There’s talk in the e-commerce world that dropshipping is no longer profitable and that its heyday is far in the past. However, it’s also easy to find business owners who say the complete opposite.
So, what’s the truth? Is drop shipping worth it in 2020 or should you opt for a different business model?
Dropshipping: How It Works
Before we can determine if dropshipping is worth it, you need to understand what drop shipping is.
With drop shipping, you list inventory to your ecommerce store without ever physically owning any of the products. When a buyer makes a purchase, you order the products from a third-party supplier who sends the item to the buyer. This means that you never have to store or ship any products yourself. Instead, you connect buyers with suppliers — and your customers are often completely unaware of this fact.
The drop selling business model is not just for startups and small companies: large corporations sometimes use drop shipping to scale their business. Both Amazon and Zappos used drop shipping in the past to fulfill orders and Wayfair still uses dropshipping for the majority of its sales to minimize the need for warehouses.
Pros and Cons of Dropshipping
To determine if it’s the right option for you, a good place to start is looking at dropshipping pros and cons.
Pro: E-commerce Is Huge Right Now
The trend toward buying online has been growing rapidly over the last few years. During the pandemic, people have even been purchasing items that they’d normally only buy in stores, simply to avoid going out.
Con: It’s Difficult to Develop Your Own Brand
When you sell products your customers love, you receive almost none of the credit. After all, the brand belongs to another company. This lack of your own brand will make it more difficult to establish loyalty and gain long-term customers.
Pro: It’s Inexpensive to Start a Dropshipping Business
You can start a dropshipping business for as little as it costs to set up an online store. This is much less than running a brick-and-mortar store, as you don’t need a physical location or any employees (not at first, anyway). It’s also cheaper than running an online business with your own merchandise, as there’s no need to buy or store inventory nor develop new products.
Con: Profit Margins Are Low
With dropshipping, you see far lower profits than with traditional e-commerce. Typically, you can expect to earn between 10 to 30 percent per product, but this does depend on what you’re selling. Large items as well as luxury products like perfume and jewelry can have much higher profit margins — even up to as much as 60 percent.
Pro: Your Business Is Scalable
Unlike most other types of businesses, there is no limit to how large you can grow a dropshipping company. Of course, it could eventually become too large for you to handle alone, but you can always contract a virtual assistant (or two) or hire a part-time employee.
Con: You Need to Make a Lot of Sales
For dropshipping to be your main source of revenue, you’ll need to make a large number of sales every week. The exact number of sales will depend on how much profit you’re making on every item, how much you spend on shipping and marketing, and how much you want to earn.
Pro: Managing a Dropshipping Business Is Simple
A lack of inventory management simplifies business processes considerably. You rely on your suppliers to do all the work related to managing stock, maintaining items, and shipping products. Your job is to simply gain sales.
Con: You Lack Control Over Merchandise
As you never physically have products, there’s always a risk that the seller could send an item in poor condition or even run out of stock after you’ve received an order. It’s your reputation on the line if the customer complains or demands a refund.
To avoid such problems, it’s important to work only with suppliers you can trust. Plus, you may like to source the same products to multiple manufacturers to avoid running out of stock — or, once your business is larger, you can even negotiate to become the exclusive seller of certain products.
Dropshipping: How to Make Money
How profitable is drop shipping in 2020? That all depends on how well you run your business. Let’s take a look at how you can make money.
Know Why Dropshipping Fails
First, it’s useful to know what factors have led some drop shipping businesses to see a decrease in profits — or even to fail entirely. These are:
- Longer shipping times
- Higher prices of quality goods
- More lower-quality items hitting the market
- No customer support from the drop shipper
- A delay in making refunds
To run a profitable business, you need to start by overcoming these issues. This involves two things.
First, you need to provide an excellent service to your customers, treating them just the same as if you were selling to them directly. Set up lines of communication that allow your customers to ask questions, and process refunds in a timely manner. Dropshipping businesses that put their customers first are the ones that survive in a competitive market.
Second, find good suppliers. Sellers should be able to provide you with merchandise at a price you can afford. They also must be able to commit to fast shipping times and consistent quality. Otherwise, you risk gaining a bad reputation, meaning fewer customers will visit your store. Plus, if you have too many refunds, you’ll lose credibility with payment gateways.
Determine Your Motive for Dropshipping
You also need to consider why you are interested in starting a drop shipping business. If you just want to turn a fast profit, you’re unlikely to see long-term success. Like any get-rich-quick scheme, your business venture will undoubtedly be a flop.
However, dropshipping can be a good option when you treat it like a real business. For instance, you can use dropshipping to provide your customers with a wider variety of products or take advantage of your marketing skills.
Research What Products to Sell
Choosing the right products will make a big difference to your profits. For instance, you should find items that are likely to sell in large quantities. This involves researching the market and finding out what’s trending. Avoid products that are likely to be a short-lived fad, though — you don’t want to be constantly updating your website.
It’s best to opt for products that don’t have intrinsic value. If customers are able to comparison shop and find the same product at a lower price, it’s unlikely they’ll purchase from you. This means electronics tend to be unsuitable for dropshipping.
A few more factors to take into consideration when researching products include:
- Customization — You can charge a premium when customers are able to personalize their orders.
- Consumables — To gain repeat business, consumables are a top choice.
- Suitability for marketing — Think about how well products will lend themselves to content and ads.
Set Suitable Prices
The last thing you need to do to make sure your business will be profitable is set appropriate prices. You need to be charging a low enough amount that target customers will find your merchandise appealing. At the same time, don’t go so low that you’ll make almost no profit when you add in other expenses. Ideally, each item will average around $50 — otherwise, you’ll make very little on each sale.
How to Start Dropshipping
All that’s left now is to learn how to start drop shipping!
Step 1: Create a Store
Several platforms allow you to set up a store with ease. Top options are Shopify, Wix, BigCommerce, and WooCommerce, all of which will provide you with plenty of support. They vary quite a bit in cost — the amount you pay reflects how much of the process the platform will handle for you.
Even if you choose a platform where you can set up a store for free, it’s worthwhile investing at least a small amount. You should pay for a domain name (rather than using a free one) and consider contracting a professional to design your store.
Another option is to sell on Amazon. Bear in mind, though that dropshipping through Amazon is a little more complicated. It’s important that you comply with Amazon’s dropshipping policy to avoid being banned from the platform.
Step 2: Choose a Niche
Even though you lack a brand, it’s necessary to specialize in a particular sector. This will make your store memorable and you’ll be able to better market your business. Avoid too narrow a niche, as this could make it challenging to scale your business. Instead, choose something where you can easily upsell and cross-sell to customers.
Step 3: Source Your Products
It’s easier than ever before to find products, thanks to dropshipping directories. AliExpress is the best known, but there are many others: Sunrise Wholesale, Doba, Oberlo, for instance. Each has a distinct range of products and additional features to offer dropshipping business owners. Alternatively, you can find suppliers directly at wholesale trade shows and similar events.
No matter where you choose to source your products, be on the alert for red flags that suggest the wholesaler is a scam. You should never pay a subscription or any other type of regular fee to access the supplier’s products. Furthermore, the supplier should not be selling products directly to consumers at wholesale prices.
If you’re unsure if you’re dealing with a legitimate wholesaler, contact the manufacturer of the products. Ask for a list of the manufacturer’s wholesale distributors to check you’ll be receiving genuine products.
Finally, you should assess wholesalers before you decide to work with them. Do this by placing a test order. This will allow you to evaluate shipping time, packaging, and customer service.
Step 4: Market Your Business
Hardly anyone is going to just stumble across your store — you need to do at least some marketing. At the beginning, this will likely be your greatest investment, although it may be an investment of time and effort rather than of money.
As you have plenty of options for marketing, make sure you spend time researching them all and learning about best practices. Top choices include social media (organic posts and ads), search engine marketing, and content marketing.
So, is dropshipping worth it? If you create a solid business plan, it can be. It’s important to note that, almost from its inception, there have been rumors that dropshipping is dead. In actual fact, this business model is as strong as ever.
If you will dedicate the time and effort necessary to run a proper dropshipping business and provide customers with a quality service, you can be successful. However, if you want to dedicate just a few hours to setting up a store and then automating all the processes, don’t expect to see any long-term gains.