What is dropshipping?
Dropshipping is a product delivery method which uses a supply chain, rather than direct retailer-to-customer shipping. With dropshipping, the retailer doesn’t hold items in stock. Therefore, instead of the retailer packaging and shipping the goods, the customer’s order details are sent to a supplier – either a manufacturer, wholesaler, or a second retailer.
Let’s take a closer look at how dropshipping works…
How does dropshipping work?
- Choose a supplier to work with and list the products on your website
- Customer buys something from your store
- You pass the order onto your supplier
- Your supplier delivers product to the client’s home
What is a dropshipping business?
A dropshipping business is a (usually online e-commerce) business which sells items to the customer but does not ship the items to them. Instead, they pass the order directly to a supplier who then handles packaging and shipment.
Is dropshipping profitable?
How profitable dropshipping is differs from business to business. Profits come from the margin between wholesale and resale price. However, things like return costs, discounts, and problems can eat into this profit. It’s up to you to find and optimise your dropshipping business’ profit-making potential.
Is dropshipping legal?
Yes, dropshipping is legal. It’s just a method of outsourcing order fulfillment to a third party supplier, using a supply chain to manage packaging and shipping. With that in mind though, there are a few legal areas you’ll need to be aware of before you start your dropshipping business.
- Local tax
- Import fees?
- If the supplier ships counterfeit or damaged goods, you will be responsible. It’s up to you to apologise to the customer and put things right.
How do I start a dropshipping business?
Spend time researching everything that goes into a dropshipping business so that you know what to expect beforehand. If you just jump straight in, you’re likely to run into any number of problems.
In the UK, you’ll need to register as a sole trader or limited company.
Is dropshipping worth it? (in 2020)
Dropshipping is an increasingly competitive space. According to Google Trends, searches have risen over the last 5 years. And if you take a look at Reddit, you’ll find 47.2k members in the r/dropship.
Ultimately, the answer to the question “is dropshipping worth it?” is completely subjective. It’s definitely down to the individual and their circumstances. Dropshipping isn’t a way to get-rich-quick. Instead, it takes time, effort, a budget, and a substantial capacity for customer service.
Dropshipping predictions for 2020
Around 2016, Facebook ads were a great way to market your dropshipping company due to fairly low competition and it being a cheaper platform than Google Ads. However, now people have realised that and moved over to using Facebook Ads. As competition is increasing, so too are ad costs. Therefore, margins are getting lower. The prediction is that this trend will continue throughout 2020.
Another prediction is that we’ll move further away from the ‘traditional’ dropshipping model and more towards the ‘easier’ AliExpress style. A one stop shop for suppliers, dropshippers, and customers.
The pros and cons of dropshipping
The pros of dropshipping:
- You don’t have to buy or store inventory.
- Low start up costs.
- Low overheads.
- Easily add to or change the items you sell.
The cons of dropshipping:
- Lack of control over (quality, trust, pricing, returns).
- Depending on your supplier, keeping an eye on inventory levels can be near impossible.
- Customer service and communication with suppliers can be time-consuming.
Things you need to start a dropshipping business
- Business plan
- Website/Domain/Platform to sell from
- A way to order stock and manage inventory on site
- Supplier or place to source stock from
- Payment options
- Email system
The list above isn’t exhaustive, these are just some of the bigger things you’ll need to start a dropshipping business. For now though, let’s look at some of the bullet points above in a bit more detail:
Before you find your niche, it’s worth asking: what is a niche? This is a specific theme or market segment that you choose to focus on. This will help you decide on what type of products to sell and who to target with your marketing efforts.
The niche you select determines how well you will do with your drop shipping business ideas. So, go with a niche that has low competition and high search dropshipping products volume Find your niche and you’ve got a good starting point in terms of knowing what you want to achieve with your business.
Some dropshippers choose to switch the niche of their shop based on current trends. For example, looking at Google Trends data over the last 5 years, 2017 was a peak time for the term ‘fidget spinner’ in UK search. When popularity dropped, many dropshippers would have chosen to find a new niche, based on rising trends.
Dropshipping isn’t just a weekend hobby. It can be pretty full on in terms of both setting up and day-to-day running. While you’re not having to spend time manufacturing or shipping your product,
A brand isn’t just a logo. It’s everything that makes up your entire business: including the look, feel, experience, voice, service and name. Obviously this can evolve over time, but it makes sense to walk before you run in terms of creating the brand that you want potential customers to see.
Depending on your skillset or budget, your initial branding exercise can be as shallow or in depth as you like. Approach an agency, commission someone on Fiverr, or do it yourself. There’s lots of information available online and in books on branding for beginners if it’s not something you’ve done before but want to find out more about. As a start though, here are some of the things you’ll need to think about and do, as well as assets you’ll need to create:
- What is your company’s mission?
- What are the benefits and features of your products?
- What are the key messages you want to communicate about your brand?
- What do you want potential customers to think about when they think of your business?
- Create a voice that you think reflects your brand well. Is your brand chatty and conversational or knowledgable and formal?
- Design templates and create brand guidelines for your site and marketing materials. This will help you stay consistent in your appearance which will help to build trust through multi-channel marketing.
- Name, logo, and tagline. If your business had to be summed up this concisely, what would that look like?
If you choose to operate as a Sole Trader (UK), it’s worth knowing that there is no official register of Sole Trader business names. To register a business name in the UK, you’ll either need to form a limited company or get a trade mark. See the Gov site for more information on setting up as a Sole Trader.
Website/Domain/Platform to sell from
You need somewhere to show your shop off. An ecommerce website is the answer. But don’t worry if you don’t know anything about building a website – you don’t need to start from scratch. There are a number of website builders you can choose from to set up your store cheaply, quickly and without needing to have any knowledge of coding. One of the most popular is Shopify.
One of the most important things you’ll need to do is optimise your site to encourage sales. Each conversion point in the user journey needs to be looked at to make sure the buying process from start to finish is as smooth as possible
A way to order stock and manage inventory on site
When it comes to listing items on your site, you could do it manually; writing, adding, and updating the product descriptions as and when your supplier has the stock. But this is time-consuming and difficult to keep track of. Especially if your supplier doesn’t keep their stock levels up to date. Or you could use Orbelo to do it for you. It integrates Shopify with AliExpress, meaning that you can find products for your store, add them to your site, and organise shipping quickly and seamlessly. There are other products you could use but Orbelo is the current market leader and streamlines a lot of processes.
Orbelo also offers advice on what products to sell and what prices to put on them, based on their other customers. It’s up to you whether or not you take the suggestions onboard but it’s handy info to have!
A supplier or place to source stock from
There are three options of supplier when it comes to dropshipping:
As their name suggests, manufacturers make products. Manufacturers usually sell in bulk to wholesalers and retailers, rather than selling directly to the public. Choosing a manufacturer as your supplier comes with positives and negatives of its own:
|It’s the cheapest way to bulk buy items.||Usually a minimum order requirement.|
|You’ll have the biggest margin for profit potential.||You may need to stock and then ship the items out to the customer yourself.|
A wholesaler is a company that buys goods in bulk from a manufacturer before marking the prices up slightly and then reselling. They usually sell the goods on in large quantities at what are still relatively low prices (especially when compared to the final retail price. Again, here are some pros and cons:
|Tend to operate within a niche so it’s easier to find a suitable fit for your business.||Most wholesalers choose to sell to retailers rather than directly to the public.|
|Generally a lower minimum order requirement (than from a manufacturer).|
A retailer is anyone who sells products directly to the public at a markup. If you run a business that fulfills your orders via dropshipping suppliers, you’re a retailer.
There are lots of ways to find a supplier:
- Google dropshipping suppliers.
If you choose to do this, don’t just rely on the first page of results. Wholesalers, for example, won’t necessarily be optimised for online searches and you therefore may need to click a few pages deep.The most popular dropshipping supplier at the moment is AliExpress.
- Use a supplier directory.
There may be a small charge to access this data, depending on the directory. However, using a directory such as Wholesale Central or SaleHoo could save you a lot of time in searching. Alternatively, if you know what your niche is and what you want to sell, you could call a manufacturer and ask for a list of wholesale distributors they use.
- Check out the competition.
If you know of an online shop which consistently receives good reviews and is a dropshipping company, you could try to find out who their supplier is. One way to do this would be to order something from the shop and then say you want to return it. You’ll most likely be sent the details of the wholesaler (such as name and address).
- Attend a trade show
This offers you a one-stop opportunity to research potential products and make contacts at major suppliers. It’s a great way to get to know suppliers in your identified niche.
Be prepared to have to iron out some details when it comes to finding the perfect fit for your dropshipping business. Do your research beforehand, but don’t be afraid if it doesn’t work out the first time. The chances are that the first supplier you choose won’t be the one you stay with for the lifetime of your business. Trial and error is ok.
This is especially true when it comes to getting the right price. Don’t expect to be able to negotiate on price at the start of your relationship. You can approach the supplier to ask, but they may not be willing at such an early stage. In the beginning, it’s more important to find a good supplier. The best price can be found later on.
But how can you tell if you’re picking a good supplier? There are a few signs to look out for when it comes to choosing a good dropshipping supplier:
Good suppliers should have sales reps that you can easily contact if you have any questions. These reps should know their stuff when it comes to their industry and products.
This is an important point in terms of shipping times, but location doesn’t necessarily indicate whether a supplier is good or bad. For example, AliExpress, which is one of the most popular suppliers based on international search activity, is located in China and deliveries can take up to 60 days to arrive to the UK.
- Good support
Something that keeps coming up again and again as a key element of a successful dropshipping business is the need for clear communication. A good supplier should provide you with a dedicated contact who is responsible for taking care of you and any issues you have.
- Tech knowhow
This isn’t a make-or-break point but a technology-woke supplier is something you’ll find handy. For example, working with a supplier whose website has things like a detailed product catalogue and real-time inventory so you know what items are in or out of stock will make running your business much easier.
- Take orders via email
Believe it or not, some suppliers are old school and won’t take orders through email. Manually placing orders via their order system or having to call in each individual order will be extremely time-consuming. Dropshipping already has the potential to take up a lot of your time as it is, so try to save time where you can and choose a supplier you can contact via email.
Along with communication, organisation is a key part of running a successful dropshipping company. Unfortunately, you won’t really be able to gauge how good a potential supplier is until you’ve actually used it. Some will be amazingly efficient while others will mess up every other order.
How will customers pay for their purchases? PayPal is an internationally-recognised online payment system. You could also choose to let customers pay via debit or credit card. There may be fees associated with individual payment options, so do your research first to find the right fit for your business.
Communication is one of the most important parts of running a business. Especially a dropshipping business where there are so many different people involved. You’ll need to keep in touch with both suppliers and customers – sending and receiving order confirmations. G suite is a good choice for this as it’s cheap, easy, and accessible.
Running a dropshipping business
While running a drop shipping business can be fun and profitable, it can also bring some challenges. Because of the way dropshipping works, there are a lot of moving parts and people involved. The primary role of a dropshipper is communication. That’s what you’ll spend most of your time doing. Next, we’ll look at some of the potential issues you could face and some ways to fix them:
Things will probably go wrong
The sooner you accept this, the sooner you’ll be able to fix any mistakes that happen. So how do you do that?
To the customer, you are the business. Therefore, when there’s a mistake at the supplier’s end, you have to own it. Whilst sorting it out and making it up to the customer. The best way to do this is through clear and fast communication. If the customer is kept updated with issues to their order, they’re more likely to forgive a mix up or time delay.
However, because you’re not in control of orders in terms of dispatch, etc, it’s difficult for you to know when an issue will be rectified. Hopefully, when you were researching potential suppliers, you’ll have taken notice of their customer service, including things like how long it took them to reply to your messages.
The worry here is that you’ll be left out of pocket. However, just because you have to take responsibility for mistakes doesn’t mean you should have to pay for them. A reputable supplier will usually take care of any mistake it’s made, including paying for shipping costs to return items.
Managing inventory + suppliers
Suppliers can run out of items. And because you’re not in control (ie buying in and holding your own stock) it can be difficult to get around this. For this reason, it’s a good idea to work with more than one supplier. That way, if there’s a problem with stock levels, you may be able to find a replacement or suitable alternative.
However, managing inventory status across multiple suppliers can be very challenging. You’ll really need to keep your eye on the ball with this one.
Shipping and delivery issues
Knowing how much to charge for shipping is something a lot of dropshippers struggle with, especially in the early days of their business. It’s made even more complicated if you choose to use multiple suppliers. So how do you decide how much to charge? There are a few methods but one example is Flat rate shipping. This is where you charge the same rate for a delivery, regardless of its weight or size. You could also choose to offer free shipping across all orders, which would make things easier but the cost would have to be swallowed elsewhere in your business.
International shipping also comes with its own challenges. When you ship internationally, you’ll need to think about things like the different weight and length limitations imposed for different countries, additional charges from suppliers for processing international orders, and higher costs for shipping large or heavy items. So is it even worth it? Really, that’s up to you and what you’re comfortable offering within the margins you’re making on sales. For example, if you sell small items with higher margins, the increased market reach may mean that it makes sense for you to deal with the inconvenience and expense of offering international shipments.
The idea of fraudulent activity is enough to scare anyone. However, it shouldn’t put you off starting or running a dropshipping business. There are a few things you can look out for when it comes to spotting potentially fraudulent orders:
- Credit card fraud and security measures
Most fraudulent orders will contain two different addresses: one for billing and one for shipping. However, some legitimate orders do this too. Therefore, removing this option may mean you miss out on real orders while trying to avoid fraudulent ones. The AVS, or Address Verification System, is used to verify the address of a person claiming to own a credit card. It does this by checking that the billing address used matches the one held on file with the credit card company.Another credit card security feature is the CVV2 number which is the three-digit number found printed in the signature space on the back of most credit cards.Along with different addresses, a combination of things like different billing and shipping names, weird or unusual email addresses and pricey shipping methods such as expedited delivery can also be cause for investigation. If you suspect an order is fraudulent, ring the number included in the order details.
Riskified is a company offering fraud and chargeback prevention services. It can be a good idea to protect yourself and your shop in this way.
Responding to customer complaints and enquiries is where a lot of your time will be eaten up. And this can be extremely difficult if you’re running your dropshipping business alongside a traditional 9 to 5. Don’t underestimate how much time you’ll need to spend on customer service. Or the amount of work that is involved. Communication is key in dropshipping, so make sure you keep on top of things when it comes to speaking and listening to your customers.
The returns process
There’ll always be the chance of a customer wanting to return an item. It’s just part and parcel of the online sales world, unfortunately. Therefore, you’ll need to make sure you have a return policy available on your site. Research has found that 67% of shoppers check the returns page before making a purchase, so it’s a necessary addition to your site.
However, before you jump into writing one, you’ll need to check out the policies of each of your suppliers. Your terms will be somewhat dictated by theirs. There’s no point saying that you’ll accept returns within 30 days if your supplier will only accept items returned in 10. That doesn’t give you enough time to sort things out. Always make sure you leave enough time to accommodate the strictest supplier policy.
5 things to include in your return policy:
- The length of time a customer has to request a return. Remember, this will depend on your suppliers’ returns policy.
- Exempt items. Items like underwear are usually exempt from most stores’ returns policies for hygiene reasons.
- Who pays for returns? It’s a good opportunity to give a little something extra to the customer and offer free returns. 95% of shoppers say that a smooth return experience would encourage them to buy from a business again.
- Do you offer exchanges for returned items? And if so, is that only on defective products?
- If you choose to ship internationally, are all countries eligible for returns?
5 step return process:
- A customer contacts you to say they’re unhappy with the item they have received and would like to request a return.
- If you’re happy with their request, contact your supplier and ask for a Return Merchandise Authorisation (RMA) number. Plus a refund and/or replacement if this is your policy. See the next step to find out a bit more.
- Then it depends on the individual shop. You can either ask the customer to send the merchandise back to you, back to your supplier, or you can choose to let them keep the item. This may be cheaper and more cost-effective than you having to pay for return shipping.However, let’s say that you ask the customer to return the item directly to your supplier. In this case, it would be a good idea to suggest that the customer tracks the return. That way, they’ll be able to keep an eye on how things are progressing.
- Once the supplier has decided they’re happy to process the refund, they’ll refund you the wholesale price of the item.
- You then refund the customer for the full price of the item. Throughout this process, keep the customer updated as much as possible. Keeping your customer happy, especially if they’ve requested a return/refund is one of your key duties as a business owner.There are extras you can offer the customer in order to change a ‘bad’ experience into a positive. Hopefully encouraging them to buy from you again in the future. For example, you could offer the customer a free upgrade of a similar item or store credit. Obviously you have to be mindful of your margins, but a little customer care can go a long way.
The area of returns and refunds will potentially be a major part of your dropshipping experience. So it’s a good idea to have everything in place before you open your shop. That way, you won’t be caught out when someone asks for a refund/return and you’ll know what to do. In an ideal world, every sale would run smoothly and no customer would ever ask for a refund. In an almost ideal world, the return process would run something like the 5 step section we just looked at above.
However, this isn’t always the case and there are things that can complicate the process:
Damaged or defective items
If this damage can be shown beyond reasonable doubt to be an issue caused either by manufacturing or shipping, the customer is well within their rights to request (and be granted) a refund or replacement. Most dropshipping suppliers won’t cover return postage for defective items. However, you should ALWAYS compensate the customer for the return shipping fees for defective items. It’s a cost you’ll have to swallow on individual sales, but you should be able to average things out across your entire pricing system.
Related to this, it might make more sense to provide a refund or replacement item without the customer having to return the original item. This can be a great way to offer refunds as part of your policy, providing great customer service, without having to sort out deliveries. There are a number of advantages to doing this:
You’ll stand out from the crowd
Most of the time, if a customer wants to return a non-defective item, a company will expect the buyer to pay the costs of return shipping. Therefore, if you’re willing to offer free returns on everything, you’ll definitely stand out. How often do companies just ship out a new product without asking for the old one back? The answer is: pretty much almost never! You’ll score some major customer service points and maybe even some return custom. On top of that, the customer will get the new item much faster than if they’d had to wait for the old one to reach the supplier before the new one could be shipped back out to them.
However, this has the potential to get expensive, so please make sure this is a viable option for you and your business if it’s something you’re interested in doing.
Ways to increase your chance of dropshipping success
There are lots of ways to increase your chance of dropshipping success, aside from picking the right supplier and deciding on your returns policy. We’ll look at a few now:
Thoroughly research your niche to make sure you’re picking an area that has growth potential. Or at least choose something you have an interest in or prior knowledge of. Once you’ve chosen your niche, give it a chance. Don’t just start adding random adding items, unless you’re looking to pivot. Otherwise, your shop will just be an Aladdin’s cave of anything.
Identify your target audience. This will be determined by your niche to some degree, but you need to know who you’re talking to. That way, you can make sure that you’re delivering your message in a way that will appeal to them. And more importantly, encourage them to visit and buy from your site over another that sells the same or similar products.
Build around your core site to increase its visibility. You can do this in a few different ways, including: optimising your content for search engines (SEO), running paid ads, targeting potential customers via social routes, and beefing up your content offering.
A content plan is one of the best ways you can add value to your dropshipping business. Afterall: ‘content is King’, as the saying goes. And the term ‘content’ covers everything from blogs posts to video clips. A good online content strategy will boost your site’s visibility meaning more eyes on your business and hopefully more sales! Think outside the box a bit too, when it comes to content. Instead of just copying and pasting an item’s photographs and details from the supplier’s site, why not buy one for yourself and create original content? Produce an unboxing video, film yourself giving a review, use the product in the real world, do a Q&A vid, the possibilities are endless! As long as your content is useful to the visitor and relevant to their needs, it’ll have a positive impact on your business. Think about the different places your content can be used, too. If you have longish videos onsite, you could repackage these to be suitable for social platforms.
With the storing and using of personal data comes great responsibility. Please look into GDPR (General Data Protection Regulations) and make sure you stick to the guidelines. If you’re outside of the EU, check your local data protection laws.
Is dropshipping worth it?
The short answer is that it can be. Depending on your niche, success in targeting an audience, and how well your products sell, dropshipping can be a great way to earn money.