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Dropshipping is in no way a new concept. It is dated back to 2005 when it was primarily based in the USA which later gained popularity in China and further globally.

Dropshipping takes care of all the hassle and hard work you face and provides you the best platform to work as a “middleman”, to selling your products to the public without actually holding any stock. So, what is Dropshipping?

Dropshipping

Dropshipping is a method by which a seller sells products to the public, without actually holding any stock or product.

Instead, transfers the details of the order directly to the supplier, manufacturer or any wholesaler, who then ships the goods directly to the customer. 

The supplier takes the entire responsibility of packaging, shipping, payment process, and delivery. You never see the product nor handle it, and you don’t need to handle the payment process also.

So where do you get the profit? You get paid based upon the difference between the price that the supplies make for their product and the price you charge form the customers.

While some suppliers will allow you to process payments and carry out the shipment responsibilities as well; however, utilizing these choices may diminish the purpose of choosing to run your business through dropshipping.

Why Dropshipping over Normal E-commerce Business?

Operating Margins– The operating margins is the ratio between a company’s pricing and operating efficiency. It is the measurement of the company’s revenue left over after paying for different costs of production. 

After using dropshipping, the variable costs of the company is always going to lower because you don’t have the burden to carry or shipping the product.

Operational Logistics- If you are running a business through dropshipping, it doesn’t require you to either store or ship any product as this becomes the sole responsibility of the supplier/manufacturer.

This gives you the freedom to run your business from anywhere in the world.

Operational Costs- If you run a traditional e-commerce business, you need to have a warehouse, procurement of goods for future demand, maintenance of the warehouse, payment of staff for business-related operations, handling customer service, etc.

In comparison to the dropshipping method, the cost of running a business becomes limited and easy where you need to receive the customer’s request and further pass on to the supplier, who executes the entire process from packaging to delivery.

Profit Rate– From an operational stand of view, dropshipping looks attractive, and much easier to increase profitability.

This is because the profit margins are higher when you purchase a product in bulk from the overseas supplier and sell them at a higher cost to the customer.

Barriers- High startup costs at least 500$ becomes an obstacle for the new competitors to enter this business.

However, a company spending 500$ for dropshipping is a lot easier than spending 10,000$ that uses the traditional method of shipment of its stock. 

Pros and Cons in Dropshipping

Dropshipping does have several pros and cons to it and you need to understand this before you get started to get involved in a business.

Understand the following pros and cons that will help you plan the best choice for your business.

Pros

Less Capital– Without any doubt, this is the single biggest advantage of dropshipping. You can launch your e-commerce store without the need to have a huge amount of capital to invest in building your stock.

The traditional business requires a person to have a warehouse, inventory that dropshipping eliminates by removing this obstacle.

With dropshipping, there is no need to make any advance purchases to build your stock for the upcoming orders from customers as you do not need to store anything with you.

There are a few websites like Shopify, Woocommerce, and Magento, that provide entrepreneurs an easy platform to start an e-commerce business. 

Go Easy

It is no longer required to physically handle products when you consider dropshipping. When you consider dropshipping, you no longer need to consider-

  • Purchasing, renting or managing warehouse space
  • Packing orders and shipping them     
  • Tracking your directory for accounting
  • Handling returned defective items for replacement/refund
  • Handling inbound shipments
  • Ordering products to maintain your inventory.

No Overhead Expenses

The exclusion of a need for you to rent or buy a storage space or buy in stock brings you an advantage of minimal expenditure. Many people run their dropshipping business from their homes using nothing me than a laptop or computer which hardly involves an overhead cost of 70$ to 80$.      

As your business grows larger so does your overhead expenses, but that will to too little comparing your level of profits.       

Freedom of Location

Dropshipping can be done from anywhere as long as you have a connection to the internet.you should be able to connect with the customers for receiving orders and suppliers for further process. You have no requirement for physical presence at the spot to make your work done. 

Flexibility in Product Selection

Since there is no requirement to purchase and store the stock, you can give a good selection of products to your customers. Be ensured that the product you selected is available with your supplier.

If you find a product rarely being sold, you can have it up for sale, as you without concerning the warehouse space.

This also introduces the flexibility to sell a new product in the market without any risk for loss as you do not store any product.

This is especially beneficial when you choose to sell a seasonal product.

Easy Business

When you run a traditional business, your profit is directly related to the amount of work done.

By making use of dropshipping, the supplier takes most of the workload that involves product storage, packaging, processing payments, shipment till delivery and this allows you to grow your business with less pain and hassle of the workload.

More sales bring more wok especially in terms of customer service but using dropshipping allows you to scale the work better than the traditional process.

Good customer service is vital. People will be willing to pay for their convenience in shopping and on-time delivery, as long as they feel they are treated as valued customers.

Whether you are a newcomer or experienced, you will experience benefits in terms of flexibility and convenience, and that may sometimes cost you.

Cons

Lower Profits

The biggest disadvantage of dropshipping is, it is very competitive. Because it is easy to get going with dropshipping and because the costs are low, more people are setting up shops and selling at the lowest possible prices, to try to bring in more customers and profits.

These people invest very little starting up their business, hence they get less margin. In most of the cases, these sellers are likely to have low-quality websites as they do not invert more on customer services.

But the potential customers search for those products which are comparatively cheaper than others. They do not bother your investment in site optimization, they simply focus on purchasing a product at a lesser price.

Issues with Stock

When you have your stock, it is fairly easy to keep track of your items whether itis full or out of stock.

Yet, when you dropship, you rely on other suppliers and these suppliers no just supply items to your customers, they have other customers or merchants as well. Thus, their inventory level changes daily.

You may not able to keep track of items if it is available with the supplier at the time of the customer’s request. If the item is not available then your customers won’t rely upon you for their further purchases. This will bring down your sales and reputation.

Another problem is the shipment. If your supplier does not ship the product on time or delay in processing a refund request then your customers may be frustrated and may not return for the second purchase.

Generally, in dropshipping, the entire business is not within your scope. Your suppliers should be equally efficient to make your work done as you almost entirely rely upon your suppliers from stock to delivery.

Issues with Shipping

Most drop-shippers work with several different suppliers and this means the products you sell are sourced from several drop shippers. You may face issues with different shipping costs.

For example, assume that a customer has ordered four different products from you. All of these come from different suppliers which means you incur four different shipping charges, one for each item.

It won’t be wise to pass on these expenses on to your customers as they will assume that you are overcharging for shipping.

The best way is to average out the shipping cost across ass suppliers. This delivery surcharge can be imposed on the customers where in some cases you may gain a bit of money or you will have to pay on.

This can also make customers feel annoyed when they order four products from one online store and all the four products sent them individually.

It also makes difficulty to customers as they have to track four products from four different tracking IDs.

Another issue comes when the customer is trying for help regarding a single product but gets messed up with the other due to different supplies for each of their products.

Problems from Supplier Side

Things may go wrong running an online business that uses suppliers to dropship. From technical issues to miscommunication, there will be several cases where you and your drop shippers may not be on the same page.

Suppose, your supplier has not shipped the product, then the blame will be upon you and you although it won’t be your fault.even the top dropshipping suppliers will make mistakes and it is down to you to take responsibility for their mistakes and issue apologies.

If you choose low-quality suppliers, then you are going to take greater trouble, with issues regarding missing of shipments that are messed up to poor quality packaging.

That may not be your fault but it will cost your reputation and business will suffer loss.

One more thing you should keep in mind that, dealing with more than one supplier can be messy.

This can become complicated since you have no common interface to deal with all suppliers. This means things from order processing, account setup and billing can be different from one supplier to the next. This makes the entire process complicated. Hence, this is something you have to keep in mind when you are dealing with more number of suppliers.

Other Considerations:-

Knowledge

Starting a website to advertise the products you want to sell is going to require a small bit of knowledge. While there are platforms where you can use a non-technical perform for your website, some basic knowledge is still going to be beneficial for you as you go through the process of setting up your website and learning to use it effectively.

Having a basic knowledge of how to run a website as well as how to find the information you need to access to solve problems you encounter, will make the process of running your business a lot smoother.

Understand Domain Pricing 

When you start your website, you are going to pay for your domain name. One thing to be aware of when you are choosing the platform to register your domain name is that the price you see advertised may not be the price you always pay.

Many companies that rent our domain names may charge an introductory price at first and move up to their regular price after a certain period has passed.

Be always aware of any price increases. If you can’t find the information listed anywhere on their website don’t assume the price as an introductory price.

Contact the company you are looking into and ask if there are going to be any increases.

An introductory price isn’t bad, it is just you should be aware of.

Settle with E-commerce Rates

When the time comes to work out the e-commerce rate with your suppliers, you should always open negotiations with the question, “What kind of discount I can get on this?”

Only negotiate with those who are in a  position to settle at a lower price.

When you are looking for a new vendor, always accept their first offer even though, this probably isn’t the best offer they are going to make since no one opens up with their best offers.

The reason you want to accept their first offer is that they will be more willing to offer you larger discounts later on with your relationship with them. You want to build a relationship with a vendor and the best way to do is building trust.

Many vendors are hesitant to give large discounts because they are worried that you are either going to tell other customers about the discount you are getting or undercut the retail price of their product.

They will continue to give you better prices if you keep your discount secret and use the discounts to make more money per sale.

Website Downtime

The performance of your website is very important. Most businesses rely on their hosting company to ensure their website ahs the highest uptime possible, but even the best web host companies can’t ensure 100% uptime for your website.

Many factors can cause a website to go down, but the four main factors are planned downtime, failure of components, malicious attacks, and natural disasters.

Planned downtime happens when the host performs a task such as a server upgrade, and hardware or software application updates. Once the upgrade is complete, the site becomes available again.

Occasionally, the server may go down by any component failure caused by programming errors or malicious attacks, such as viruses and file corruptions.

Physical damage to the hardware components can also cause downtime. Physical damage can be caused by natural disasters, hurricanes, tornadoes, fire, etc 

Any sort of extensive downtime can hamper your business. It can lead to decreased sales as well as dissatisfied customers, and a negative impact on search engine rankings.

How to Set-up Your Online Store

The process of setting up your online store is not complicated. If you know the steps to follow and are aware of do’s and don’ts then you can dive into the world running an online business that uses suppliers that drop ship their products to your customers.

Selecting Your Product

Before you are setting up your online business, you need to choose the appropriate product.

Before you start searching for new ideas of what you should sell, start with what you already have, or how can you solve your problems or the problems of your customer. Some questions to ask for your reference-

  • What products are you interested in?
  • What products are your friends passionate about?
  • What issues are you having in your own life?
  • What sort of businesses are around your community? Can they be turned into an online concept? What business will appeal to your community and others outside?
  • What products are trending in other parts of the world?
  • What products are popular in other online stores? Is there a specialty to your product that you intend to sell?   
  • What trending on social websites? Is there any product with high shares and likes?

Understanding Your Market

The most important condition to consider is your target audience. You aren’t going to be able to run a successful business if you are selling wedding supplies and dog toys together on the same site.

You need to sell products that are in some way similar to the other.

There are thousands of products and services available to customers. That means, there are unlimited ways you can enter an online business.

Before you can dive right in, remember to choose specific demographics-

  • Age 
  • Gender
  • Location
  • Income
  • Education level
  • Marital Status
  • Occupation

Choosing the supplier

The supplier you are going to work with is one of the biggest decisions you are going to make when you start an online business.

The supplier you partner with has a large impact on your success and you want to make sure you choose the right one.

Begin you begin working with your supplier, these are a couple of things you need to do:-

Make sure to prove yourself an approved retailer. Have your business ‘EIN’ number as well a copy of your resale certificate.

Be familiar with dropshipping terminology as well as the common practices of dropshipping before you contact any potential suppliers.

Once you’re familiar with dropshipping, you are ready to set out and find your supplier.

Setting Up a Website

Before you begin setting up your website, you should have some business aspects that include your company name, the product you are going to be selling, and the prices of your products.

The next thing you are going to read are-

  • A domain name and extension
  • A web host
  • A dedicated IP address
  • A private SSL certificate
  • A shopping cart script
  • A payment gateway      

Once you have the above things, you are ready to set up your website. You have two choices when it comes to setting your website. You can either create a home page, and other static pages, or you can use a shopping cart script as a standalone for your website.            

Things to Keep In Mind While Conducting Business

Customer Satisfaction- Your customer is a person, even if you never see or speak to them. You want your customers to be happy, and this is what you can do with good customer service.

Keep an active mailing list- Offer a reward, such as free shipping, for signing up and you can use their email address to send out newsletters about new product offerings and sales to keep your customers coming back.

Don’t Oversell- No one wants to feel pressured into buying something. Pointing out advantages in a product is great, but you don’t want to lose customers because you are pointing out the features of a product too frequently.

Respond Quickly- When visitors to your site send you emails or fill out their information for your mailing list, it is important to respond as quickly as possible. People will remember how long it took you to respond to them and often appretiate a quick reply in response to an email.

Related Questions

What is ERP(Enterprise Resource Planning)? It is a software such as ‘Oracle’  that an organization uses to manage day-to-day activities such as accounting, project management, procurement, supply chain operations.

What is the B2C business model? This B2C business model sells the product directly to customers. The customers can easily view the products on the website and choose the product from the different varieties and order the product accordingly.

What is Data Mining? Data mining is a process that is being used by organizations to convert raw data into the useful required information. It involves a database, data management, data-preprocessing, online updating.

What is Market Automation? Marketing automation is a technology that manages marketing processes and multifunctional campaigns, across multiple channels.

What is Google AdWords? An advertising service for companies wishing to show ads on google and its other networks. It is the most PPC advertising system in the globe.

Why is online marketing preferred over offline marketing? Online marketing is preferred because the information about any product is immediately available.

One can easily get in touch with customers and provide feedback. It is also easy to make corrections in campaigns in real-time.

What is the best way to increase traffic to your website? Though there are scores of ways to increase traffic to your website, the most effective way is to use referral links and invest in SEO management. 

You can also post content to LinkedIn daily to increase traffic. By doing this, you will build a platform where guests will keep coming back.

What is the conversion rate in PPC? Conversion rates are the number of conversions divided by the total ad clicks.

E.g., If you get 10 conversions from 100 clicks, your conversion rate is 10%.

What is AMP(Accelerated Mobile Pages)? It is a joint project of Google and Twitter for making fast mobile pages. It is an open-source initiative, which is lightweight and fast to load.

What is Content Marketing? Content marketing is a strategy to create and share valuable content across different platforms. It aligns business and consumers, and quality content can attract and convert a visitor to the consumer.

Advertising and marketing do not end here. You need to constantly test new methods and grab opportunities, tune-up current campaigns that increases your business and allows you to know when to optimize or shift campaign areas.

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