What is Dropshipping?
Dropshipping is a retail business model where the shopkeeper sells products online without stocking the merchandise or shipping it to the buyer. Instead, the store owner focuses on marketing and passes on the orders received to the drop shipper. A dropshipping general store ships the products to the customer under the name of the shopkeeper. Being online, the customer never sees the shop and is not aware of who has actually shipped the products.
The drop shipper can be a manufacturer or wholesaler who sells at less than retail prices. The difference between this price and the price the shopkeeper charges to her or his customers is the profit of the shopkeeper.
For a dropshipping general store to be profitable, the shopkeeper has to ensure that she or he is actually dealing with a manufacturer of wholesaler, and not one of the many retailers posing as a wholesaler. You will not get wholesale prices from a retailer and will find it hard to make any profit if you buy from a retailer.
Once you have found a manufacturer or wholesaler, you have to check whether they are willing to ship in small quantities to individual buyers and whether they will do so under your business name.
How do you Find a Drop Shipper?
The last two paragraphs of the previous section would have highlighted a key issue. You will have to find someone who will:
- Ship small quantity orders to your customers under your name
- And charge you only wholesale prices so that you can make a profit by selling at retail prices
How do you find such drop shippers? Can you find them at all?
The good news is that you can find such drop shippers. While few manufacturers might be willing to ship in small quantities, many wholesalers are willing to do so to increase their business volumes. A dropshipping general store gets them orders through ecommerce digital marketing efforts without setting up a digital marketing department of their own!
That means you do digital marketing.
With these preliminaries, let us now see how you can find drop shippers. The following approach will work if you do it well:
- Register yourself as a proper retail business with business and tax IDs. Wholesalers might not reveal their wholesale prices until they are convinced that you are a genuine retailer.
- Decide what products you want to sell (see next section) and then contact manufacturers of those products to find out names and contact details of their wholesalers.
- Contact the wholesalers with your retailer credentials and find out whether they do drop shipping, i.e. ship small quantity orders under your name to your customers.
- You can also do a Google or other search to find wholesalers for selected products. In this case, don’t restrict your search to the top few pages. Good wholesalers might not be good digital marketers who can get their sites to the top of search engines. So continue searching into pages 50 and lower
- Or get access to an authoritative list of wholesalers or drop shippers. For example, you can check:
How do you Identify Genuine from the Rest?
Genuine drop shippers don’t charge their customers a monthly fee for doing business with them. If your “drop shipper” asks for such a payment, it could be a signal that they are not genuine.
Many retailers pose as drop shippers and try to enhance their income by charging monthly fees. If you work with them you could find yourself priced out of the market after paying them. Competition is intense in dropshipping and margins are low. Hence it is critically important to find genuine wholesalers who offer low prices to start your dropshipping general store business.
How to Decide on Products to Sell?
With the intense competition in the market, it is critical to find the right product to dropship. How do you find the right product?
- Existence of Demand: The product must be one in good enough demand to generate viable volumes for you. If you select a product that has few buyers, you are unlikely to generate margins that will recover your marketing and other costs.
- High Margins: In a competitive market, it is difficult to find products that can be sold at high margins. However, if you focus on the following, you might still be able to generate good margins:
- Lower priced accessories: Low prices and regular replacement needs could generate margins and volumes that lead to profits
- Hobbyist products: Hobbyists are usually willing to pay high prices for things they are passionate about but find difficult to get
- MAP products: MAP means Minimum Advertised Price. Some manufacturers insist that their products cannot be sold at prices below the MAP level. In such cases, competitors will not be able to reduce prices below that level and margins can be maintained
- Differentiate Your Offer: If a product needs a lot of support, you can add value to your offer by including the support along with the product. A detailed operations manual, installation and maintenance support and phone support might not be provided by all sellers. You can differentiate yourself by adding value in these and other forms. By selecting complex products that need support, you open up the opportunity for such differentiation
- Larger Volume Purchases: Thin margins per unit can be compensated by high volumes. High volumes are possible if the products are used by businesses, who tend to buy in bulk, and for items that are purchased repeatedly by the same customer, as in the case of supplies and accessories for the main product
If you select products by looking at factors like those above (instead of selecting them on the basis of your personal likes and dislikes) you can enhance the success potential of your dropshipping general store business.
While the dropshipping general store business model has several advantages, it also has several disadvantages. Unless you think through these and prepare yourself, you could find yourself in serious trouble. Let us take a look at some common issues:
- Lack of Control over Merchandise and Shipping: You depend on the drop-shipper for the quality of the merchandise and for the correct shipping of each order. If they make a mess of these, you will have to take responsibility and keep the customer happy. You can never put the blame on the drop shipper who is not in the picture as far as the customer is concerned
- Return Policies: in case the customer wants to return the goods, again, you will have to coordinate with the drop shipper in the background and facilitate the return to the customer’s satisfaction
- Controlling Operations: You might work with increasing numbers of drop shippers as your business grows. This will mean managing a lot of things to keep operations under control. You will have to route orders to the right drop shipper, keep a watch on items getting out-of-stock, and monitor product quality, correct shipment, returns and any customer complaints. Unless a proper system is in place to attend to each issue, you could find yourself in a complete mess
- Compliance with Government Regulations: In addition to standard business and tax regulations, you will also need to comply with things like customer data privacy and Payment Card Industry (PCI) requirements. Get a clear idea of what you have to comply with and how to meet the requirements efficiently and effectively
- Leading Your Business to Success: While attending to the routines above, you also have to work on making your business a success. This would depend primarily on the value you add and the effectiveness of your marketing efforts. We look at success factors in more detail in the next section
- Other Issues: There are also issues like computing and recovering shipping costs, complexities of international shipments and dealing with credit card chargebacks and order frauds. Do the research and prepare for these
Dropshipping general store is easy to start and offers many advantages such as lowered business risks. This has led to a huge number of entrepreneurs entering this industry. You will have to find ways to compete successfully through:
- A great Website: Create a website that showcases your products to great effect, and makes it easy for buyers to find the product they want, make the purchase, pay for it and get support. You can create such sites using platforms like the following:
- Website Promotion: Get the website in front of prospective customers using comparatively inexpensive options such as social media and ecommerce SEO. Some helpful resources include:
- Value Addition: As mentioned earlier, you have to find ways to add value to compete in the competitive market. Help your buyers benefit most from their purchases by providing clear information, guidance and support
- Specialize in a Niche: Value addition becomes practical when you specialize in a niche so that you can learn everything about the problems customers face in that niche, and help them solve these
- Build Your Reputation: Create a great image among your customers through excellent products and support. Keep an eye on what they are saying about you. Be ready to forego some immediate profit to keep customers happy
Dropshipping General Store Business: Summary
There are many advantages of the dropshipping business model such as low investment, lower risk, and less hassle in managing operations. You don’t need a warehouse or inventory. You do not face the prospect of a big financial loss if the product is not accepted by the market. And you don’t have to bother about packing and shipping thousands of orders.
On the other hand, you will be operating in an intensely competitive business with low margins. You will also have to answer to your customers for mistakes that the drop shipper makes.
However, if you can add value in some form to the customer so that your offer is differentiated from competitors’ offers, and can do a great job of marketing, you could make your business a success. Specialization in a niche is a great way to achieve differentiation and effective marketing.