Whether you’ve outgrown a storage warehouse or you’re struggling for room in your home-based business, dropshipping is a great way to free up space. It takes away the challenge of managing your inventory, as a third-party supplier stocks and ships your products directly to the customer.
In this guide, we’ll take a look at how a dropshipping business model works for eCommerce businesses and the benefits of using this popular supply chain method.
Here’s what you should know about dropshipping, including:
What is dropshipping?
Dropshipping is a handy retail fulfilment method that frees up space for your business, as you don’t have to keep the products you sell in stock.
Instead, when a dropshipping retailer sells a product, they purchase the item directly from a third-party supplier that sends the product directly to a customer. This third-party could be a manufacturer, wholesaler or even another retailer.
If your business adopts a dropshipping model, you can act as a shopfront that customers visit and order products from. Once they place an order, you can charge the consumer and the third-party supplier will charge you. You’ll never have to store, ship or handle the actual products.
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How does dropshipping work?
Dropshipping is a form of supply chain business model that uses a network of suppliers, materials, manufacturers and retailers to create and distribute a product.
From production to customer delivery, dropshipping typically involves the following:
Manufacturers create the products. They usually don’t sell to the public, but sell in bulk to wholesalers and retailers instead.
Wholesalers buy products from manufacturers, and then mark them up before selling them on to retailers. Wholesalers usually stock products from a variety of manufacturers.
Retailers sell products directly to the public, at a markup.
And here’s how it works:
- The customer places an order with your business, the retailer.
- You alert the dropshipping partner — either the manufacturer or the wholesaler — who packages and ships the product to the customer.
- The dropshipping partner charges you, the retailer, for the service and you charge the customer.
Generally, the shorter the supply chain, the greater your profits will be. This is because there are fewer parties taking a cut. The shortest dropshipping supply chain is one where you deal directly with the manufacturer.
The benefits of a dropshipping business
Drop shipping is a retail inventory management method that can help your business decrease risk, but there are other benefits as well. Here’s a look at some of the advantages of drop shipping:
Dropshipping isn’t just a great way to save space, it can also help you start a business and test ideas, with limited risk. Here’s a look at the other advantages of dropshipping:
It lowers your start-up costs of starting and maintaining a business
Dropshipping drastically reduces the initial costs of starting an online store since you don’t have to invest in building inventory upfront. As you don’t have to deal with purchasing inventory (or managing storage for that inventory), your overhead remains relatively low. It also means you aren’t stuck with products that won’t sell, so you don’t have to mark down those items and take a loss.
Your location can be flexible
Dropshipping businesses can also be more adaptable than those with more traditional structures. Because you don’t have physical inventory, you can basically run your eCommerce store from anywhere you find an internet connection.
You can offer customers a wider selection of products
Since you don’t have to invest in building your own inventory, you can stay on top of trends and quickly add new products to your site. You can also quickly switch up your offerings without first having to order new items or clear out backstock – perfect for when you have a calendar of retail events to stick to.
You don’t have to manage inventory
A lack of inventory also means that you won’t have to manage it. Organising and stock checking inventory can be complicated and time consuming (although inventory management software can make the job much easier). Not having to watch, reorder, and process your stock means you and your employees have more bandwidth to work on other aspects of your business to help it grow.
The challenges of dropshipping
Drop shipping can be beneficial for business owners, but there are drawbacks that might not bode well with your overall business plan. Here are a few examples of why dropshipping might not be right for you:
Reduced profit margin
The longer your supply chain, the lower your profits. So, when you consider the costs of handling fees and percentages taken out by various middlemen, it might not be worth it to pursue a dropshipping operation.
There’s also a lot of competition in the dropshipping niche. Because it takes so little investment to get started, dropshipping businesses often provide products at very low prices. To compete, you often have to drop your prices too.
When you own inventory, it’s easy to check stock levels. But when you get products from multiple suppliers — who in turn are working with other retailers — it’s more difficult to make sure that the products you need are readily available.
Complex shipping costs
If you’re working with a number of dropshipping suppliers, your shipping costs become quite complicated. Let’s say that a customer orders two items, each from different suppliers, each with different shipping costs. You’ll need to determine how to charge the customer for shipping in a way that the customer won’t feel overcharged.
Lack of control over customer experience
By putting reliance on a drop-shipping partner to get products to your customer, you’re acting in good faith that they will deliver the orders on time and intact. If they don’t come through on their end of the deal, or deliver items late, broken or not at all, it can result in bad reviews and a loss of consumer trust that can negatively impact your company and any customer relationships you’ve worked hard to build up.
Potential problems with suppliers
It’s imperative to have solid relationships based on trust and mutual respect with your suppliers. Suppliers are at the core of your business, so be selective about whom you partner with, and never take those relationships for granted by paying them late or being difficult to work with. To build strong partnerships, it’s important that you learn how to manage your suppliers effectively in order to maximise dropshipping efficiency.
How to select a dropshipping supplier
Your chosen dropshipping suppliers will determine your supply chain’s success, so you need to do your due diligence during the selection process.
Generally speaking, you want to set up dropshipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line, so whenever possible, it’s best to work directly with a manufacturer.
Here are some questions to ask potential suppliers:
How much do you charge?
Crunch the numbers before selecting a drop-shipping partner. If the wholesale price isn’t enough for you to make a decent profit off of the products, look elsewhere.
Also ask, is there a handling fee? If so, assess how it may affect your profit margin. Again, every fee and each middleman affects your bottom line, so you want to streamline the process as much as possible.
How are products shipped?
You want a partner who ships items via a service that provides tracking numbers (which they should send to you). That way, if your customers inquire about the status of their orders, you can provide them with accurate, up-to-the-minute information.
And, with shipping comes returns. Find out the return and warranty policies. If returns aren’t accepted or products not guaranteed, steer clear.
What is the billing process?
Do dropshipping partners charge your credit card as soon as you submit an order? Or do they send you a monthly bill? Make sure to choose a partner whose billing process is a good fit for your cash flow.
Product ideas for dropshipping
Now you’re all up to speed about how dropshipping works, it’s time to think about the type of products you may wish to sell. You could create a subscription service for repeat purchases, provide niche products for a specific hobby or cater to business clients who bulk buy office products.
Whichever option you choose, it’s always a good idea to do some market research before you settle on your product range. You can use Google trends and social media to monitor popular interests and engage with your target audience, while a competitor analysis can help you see what’s already on the market.
Get some inspiration from our dropshipping ideas below:
Health and self-care products
Online searches for self-care have risen by 250% since March 2020, so the health and wellness industry has never been more in demand.
From face masks and organic teas to skincare serums and teeth whitening, there’s endless possibilities for dropshipping in this market. Try to build a strong social media presence to support your brand, so that people think of you when looking for these products.
Fashion and accessories
The fashion industry is constantly evolving, with old trends resurfacing and new ones emerging. Vintage-inspired head scarfs and colourful 2000s scrunchies are just some of the popular accessories you can dropship.
The past year has also seen lounge wear become a staple in everyone’s wardrobes, so why not take advantage of the current demand?
Whether you’re interested in selling cleaning products or trendy homeware, the interiors and lifestyle market has a variety of avenues for your dropshipping business. Wall art and prints have long-term appeal, while statement furniture tends to come in phases.
You can use social media sites like Pinterest and Instagram to spot the latest trends, before finding a manufacturer or wholesaler who can supply the products for you.
Turn your technology interests into a business by dropshipping the most up-to-date tech, such as wireless earbuds and chargers, fitness trackers and drones.
You could even appeal to existing brand audiences with accessories that support their devices, like cases and repair kits. Phone cases for the latest iPhone are continuously in demand and you can easily expand your business to other devices if you’re successful.
Tips for a dropshipping business
There are a few best practices to implement to ensure your dropshipping business is a success.
Make online shopping a pleasure
From ordering to delivery, you want to make the experience as seamless as possible. That starts with a user-friendly e-commerce experience. You want to invest in building an elegant website that is easy to use (on all devices)
Be particular about products
While dropshipping allows you to sell a wide variety of products, that doesn’t mean you should sell everything. Do your market research and analyse trends to determine what you should be selling in your shop. Think carefully about what is marketable, what is easy to ship and what is hard for people to find locally.
Focus on quality
Even if you thoroughly vet a supplier, you should remain vigilant about the service once you’re working together. For example, if there are several incidents of damaged products, lost packages or late deliveries, question the supplier and cut ties if necessary, to avoid losing the confidence of your customers.
Dropshipping can lead to lots of admin and adds a lot of more work to your operations management. It might be worth finding a dedicated staff member for dealing with the parties in your supply chain, to keep things organised and ensure everyone’s happy.
Build a trusted business
Your reputation is everything, so not only do you need to follow through on your promises with reliable drop-shipping partners and a great website, you should also work to boost your online credibility to ensure customer trust. From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your drop-shipping business.
Your reputation is everything. So, not only do you need to deliver on your promises with reliable dropshipping partners and a great website, you should also work to boost your online credibility to ensure customer trust.
From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your dropshipping business.
Dropshipping could be the right option for your eCommerce business. Its flexible approach to supply and demand lets you test out your product ideas, avoid expensive stock storage and target the latest trends. So, start your dropshipping business today with Square.