What is Dropshipping?

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Posted by The Savvy Retiree on August 19, 2020 in Make Money, Online Income, Online Income Opportunities, Portable Incomes

Dropshipping is a business model that allows you to own and operate an online store but without having to buy or store inventory.

The process works like this: A customer goes to your online store (website), orders a product at the retail price, and you take the payment. You then order the product from your supplier at the wholesale price, and have the supplier ship it directly to your customer. Your profit is the difference between the retail price you charged the customer and the wholesale price you paid your supplier.

To develop a dropshipping business, you need to establish a relationship with one or more suppliers. As part of this dropshipping arrangement, your supplier will “white label” your shipments, which means that the packaging and any materials inside the box, like a receipt, will have your name and logo on them. This way it appears to the customer that the goods came directly from you, when in fact they were shipped by your supplier. 

The advantage of dropshipping is that it reduces your costs considerably. If you were to start a traditional online retail business, you’d have to set up a store, buy inventory at a wholesale price, and store it in a warehouse or your garage until it sells. Once a customer buys an item, you’d then need to handle shipping. All of this means increased startup and operating costs. 

However, as a dropshipping retailer, you set up your online store, make a deal with a dropshipping supplier, and promote your website online to attract customers. Then you simply process orders from your customers and send them to your supplier, thus eliminating the costs and hassle of both building up inventory and managing the shipping process.

While dropshipping is now mostly associated with online retail, it’s important to note that this business model has been around for a long time. In fact, it’s one of the oldest business models in the U.S. and remains common beyond the online world. 

Think of late-night shopping ads on channels like QVC. They are essentially based on a dropshipping model. When a customer watching a shopping channel sees a kitchen gadget they cannot live without, they call the 1-800 number, give their credit card information, and a week later they have that item in their home. 

In this example, the TV channel is operating in much the same way as a dropshipping store. It doesn’t keep hundreds of these products on set. Instead, when you call in, the phone operators take your name, address, and payment details, and then send your address to a third-party warehouse (their supplier), which packs and ships the order, with the shopping channel’s label on it.

What Do You Need to Start a Dropshipping Business?

The first thing to note about dropshipping is that it’s a business and should be treated as such. 

True, the dropshipping model eliminates many of the barriers to entry present in traditional retail, such as the need for a large amount of startup capital. This genuinely means it’s possible for anyone to start their own dropshipping business. Just don’t believe the hype about spending 10 minutes a day managing the business from your sofa, at least not in the beginning. It’s possible to get to that point in time. But initially, it takes commitment, energy, and research to set up and operate a new dropshipping business. For this reason, you’ll need a good computer, a stable internet connection, and a comfortable workspace.

Running your business will be frustrating if you are trying to work with an old, slow computer with a 12-inch monitor. Get yourself a decent laptop or desktop. A second monitor is a great idea and will really increase your productivity. Make sure you have a comfortable place to work where you will not be interrupted. 

The good news is that these are essentially all of the physical tools you need to run a dropshipping store. For the business itself, you’ll need to pick the products you want to sell, find suppliers, and buy or build a website. You’ll also need to get some additional software tools to use in your business, such as advertising and sales apps. If this sounds technically complex, don’t worry, it isn’t. Online platforms such as Shopify make the process easy to learn and intuitive. I’ll address each of these points in more detail below.

Who Can Start a Dropshipping Business?

Essentially anyone. Successful dropshippers range in ages from 18 to 75+. The point is, you do not have to be a tech guru to earn through dropshipping. If you can send an email, post on Facebook, write a document in Word, and review a basic Excel spreadsheet, you have all the computer skills required to start your own dropshipping business. 

From a business standpoint, the process is also simple to understand and operate. Once you choose your niche and set up the website, your main responsibilities are to attract customers to your store and ensure the smooth operation of the business by processing orders in a timely manner and providing a quality customer experience. 

Quality customer service is key. You can stand apart from your competitors by ensuring your website has excellent product information and by responding to customer queries and any complaints in a timely, approachable manner. (In time, it’s also possible to outsource your customer service work cheaply.)

For these reasons, the success of your business will be in part determined by how much time you put into it. A dropshipping business can be part-time or full-time, depending on your situation and your income goals. If you’re looking to earn a little extra money, grow your nest egg, and build toward a full-time income replacement, expect to put in 15 to 20 hours a week when you’re starting out.

How Do You Choose a Dropshipping Niche?

A niche is a subset of a market. For example, clothing is a market, men’s jeans are a niche. Generally speaking, the more defined and narrow your niche is, the easier it is to succeed in dropshipping.

While not essential by any means, it can also help to choose something you are passionate about. However, don’t choose something just because you’re interested in it. Robust product demand and profitability are more important than passion. A basic rule of thumb is that you want to strive for 30% to 50% profit margins with your products. 

Whether you’re passionate or not about the products you sell, you need to learn about them. If you choose women’s purses as your niche and you receive an email from a customer asking if the shoulder bag you have on your website is a better choice for them than the crossbody bag, you need to know how to respond.

When looking for a niche, you want to find a product subcategory with robust or growing demand. In essence, you want to choose a product that is trending upward, rather than a fad. You do not want to build a business around a fad, at least not for your first dropshipping business. Later when you are an experienced dropshipper, you could quickly jump on fads and make some fast money, but you have to know exactly what you are doing.

There are two great websites for discovering product trends: Amazon and Wish. These sites give you a lot of data to work with. On Wish, you can input “trending” into the search bar to find popular products. This site even specifies sales numbers for a given item.

On Amazon, you can check the Amazon bestsellers list and theAmazon Trend Report. In the bestsellers list, you can look at every department in Amazon’s catalogue to see what items are in greatest demand. But remember, a niche is not a category, it is a subcategory. For example, under Amazon’s bestsellers list, there is the category Automotive. When you click on it, you see more defined niches, such as RV Parts & Accessories. Maybe you are an RV owner and it’s something you are passionate about. If so, then this could be a niche for you. If you look in this subcategory on Amazon’s bestsellers list, you get an idea of what people are buying in this niche.

You can do this on other sites as well. If you want to look at electronics, try Best Buy’s bestsellers list, or you can get more general ideas from Walmart’s bestsellers list. There are several things to be aware of when checking the results in these searches. First, only look at the generic results, not the sponsored ones. Next, when you’ve identified some interesting products, check out the customer comments. A large number of reviews indicates more sales and greater consumer engagement. 

There are also a number of online tools available to help you find a good product and verify its continuing popularity. Google Trends is an excellent resource for investigating the long-term viability of a product. To use this, first choose the geographic area you want to search, next enter your search term, and then select the length of time to go back. You can go back up to 15 years, though five years is probably enough. This will show you if the product’s search popularity is growing, declining, or has been steady over that period. 

If you think you’re honing in on a product, use Facebook, Instagram, and YouTube to further investigate its popularity by checking likes, views, shares, and use of its hashtag (#). If there is significant engagement around the product on social media, that’s a good sign.

For a free online tool to help you identify trending niches, check out Niche Scraper. Say, for instance, your niche is backpacks. You can use Niche Scraper to search for backpacks and see the items that are selling best. 

Spend some time on this aspect of creating your business. Do not decide on a niche too quickly. Your dropshipping business deserves a good niche. 

How Do You Choose the Right Products?

Once you have chosen your niche, you now need to spend some time choosing the right products. Selecting the right dropshipping goods is crucial. You want a website with a good selection of products, but do not go too wide. More products is not always better, as you may have to target a wider audience.

Let’s say, for example, you are a drone enthusiast, and decided on drones for your dropshipping niche. The prices of drones range anywhere from $30 to $5,000. So to target your audience and make converting store visits to sales easier, you should choose a specific price range, or a brand of drones.

You could have a dropshipping website related to starter drones, or one focusing on intermediate drones, or even specialize on a brand, and make your website just about DJI Spark Drones. Once we get into later sections about targeting your audience and SEO (search engine optimization), you will see why this is important.

Once you identify your niche and products, you need to find suppliers that sell your product, and at a price that allows you to compete in the marketplace. It is not always necessary to have the lowest price, but you do have to be competitive. So, go back and revisit the Amazon, Best Buy, and Walmart websites, or web retailers in the country where you are located or where you plan to sell. You want to check the pricing on the products you are interested in, find out how much you can buy them for from your supplier, and what your profit margin will be. A 30% to 50% profit margin is ideal, but 25% to 40% is acceptable on higher-ticket items.  

Let’s quickly look at profit margins. Back to your drone site, an average DJI drone sells for $500, so if you can buy this item for $375, you will make $125 per sale, which is a 25% profit margin. This is a solid business model.

Never commit to selling a product unless you are sure it has robust demand. This is a basic rule of economics. Always play around with Google Trends to fully assess the demand of your product. 

Important: The narrower your niche is, the less demand you will need, as it is easier getting a customer to your website when they search for a specific item rather than a general term.

What Technical Platform Should You Use? Shopify, Woocommerce, or Magento?

To start your dropshipping business, you will need a website. Don’t let that scare you, this is going to be easier than you think. There are companies online that specialize in this, offering drag-and-drop website creation tools specifically designed for your dropshipping business.

We will start with the most popular one, Shopify. This system is for beginners and advanced users alike. Shopify is an e-commerce platform that allows anyone to run an online store, take credit card payments from buyers, process and ship orders, and communicate with customers. For those of you who have never built a website, this is the system for you.  

Shopify is also relatively inexpensive, starting at $29 a month for the basic version, which is what you will need to start your dropshipping business. As your business grows, Shopify will grow alongside you with many add-ons available. In Shopify’s major markets, it can be integrated with payment processors and offers shipping discounts with major freight carriers. 

With Shopify, you do not need any technical knowledge and the platform is secure and reliable. With over 1,500 apps in its app store, you can also customize your site and its functionality in any way you desire, including custom reporting, social media connections, and more.

Woocommerce, which works in conjunction with WordPress, is another popular option for building dropshipping websites. You will need some technical experience and some knowledge of website design to use Woocommerce, however. The advantage is that, with Woocommerce and WordPress and their over 5,000 plugins, you can really make your store’s appearance and flexibility stand out. 

There is one big difference between Shopify and Woocommerce. With Woocommerce, you host the WordPress site on your own server, for as little as $10 a month, and you have full and permanent control over that website. With Shopify, the company is hosting your store on their server. Ultimately, though, Shopify is a billion-dollar company, so this isn’t really something you need to worry about.

A third option, again for those with some technical knowledge, is Magento. An open source project developed by Adobe, Magento also allows you to host your site on your own web server. Being open source, it is free to download and install. Magento also has a vast selection of add-ons, some free and some paid, that work well with the dropshipping business model. 

The decision between these three options should basically be determined by your technical knowledge. If you have more technical or programming experience, you may want to go with Woocommerce or Magento. Otherwise, stick with Shopify.

How Do You Brand Your Business?

When creating your dropshipping business, your goal should be to create a new brand for your company. That is why it is important to be narrow in your niche selection. Do not try to be another Amazon or Walmart, you will never be able to stand out.

For example, in the niche we spoke about before, RV Parts & Accessories, you could create a brand by naming your website Best RV Parts & Accessories, purchasing a similar domain name, and coming up with a great logo. Over time, your customers will start recognizing your name and logo and begin referring your brand to friends. Be careful to avoid using existing brand names in the title of your business. For instance, do not name your site Best Winnebago Parts & Accessories, as that is likely to get you into some legal difficulties.

Down the road, as your dropshipping site grows, you can incorporate marketing of your brand into your sales. You could have contests with winners receiving “swag” bags of your branded T-shirts, coffee cups, etc. For customers that order over a certain amount, you could offer free caps or T-shirts. Think about marketing here; everyone likes free stuff, and when that RVer is in the campgrounds this summer wearing your ball cap with your business name and logo on it, others will see it and you will end up with more customers.

Also, you want your name and logo to be consistent all over the internet, not just on your website, but on all your social media pages too. The key point here is that branding is important but it will take some time, so planning for it from the beginning is always best.

How Do You Find Suppliers?

Now that you have your niche, and have decided on the platform you are going to use for your dropshipping site, it is time to find suppliers for your products. 

There are a few important factors to look for in a supplier: price, warehouse location, shipping times, reliability of inventory, requirements to become a client, and product quality.

Of course you need good prices, so you can make the margins we discussed above. Depending on what country you are living in and targeting with your dropshipping business, you want to be able to offer your customers relatively fast shipping times, often one week or less for small- to medium-sized items, so your supplier needs to have a warehouse in that country or to be able to deliver in that timeframe. 

You need to choose a supplier that has good inventory levels. The worst thing that can happen is that your customer orders a product, pays you, and your supplier does not have it in stock. And you need to know what that supplier requires for you to become a client. Do they want you to have a tax ID, corporation status, business license, etc.?

Product quality, however, is the most important of these aforementioned factors. If you have been doing your research online about dropshipping, you have probably come across Alibaba, or AliExpress. This is a China-based online retail service with millions of dropshipping products, but until you are an experienced dropshipper, you should probably stay away from it. The products can be inferior, and shipping times average two weeks or more, which will not get you a profitable dropshipping business. Once you become a professional dropshipper, AliExpress can be a resource if you learn how to navigate it and find local vendors on the service selling quality products.

An important point to understand about dropshipping is that while you’ll be operating an online store, you’ll still, in all likelihood, be targeting customers in a limited geographic area. And the area you’re targeting will determine your suppliers. 

For example, if you are targeting the U.S., and your market is home décor, Koehler Home Décor offers a dropshipping program. In the pet market, Pet Store USA also does. Foot Wear US has a program as well. Dropshipping companies like these will offer you decent profits, reliable inventory, and quick shipping times. For more general research of numerous markets, you can start at Wholesale Central, a catalog of U.S.-based dropshipping suppliers. 

Also remember, while you’ll want to target your sales efforts at a particular market, that doesn’t mean you have to live there. There is nothing stopping you from living in France and running a U.S.-focused dropshipping business. 

The difficulty you may have with individual dropshipping suppliers is the application process. Many will need you to have a tax ID number, possibly corporation status, and an existing website with some products listed. Some may also restrict resellers to a specific country. 

Because many suppliers require you to have an existing website, it is important to first build out your online store and make it look and operate professionally. Then you should start adding items from vendors who don’t require pre-approval, and subsequently apply for vendor partnerships with the suppliers that require an existing website.

How Do You Market Your Dropshipping Business?

Ultimately, the success of your dropshipping business will be determined by your marketing. If no one finds your website, no one will buy anything. Just launching a website on the internet does not bring you sales. Millions of websites are launched every month, and depending on how competitive your niche is, it will take time for people to find you, so you will have to put some effort into marketing your website.

The first thing to do is set up your site with proper search engine optimization, or SEO. Taking a course on SEO can be very beneficial as you begin this journey. Udemy, an online teaching platform, is a great resource for this. It offers many SEO classes for less than $20, and just knowing the basics will help you a lot. It also provides many great SEO courses specifically for Shopify and WordPress that you can take after you learn the basics, to ensure your site is set up correctly. 

Once you have selected a name and domain name (always choose a proper .com address) for your dropshipping business, grab the same social media handles on Facebook, Instagram, and Twitter. (If the name you choose is already taken and prominent on social media, it’s best to pick another.) Once your business social media pages are set up, invite every friend you have to like them and ask them to share these pages too. The more likes and shares you begin with, the better. 

Apart from SEO and social media, creating content for your website is vital. Every website selling almost anything should have a blog. This is where being passionate about your niche comes into play. On your blog, start creating quality 500 to 1,200 word articles about your niche. 

In this keyword-rich content (you will learn about keywords in the SEO courses), you can promote your products or just write an informational post that gets readers to your website. Once readers are there, they tend to look around. Do not make all your blog posts, or for that matter Facebook or Instagram posts, just about selling your products. Make them also informative about your niche, educating your customers and future customers. 

If you just cannot get the writing juices flowing, hire some help. There is a great service called iWriter. There you can get decent content for as little as $10—depending on the word length you need—that you can then edit and clean up yourself and add your voice to. Try to select well-rated writers or else you could have problems with the usability of your content. In the iWriter platform you can browse writers by ratings, see what countries they are from, and add them to your favorites, so only they can request to write your articles.

Building an email list is one of the most important marketing tactics for your website. You want people to be able to opt in to a list so you can provide them with weekly promotions, information on new products, etc. With Shopify, you will have the email addresses of buyers and will be able to collect the email addresses of interested shoppers. With WordPress and Woocommerce, you can get a MailChimp account for free and integrate it into your website to collect the email addresses of shoppers and buyers.

The final method of marketing to talk about is paid advertising. Be careful here, as it can get expensive with no results if you do not know what you are doing. Again, search Udemy for Facebook advertising and Google ads courses, and learn more about this. Then set up a monthly budget, start small, maybe $50, and start driving some instant traffic to your website. With a small campaign and proper tracking methods, you will see what ads work best and then you can increase the budget for them.

Be smart with paid advertising, you can lose money here, but do not be scared to risk a little when you’re learning. All these paid advertising systems use maximum daily budgets, make sure you set them and stick to them.

Conclusion

For the past 15 years, I have been running at least one dropshipping website. At my peak I was operating six successful sites, all in different niches. When I started my first one, the concept of dropshipping was foreign to me, as I came from a traditional retail/wholesale business background. I had to wrap my head around this “having no inventory” thing.

With the cost of inventory and logistics for freight being removed from the business equation, I had doubts about who I could trust as a supplier. I thought that I would lose control of the business.

I soon found out there are great suppliers out there and building a relationship with them was easy. So my biggest lesson, and the advice I give to anyone getting into this field, is to find a great supplier with quality products.

As a semi-retired Canadian expat living in Panama, I have since met dropshippers of all ages and backgrounds—men and women, old and young, some part-time and some making large full-time incomes.  

Is dropshipping the right business for you? Well, you need to answer a few questions. Are you comfortable working in front of a computer? Are you ready to learn something new? Are you ready to work hard, for a select number of hours a week, until you make it a success? Do you honestly want to provide a good product at a fair price to your customer? If you answered yes to all of these questions, then it’s time for you to start your dropshipping adventure.

By Rod Taylor

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