What Is Drop Shipping?
Drop shipping is both a sourcing a fulfillment business model where the retailer (you) never actually owns the inventory you are selling. Instead, you are acting as a middleman that is selling the goods on your own website and when you receive an order, you pass that order onto the drop shipping company for them to pick, pack and fulfill. Your profit is the difference between what you charge your customers on your website and what the drop shipping company charges you.
What are the benefits of drop shipping?
The drop shipping model has a number of advantages:
Lower Capital Requirement: With drop shipping, you don’t need to invest thousands of dollars in inventory. Instead, you only purchase a product when you have an existing order to fill.
Wider Product Selection: When you don’t have to pre-purchase all the items you sell, you can offer a significantly larger number of products to your customers.
Reduced Risk: Without thousands invested in inventory, the risk involved with starting an online store is dramatically reduced. If things don’t work out, you aren’t stuck with thousands in inventory you have to sell at a loss.
Location Independence: Because you don’t have to worry about fulfillment or running a warehouse, it’s possible to run a drop shipping business from anywhere with a laptop and an internet connection.
Highly Scalable: Because you don’t need to manually fulfill each order, it’s relatively easy to scale a drop shipping business.
Disadvantages of Drop Shipping
Drop shipping can be a great startup business model, but it’s not without disadvantages and drawbacks. Some of the most notable disadvantages of this business model include:
High Competition: One of the biggest challenges with drop shipping is the ubiquity of products available through drop shipping suppliers. The trade-off for easy access to products is that many people will flood the most popular marketplaces with popular items.
Low Margins: Margins for drop shipped products tend to be slim. This can make it difficult to compete with manufacturers and retailers with larger margins.
Low Level of Brand Control: Because you don’t touch or ship the products yourself, you have a lower level of control over the brand experience.
Difference Between a Drop Ship Wholesaler and Manufacturer
It’s easy to get confused between all the terms when you’re searching for a drop shipping supplier. Many times it seems like they are used interchangeably, but there’s differences between each of them and it’s important to know those differences.
A manufacturer actually manufacturers the end product that you are purchasing. Some manufacturers will have a drop shipping program in place where you can partner directly with them. This is ideal because there are no middle men so you will usually be getting the best prices which means you can get the greatest margins.
A drop ship wholesaler is someone that purchases products from the manufacturer and then drop ships them on behalf of you (the retailer). Many times manufactures just want to focus on manufacturing and don’t want to deal with selling to small companies so they will sell in bulk to a drop ship wholesaler who will then in turn, create a drop shipping program for retailers like you to join.
A slightly different term you may come across is a drop ship aggregator. A drop ship aggregator like WorldWideBrands is essentially a wholesaler that partners with hundreds of manufacturers and makes it easy for you to add products from those hundreds of manufacturers to your own store.
While this sounds good in theory, a drop shipping aggregator like WorldWideBrand takes a cut of your margins for this service. Being that drop shipping inherently already has slim margins, this makes it extremely difficult to build any sizable business. In addition, these aggregators usually charge hundreds of dollars in yearly fees.
Note: I personally do not recommend or support using any drop shipping aggregator service at this time.
Is drop shipping a profitable business model?
Drop shipping model that I used to start my own store after quitting my job and build a seven-figure business. So it’s definitely possible to build meaningful drop shipping businesses that generate real wealth. However this was in 2008.
Since then, it’s become more difficult to compete as a drop shipper in the world of Amazon and as eCommerce has become more competitive. Today, it’s important to have a very strong unique selling proposition. It’s not impossible to accomplish this with drop shipping, but this is much harder when you’re selling other people’s products.
Drop shipping usually works best when you can a) offer a tremendous amount of informational value with your products and b) you can sell a lot of high-margin accessories or c) you use it to supplement a catalog of your own proprietary products.
Who Is Drop Shipping For?
There are a few types of entrepreneurs that the drop shipping model will work well for. Let’s take a look at some of them:
Validating Entrepreneur – Drop shipping can be a great way to test new products or even a new startup before investing heavily into inventory that may not sell making this the perfect model for the entrepreneur that requires a high level of business and product validation before investment.
Budget Entrepreneur – Drop shipping is definitely the least expensive method of selling online because you don’t have to purchase any inventory upfront. Because of this, the drop shipping method works well for entrepreneurs that have limited budget or would prefer to keep startup costs as low as possible.
First Time Entrepreneur – The drop shipping model for selling online also is a good business model for someone just starting out selling online. The fact is, selling online isn’t easy. Driving traffic and converting that traffic for the average marketer can take a long time to figure out and optimize. Because of the low costs associated with starting a drop shipping business, it allows new entrepreneurs start to learn the ropes of setting up a store, driving traffic and conversion optimization before investing thousands (or more) in inventory that you may get stuck with.
Walmart Entrepreneur – Drop shipping is also for the person that wants to sell a wide variety of products and models. Depending on what the price range is of your products you intend to sell, if you want to sell hundreds or thousands of different products, it’s near impossible without massive funding to acquire all that inventory. In this case, drop shipping would be the appropriate model because, again, you don’t need to purchase inventory upfront.
Who Isn’t Drop Shipping For?
There’s also a few types of entrepreneurs that drop shipping isn’t for:
Brand-Centric Entrepreneur – Building a long-term sustainable brand is difficult but the rewards can be incredible worthwhile. However, building a brand while utilizing the drop shipping method is exponentially more difficult as there is so many elements of the entire customer experience that you won’t be able to control. For example, many times you may find out that after a customer has purchased something from you, it’s sold out with your drop shipper. This leaves you in the bad position of trying to coordinate between your customer and your drop shipper and can become a really poor experience for your customer. Another point to keep in mind is because you’re not shipping the product yourself you don’t have any control over the experience of your customer receiving the package. Almost 100% of the of time, it’s going to be the product in a big brown box with packing peanuts. You need to ask yourself if that’s the experience you want your customers to have. Finally, because you don’t ship the products yourself you don’t own the relationship with the shipping companies. When something does go wrong and your customer doesn’t receive the package you can’t simple call UPS and get the situation corrected. You need to coordinate this with a busy account rep which could take days to sort out, again, leaving your customer with a bitter taste in their mouth.
Margin Focused Entrepreneur – Probably the biggest problem with the drop shipping business model is the razor thin margins. Generally, for traditional drop shipping products and companies, your gross margins (price you sell it for minus the cost you pay your drop drop shipper) are around 10-20%. At the end of the day when you pay your credit card transaction fees, shipping cart, email service + other app fees you will be looking at only a few percent. I’ve met my fair share of online entrepreneurs running 1 million dollar revenue / year drop ship business that at the end of the day are making 40-50k profit.
Non-Creative Marketers – Most manufacturers (which can also be drop shippers of their own products) have sales goals in which 30% of the sales need to come from direct-to-consumer sales, usually through their own ecommerce site. This means that if you’re selling their products, you will be competing directly with your own supplier, a supplier that themselves have much higher margins than you on the very same products. Any chance of competing head-to-head against them is pointless. They will almost always win because they can afford to. If you’re going to beat your own supplier you need to be creative and find and exploit channels they aren’t using to acquire customers. If your only ideas are to you Google Adwords and Facebook Ads, you are likely out of luck.
Drop Shipping Margins
Your profit is the difference between what you charged the customer and the price the drop shipper charges you. Typically with drop shipping your profit margins are slim, around 20%. Keep in mind that after all other business expenses like advertising and overhead, you are usually looking at just a few percent profit.
Drop Shipping Risks
Drop shipping is pretty low risk in terms of potential financial loss because you never buy inventory up front nor do you have to worry about shipping product. However, risk comes in the form of very slim margins and high levels of competition. Slim margins means you have to move a lot of units to make decent profit. Compounding that, the slim margins diminishes your ability to profitably carry out certain marketing activities like pay-per-click to acquire new customers.
Is Drop Shipping a Dead Business Model?
Ten years ago, drop shipping was a thriving business model. However, in recent years, as it becomes increasingly easy to set up an online store, drop shipped products have saturated the market. This is making it more and more difficult to compete with other drop shippers.
Additionally, customers are demanding a more premium brand experience that drop shippers currently aren’t able to keep up with.
Although the business model is far from dead, it is much more difficult to build a large and thriving business using the drop shipping model. In order to give yourself the best possible chances of succeeding with drop shipping, you’ll want to have a laser focus on the products you choose to sell, and should work directly with manufactures as oppose to drop ship aggregators to get the best possible margins on your products.
How To Be Successful Drop Shipping
More than ever, if you decide to go the drop shipping path, you’ll really need to specialize in a specific niche. Retailers that decide to utilize drop shipping tend to be more successful the more they specialize in a certain niche. Many new entrepreneurs thing that by narrowing their focus of their products, their customer base will be limited along with revenue and profits.
The reality is quite the opposite. By narrowing your product focus, you also narrow your ideal customer which helps focus your marketing and decrease the cost of customer acquisition.
Additionally, working directly with manufacturers that drop ship can help you maintain the healthiest margins by cutting out middle men.
Overall, drop shipping is a great model to get started building online businesses, however, it’s become increasingly more difficult to build a sizable business and compete effectively.
Where do people sell drop shipped products?
People sell drop shipped products just about everywhere! Many sales on eBay and Amazon are fulfilled through drop shippers, as are items on thousands of eCommerce sites, especially smaller ones.
And even the big boys utilize drop shipping to expand their product catalog and offerings. It’s likely that large companies like Sears and Home Depot utilize the drop shipping model for some of their less popular items. This allows them to offer a broad selection while limiting the inventory they have to maintain.
While it’s possible to sell drop shipped items in a number of ways, creating your own eCommerce site offers the best chance of building a scalable, profitable and successful business in the long run.
How do I find drop shipping companies/wholesalers?
There are a number of ways to find drop ship suppliers:
Subscribe to a Directory: While there are a lot of drop shipping directories online, many of them are low-quality and provide little value. However, there are some legitimate directories, and the one I recommend is World Wide Brands (aff link). Their directory offers access to a searchable database of thousands of pre-screened drop shipping companies.
Contact the Manufacturer: If you know which product you want to sell, the manufacturer should be able to point you to authorized distributors of their who may also may be willing to drop ship.
Search on Google: When searching in Google, make sure to dig deep! Wholesaler drop shipping companies are notoriously bad at marketing and you’ll likely have to dig through 5 to 10 pages of irrelevant or spammy listings before you come across a legitimate drop shipper.
How To Start A Dropship Business Video
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