Whether you're looking for extra side income or want to make a switch to a full-time remote work opportunity, dropshipping presents several advantages. This modern take on digital sales allows you to essentially become an e-commerce middle-man for an endless selection of different markets and products that are both physical and digital.
Dropshippers run an online store that sells products. However, instead of following the traditional sales model of securing a warehouse, filling it with products, and marketing them to customers, dropshipping allows aspiring entrepreneurs to focus on building an online store and running digital advertisements. This new way of selling things online has allowed individuals to earn money with little to no startup costs in the process.
If you are considering trying your hand at dropshipping, we are here to help cut through the online chatter and get you started. Keep reading to discover the pros and cons of dropshipping, along with some simple steps to create your own dropshipping business.
How Does Dropshipping Work?
For the customer, dropshipping is no different than any other online shopping experience. Anyone can view and purchase their desired products and have them shipped to an address of their choosing. The difference between dropshipping and traditional retail occurs behind the scenes between purchase and shipment.
Dropshippers handle the online store and marketing but send any orders they receive directly to the manufacturer or other third party. This third party typically manufactures, stores, and ships the products directly to the customer on behalf of the dropshipper. A typical order may go something like this:
- Dropshipper creates an online store
- Customer visits the store and makes a purchase
- Dropshipper receives information and money for the sale
- Dropshipper places an order for the desired product with the manufacturer
- The manufacturer ships the products directly to the customer
- Customer receives product
- Dropshipper earns the difference between the customer's purchase price and the manufacturer's charge
What Are the Benefits of Dropshipping?
Below we'll explore some of the reasons dropshipping has continued to increase in popularity.
Low Start-Up Costs
One of the most alluring reasons people continue to try dropshipping is because it does not cost much to start. Because dropshippers never buy inventory, store the products, or ship anything, the costs are limited to the time spent researching, store setup costs, and advertising expenses. These costs can be further mitigated with trials and discounts when signing up for e-commerce platforms like Shopify, Magento, and OpenCart.
No Need to Store or Manage Inventory
Supply chain management is a big struggle for traditional retail. With dropshipping, many of these obstacles are taken care of by the manufacturer. While every dropshipping supplier is different, items are typically available in bulk, eliminating the need to worry about running out and lowering the per-unit price. Likewise, avoiding storing products that are waiting to be sold helps save dropshippers thousands on warehouse and employee costs.
Easy to Scale
As long as you have selected the right partners, scaling your dropshipping business should be straightforward. Once you have your online marketing tuned in and have identified your customers, it should be a matter of money to scale up your ads and increase business. Since you are going directly to the manufacturer, fulfilling more orders should not be an issue. When selling digital products, such as online courses, software, or an ebook, scaling is even easier since your supply is essentially infinite.
Work From Anywhere
The chance to work from a computer anywhere in the world is another benefit of becoming a dropshipper. With nearly every aspect of the business being performed online, you won't be tied to a geographic area. Instead, anywhere with an internet connection could become your office. Also, with the right setup, you can automate much of the process, further reducing the amount of time you may need to spend on day-to-day busywork.
Simple to Test New Products & Markets
One of the biggest struggles a dropshipper faces is finding their "winning products." Luckily, this can be done with a small budget by running ads to help identify which products your potential audience will respond to. Because you don't have to purchase inventory, time will be your biggest expenditure to explore endless new products and markets until landing on the right one to grow your business.
Ability to Earn Extra Income or Replace Your Day Job
Ultimately, not every dropshipper succeeds. And while the startup costs are low, the learning curve can be steep. However, for those who succeed at creating a sustainable online drop shipping business, the sky's the limit. For many, this creates an avenue not only to earn extra income but has the potential to become their full-time job.
What Are the Cons of Dropshipping?
Even with the potential upside that dropshipping offers, it's not without its downsides. Below, we'll explore some of the negative aspects of starting your own dropshipping store online.
Most dropshipping suppliers do not have exclusive agreements with a single online store. This means anyone can begin selling similar or even the same products as you. This can create a race to the bottom with pricing, lowering the amount of money you can make with each sale. Likewise, the amount of work you'll need to put into your store to stand out may also be expensive and time-consuming to compete.
As we reviewed earlier, the dropshipper's cut is essentially the difference between their store's sale price and what their supplier charges. While you may have the ability to charge any retail price, the average margin for dropshippers is 15%-20%.
Lack of Control Over Shipping & Quality
While never having to handle a product is a huge benefit to dropshipping, it also presents some unique problems. Without that level of control over manufacturing and shipping, your store will ultimately be at the mercy of your supplier. That's why picking the right partners is crucial. Otherwise, you may be stuck dealing with unhappy customers and refunds when the products arrive late or are not up to quality standards.
How Can I Start a Dropshipping Business?
Now that you have a better idea of what you are getting yourself into by starting a dropshipping business, let's review the essential steps to get started.
Select A Product or Niche
Market research is critical to launching a successful dropshipping store. Consider the same line of thinking you would need to follow before opening a brick-and-mortar location. Look into competitors and trends. You can start with keyword tools like Google Trends and even browse social media and Amazon for inspiration.
Most of the time, with dropshipping, you will not be selling a new product but instead capitalizing on a niche or specific product that is already selling well online. While popularity should be your guiding light, remember you'll be spending some long hours on this, so be sure that the product is something you also have some passion for.
Find a Reliable Supplier
After narrowing down the products you want to offer in your store, start to look for a reliable supplier. Look for a partner that has a strong track record of supplying high-quality products that ship on time. Many drop shippers start their supplier search on sites like AliExpress or Oberlo.
Build Your E-Com Store
With your products and supplier ready to go, you'll need an online store to showcase your goods. Don't worry if you don't have previous experience building a website. Today, there are countless novice services to help, including sites like Squarespace, Shopify, and RocketBuildr. These platforms allow anyone to create an online store by simply dragging and dropping the elements they want, including plugins to accept payments and even automate your orders to suppliers.
Don't want to build your own store? Some dropshippers have also found success placing their products on Amazon, Etsy, and other online marketplaces.
Incorporate Your Business
Before you begin marketing and accepting payments, protect yourself by incorporating your new business. Properly setting up an LLC in your state can help protect your personal assets in the event an unhappy customer files suit against you. Likewise, establishing your new venture as a business will help provide possible additional tax advantages.
Request an EIN & Open Your Business Accounts
After your LLC is formed, it will be a simple process to request your Employer Identification Number with the IRS. You can also use this information to set up business checking and savings accounts, which you will need to deposit store funds.
Market Your Store or Product
After your legal, tax, and banking have been set up on your back end, you'll be all ready to create buzz for your store with some online advertising. One of the most effective avenues for this is through creating social media ads for sites like Facebook that will allow you to target a specific audience. Be sure to test different images, videos, and call-to-action statements until you find an ad set that reliably drives new customers to your store.
Test, Analyze, Improve Continually
Just like your marketing, your entire store will likely need to be improved along the way. Be sure to review your store's analytics frequently. Look for things like visitor demographics and what items are getting the most clicks. Use the information you learn to improve the customer experience, provide more targeted information, and even adjust prices as needed to improve sales.
Get A Crash Course In Starting Your First LLC
One step that far too many dropshippers ignore is incorporating their business. However, forming an LLC can help provide additional tax savings and protect your personal assets if you get sued. Luckily, forming an LLC is simpler and cheaper than you might think. To learn how to get started, check out our Incorporation Guide. It's a quick read and gives you all the information you need to get started today!