to set your own mark ups, just make sure to research similar products so you don’t price yourself out of the market and aim to cover your expenses at the very least.

Is Drop Shipping worth the time and effort?

Well that is a personal opinion, I truly do believe it is worth the time as it can be very profitable.

Like any business you do need to dedicate time and effort to setting it up. But it is possible to do this as a side business and make it successful.

Once you get your first set of products right, it makes it much easier when you are ready to expand.

It is also a great way to compliment an existing blog that you might be running. If you choose products that fit within your niche, you can have a separate store front and direct traffic there through your existing social media platforms and blog.