Dropshipping is retail fulfillment. You don't hold inventory. Or handle any of the shipping and logistics. Pay wholesale price for dropshipping products and sell them for profit. Headed for market values of USD$476.1 billion by 2026. Dropshipping continues to be extremely profitable.
What Are The Pros & Cons Of Dropshipping?
Drop shippers don't need to manage or distribute their dropshipping products. Instead, you sell directly to consumers without stocking inventory.
So what are the pros and cons of dropshipping? Drop shipping isn't a get-rich-quick scheme or a way to make fast cash. It takes time and consistency to be successful. So know what you're up against before you begin.
Low Start Up Cost
You pay wholesale price for products and resell them at a higher price to make a profit. You're not out of pocket for anything. This makes dropshipping an attractive business model. But you need to have enough cash to cover the costs of things like:
Pro Tip: Be prepared to lose money initially because it might take testing multiple products before finding a winner. But unfortunately, people give up before they find their winning product. And this is one of the disadvantages and risks of dropshipping and why people fail with this business model.
Quick Launch Times
You can set up a dropshipping store in as little as a few hours to a few days. You don't need to worry about purchasing inventory or securing storage space. But the days of throwing up a quick store. Listing product after product of poor-quality merchandise doesn't work anymore.
The market has changed drastically, and guaranteed methods don't exist. The old style of building a dropshipping store focused on quantity, not quality. General stores with a ton of products but no cohesion.
Now there's a new winning formula for dropshipping. Instead, look at the product websites of the original sellers. Model what they're doing to make your site look more legitimate.
Stop copying other drop shipper sites and look at big names. Instead, use the branded product approach. Which focuses on picking a niche and creating a group of items and new products around your choice. By following what your favorite brands are doing, you create an identity for your site.
This method will set you apart from your competitors and give your customers a better experience. You establish yourself as a more credible and trustworthy dropshipping store.
Pro Tip: By offering your identified target market better selection. You'll also get higher average orders and dominate your market.
No Inventory Requirements
A business model that doesn't require you to own any stock. You don't have to spend a ton of upfront capital on inventory. Or get stuck with merchandise that doesn't sell. Instead, your supplier handles order fulfillment on demand.
Dropshipping appeals to people who want to make money online. There's no guesswork because you don't need to assume what people want. Instead, you test products and determine what people are interested in buying.
Purchase sample products from your supplier without ordering bulk quantities. So you’re not stuck with unwanted stock. Or a hefty price tag for storing merchandise. The goal is to leverage the benefits of dropshipping without the drawbacks.
How To Decide On What Products To Source:
Be purposeful and efficient in choosing products to source. You want to sell trending products. Ones with that solve a problem or fill a gap in the market. Source inventory that's hard to find to sell in your dropshipping store.
“29% of newly established businesses fail because they have run out of cash”. CB Insights
Better Cash Flow
Dropshipping appeals to people who might not have much money to invest upfront. Because you don't need to buy a bulk amount of inventory. Or worry about storage and warehouse fees.
Dropshipping takes most of the traditional operational costs out of the equation. But because profit margins are lower with dropshipping than traditional retail, you need to be mindful of your cash flow.
Cash flow is the foundation of your profitability. So you need to track your expenses and understand the difference between revenue and profit. Just because you're making money on paper doesn't mean you're generating a profit. Use software like CashFlowTool to help make sure you stay in the black.
What are ways to improve your cash flow with dropshipping?
The goal is to be profitable with a positive cash flow. You want more money coming in than going out and still have enough capital to cover costs.
Pro Tip: Reinvest money back into your business, and build your cash reserves before scaling.
Dropshipping allows you to sell to anyone anywhere in the world. There's no limit to how many people visit your dropshipping store. And you don't always have to pay for advertising. Organic search traffic accounts for 10%-15% of sales. It's 100% free and can broaden your reach.
How To Increase Organic Sales:
Scaling is about moving past one-time sales. Start looking at backend sales and focus on recurring sales from qualified buyers. Set up email sequences offering extra products not available to every customer like:
Create more offers to sell additional products to your customers. Use Google paid ads. Or social media platforms like YouTube and TikTok to engage your target audience.
Pro Tips: Pay influencers to promote your product.
If you use Facebook ads, plan on doubling your ad budget as soon a campaign starts performing well.
Fast Way to Test Products
One of the biggest pros of dropshipping is the ability to test products. You can buy a sample for minimal cost using sites like AliExpress or Alibaba. You're looking for products that will sell well or go viral. Choose items that solve a problem, save people money, or improve convenience.
Criteria To Consider When Testing Products:
Use tools like Google Trends, Amazon, TikTok, and YouTube. Research the level of interest.
- Are people searching for this product?
- Can you source this item and offer it at a competitive price?
Pro Tip: Factor in your product and shipping costs and multiply by 2-3. You want your price comparable to Amazon but cheaper than name-brand stores.
Profits & Pricing
You're already dealing with razor-thin profit margins. Most drop shippers make between 10%-20% profit. So, there's not a lot of room for error. When comparing Shopify dropshipping vs Amazon FBA, this is one of the biggest drawbacks. How you price your product can be the deciding factor on success or failure with this business model. You need a pricing strategy that coincides with a few basic factors like:
You have to cover all your business costs with revenue from products sold. What's left is your profit margin.
But there are a few ways to increase your profits, including:
- Offer Quantity Breaks
- List Expedited Shipping On Your Store For An Additional Cost
- Sell Similar Products On Your Store At A Mark Up (makes your main offer look more attractive)
- Use Custom Content For Your Offers
- Establish Organic Reach Using Social Media Platforms
Pro Tip: Look at your products on AliExpress and see what they're charging. Then check to see what the big brands are selling the same item for. You want to be lower than the name-brand site so people will buy from your drop shipping store.
The dropshipping market has become super cutthroat and scaling your online business is a challenge. In fact, when you scale, it may seem like everyone wants to shut you down. Facebook keeps increasing limitations for scaling and customer feedback. Dropshipping businesses accounts are getting banned more quickly. And not always with an explanation
Drop shippers are also faced with payment gateway issues. Payment processors like PayPal and Shopify make it harder to get approved. Because of high volumes, a potential influx of chargebacks, and a lack of trust.
The other issue is direct competition from other drop shippers. Stores that low ball prices or copy your methods. But most of these stores lack personality. Outplay the competition by implementing a few techniques, including:
Pro Tips: Invest the time on product research and look for items that will be easy to private label.
Focus on how your product can solve a problem (list the benefits and don't worry as much about the features).
Duplicatable (Low-Barrier to Entry)
One of the most challenging issues with dropshipping is how simple it is to duplicate a store. It's so easy for people to come in and steal your winning product. Kick you out of the marketplace and out scale you on your own merchandise. So you need to make your dropshipping business difficult to copy.
Three main pillars make a successful dropshipping store:
A few techniques to building a unique store that will be hard to duplicate include things like:
Pro Tip: The better your website, the lower your ad costs. Build a site that represents your product and your brand, and it will be hard to copy.
Here's an example of a dropshipping store that does a $1 million per month: warmlydecor.com
Notice how they use high-quality photos and the vibe of the site in congruent with their branding
Suppliers & Minimal Control
By eliminating the need to own merchandise. You're giving up control over fundamental aspects of your drop shipping business. Instead, you rely on your suppliers to package and ship products to your customer giving you minimal control over product quality and availability.
So to avoid poor quality products, inventory management issues, and shipping delays. Or problems with refunds and returns, you need a reliable supplier. Choosing a supplier from China has been the standard with dropshipping. But this method isn't sustainable in the long term as it can equal supply chain issues and delays. No control over shipping impacts sales. Plus, if you or your supplier mess up, your dropshipping business could even get shut down.
The lack of control around order fulfillment and product quality almost always leads to poor customer experience. Resulting in negative reviews. So, you have to build a relationship and level of trust with each supplier.
Consider working with wholesalers in the country you plan on selling or live in to reduce shipping issues. And have more control over the fulfillment process. There are a couple of options on where to find suppliers.
Or check out this list of the US dropshipping suppliers. The goal is to find suppliers with high-quality products. Ones that offer fast shipping, fair prices, and good reviews. Get your shortlist together then research the key features of each potential candidate.
How To Choose The Best Dropshipping Suppliers?
Unfortunately, choosing a bad supplier could strip your store of its credibility. Or even force you to shut down. Finding a legitimate supplier is nonnegotiable. But there are a few ways to check if a supplier is legit or not.
How Can You Check If A Supplier Is Legit Or Not?
- Read reviews around the quality of the products they sell and their customer service.
- Order a test product and go through it first hand to determine:
How they package their items.
How long did it take to arrive?
What was the unboxing experience?
Review their policies and fees (available on their website).
Limited Branding Ability
As a long-term business model, drop shipping has become increasingly unstainable. It's becoming harder to stand out in a saturated market. Traditional drop shipping stores don't always look legitimate. And there's no way to out-compete big brand names without consumer trust.
But there is a way to streamline the process with minimal capital and still not store inventory. You need to find a niche with a passionate audience (because of the emotional triggers behind purchasing). Establish a brand in a niche with a large community to capitalize on organic traffic. Then, concentrate on building a brand around a winning product.
A few benefits to building a branded store include:
Cheaper Ad Costs
Increased Word Of Mouth Advertising
More Repeat Customers
Higher Social Proof, credibility & perceived value
The most difficult part of the process is finding the right product to put your logo on. So, learn how to spot trends and capitalize on unsaturated markets. Stop focusing on making money with drop shipping. Instead, consider using drop shipping as a way to find your ideal product.
Pick products that fit the gap and solve the problem. Building a branded or private label online store will result in more recurring customers. You'll also see more sales and better social proof. Most drop shippers aren't interested in spending the time and energy to build a branded store. So, it will set you apart from the competition.
How To Build A Branded Dropshipping Business:
Pro Tip: After about 20 products per day, get your merchandise sent to low-cost order fulfillment centers. Like ShipMonk or Dollar Fulfillment and have them ship inventory to your customer.
Not only will you get faster shipping times (compared to sites like Alibaba or AliExpress). But you can save yourself some money. Especially if you have a large sales volume.
Customer Service Issues
When you have an online store, you're selling to all kinds of people, and sometimes they get angry. For example, customers aren't willing to wait weeks for shipping. There are also concerns around low-quality merchandise or even buyer regret.
So you need to order and sample products. Know what the customer experience is like. Test the process before you sell them on your drop shipping store. This will reduce some of the issues and help from a marketing perspective.
Your primary goal is to create a positive customer experience. So, try to solve the problem and fix things that are broken. From packaging to fulfillment or even your website.
“Businesses can grow revenues between 4% and 8% above their market when prioritizing better customer service experiences”. Bain & Company
For dropshippers, one of the most common dropshipping mistakes to avoid is around issues with refunds and returns. Unfortunately, every time you refund an item, you're losing money. You also run the risk of chargebacks or getting shut down by payment gateways. So, you need to have a clear refund and returns policy on your site.
How Do You Handle Returns Or Damaged Products?
Look at your suppliers' return policy (on the footer of their website) and look at things like:
Your policy should be like your suppliers. This will reduce customer confusion and negative reviews. The goal is to make the process streamlined for your customers.
You need to own the mistake. Consider offering a replacement item. Or even a discount. Capitalize on these situations with things like:
- Offer Exchanges
- Sell Product Warranties
There will always be customer service issues when you have an online business. Determine if it's cheaper to replace or refund the product.
Pro Tip: Ensure you align with a reliable supplier. One with fast shipping and high-quality inventory. This will help reduce negative reviews and dissatisfied customers.
Getting Started With Dropshipping In 2022:
You need to implement techniques to market and advertise your dropshipping store to be successful. And you're going to need capital. Around $3000-$5000 and budget for $300 for every product you want to test. Plan on testing more than one product and be prepared to lose money at the beginning.
Pro Tip: Start with a general store so you can test all kinds of products in a variety of niches. Save yourself time and money building multiple stores. Make sure your store is neat and shopper-friendly. From the home page to every product page using techniques like:
The purpose of a general store is to find your winning product. Once you have a hot ticket item, build a one-product store around that product.
Pro Tip: Don't plan on scaling your general store. Once an item hits between $100,000-$200,000 in sales, take it off your general store. Then build your one-product store.
How To Maximize Conversions On A One-Product Dropshipping Store:
Conduct thorough product research. You're looking for products that solve a problem and make customers feel like they need it.
Understand your target niche market, and add more personality to your site as you learn more about your customer market.
This is a simple way to get conversions and target specific groups, making it easier to run paid ads.
Here's when you should consider branding or white label for your dropshipping business.
Focus on customer loyalty and retention. It's one of the best ways to build a sustainable store with longevity. Because it's cheaper to sell to your existing customers (they have experience with you and trust your brand).
Retarget and reengage customers using text message marketing with apps. Like YotPro SMS Bump that sends messages right to your customers' phones. Send out the right message with the right offer and increase customer loyalty.
Pro Tip: Be sure you create reasonable customer expectations. Provide excellent customer service with quick response times. Your goal is to build a brand that will last and make you money.
Here's our resource page on starting a dropshipping business
You need to be able to troubleshoot. Act fast when things aren't working. Be consistent in the business and build a fleet of properly researched products. There's no winning formula to this business model. But if you leverage the pros and cons of dropshipping, you will increase your dropshipping success rate.