Dropshipping can be summarized as a 4 step process:
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in any form of inventory. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.
The biggest difference between dropshipping and a standard retail model is that the selling merchant doesn’t physically stock or own any inventory. Instead, the seller purchases inventory as needed from a third party (usually a wholesaler or manufacturer) to fulfill orders.
Benefits of Dropshipping
Dropshipping is a great business model for aspiring individuals to start with because it’s an accessible and easy setup. With dropshipping, you can quickly test different business ideas with limited exposure which will not have such huge impacts on your business, this lets you learn a lot about how to choose and market in-demand products on the go. Here are a few other reasons why dropshipping is such a popular model:
- Less capital required compared to other business models.
Probably the biggest advantage to dropshipping is that it’s possible to launch an eCommerce store without having to invest thousands to build up an inventory of products or employ workers capable of supplying a service. Traditionally, retailers have had to tie up huge amounts of capital in purchasing inventory and hiring staff, this is not a feature of the dropshipping model.With the dropshipping model, you don’t have to purchase a product unless you’ve already made the sale and have been paid by the customer. Without significant up-front inventory investments, it’s possible to start sourcing products and launch a successful dropshipping business with very little money, for less than $100 you can essentially create a fully functioning and operational business.
- Easy to get started
With dropshipping, you don’t have to worry about:
- Managing physical inventory
- Paying for a warehouse or stock room
- Packing and shipping orders
- Tracking your inventory
- Low overheads
Because you don’t have to deal with actually purchasing inventory or managing a warehouse or stock room, your overhead expenses are quite low. The fact is that many successful dropshipping stores are run as home-based businesses, requiring little more than a laptop and a few recurring expenses (such as domain registration/subscriptions) to operate.
- Flexible location
A dropshipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business. We have had successful dropshipping students who manage their day to day dropshipping store from their mobile device or tablet.
- A wide selection of products to sell
Since you don’t have to pre-purchase the items you sell, you can offer an array of products to your potential customers. This means you can easily pivot to the next money-making product or service in a matter of hours, giving you the time advantage over traditional retailers.
- Easier to test markets
Dropshipping is a useful method for both launching a new store and for business owners looking to test additional product categories. The main benefit of dropshipping is, again, the ability to list and potentially sell products before committing to buying a large amount of inventory.
- Easier to scale your business
With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. With dropshipping you can easily start out small and grow, or contract depending on your sales. This means you can scale up or down at little or no actual cost to you. Simply add or remove products or services you wish to scale and that’s it. Although more business will generally create more customers and therefore more customer support will be likely, this can either be done by you or you can elect to outsource this service.
Disadvantages of Dropshipping
All the benefits we mentioned make dropshipping a very attractive model for anyone getting started with an online store. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a price. Here are a few shortcomings to consider.
- Potentially Low Margins
Low margins can be the biggest disadvantage to operating in a highly competitive dropshipping space. Because it’s so easy to get started, and the overhead costs are so minimal, many competing stores will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins.
- Inventory issues
Although you will not have any physical inventory, you will be dealing with potentially multiple warehouses that do have warehouses. These warehouses will potentially have inventory issues that they can pass on to you. Luckily nowadays there are apps to keep track of this and keep your inventory worries at bay. We discuss how to stay on top of this problem in our dropshipping course.
- Shipping complexities
If you are dealing with multiple suppliers (as most dropshipping stores do), the products you sell will be shipped from individual suppliers. These individual suppliers will likely have their own specific shipping arrangements. This can be difficult to navigate the problem and can be costly in some scenarios: Imagine you have one customer who buys 5 separate items on your store, these 5 items will likely be shipped individually. This means there will be 5 shipping charges but only one customer. Do you pass this expense onto the customer or do you build a solid plan to minimize this factor? Our guide will show you how to go around this problem, which is much less of a feature if you plan to dropship services rather than products.
- Supplier errors
The errors made by your suppliers will become your errors. At least from the standpoint of the customer. You will be blamed for mistakes your suppliers may make rather than errors of your doing. Be prepared to apologize and accept responsibility for others’ mistakes. This can be avoided by using higher quality suppliers, who you can communicate well with. A lot of these supplier problems we have noticed are down to a breakdown in communication where a language barrier exists. Choose suppliers wisely!
- Limited customization and branding
Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, you will be forced to sell a product ‘as is’ without the customization. If you do want to customize orders then expect to work a whole lot harder. Custom text or logos would potentially have to be conveyed to you from the customer, you must then bring this information to a supplier, this creates quite a headache and we would not recommend this method, but that decision is entirely up to you and your individual goals and visions!
How Do Dropshippers Make Money?
Dropshipping businesses make money by selling products or services at a higher price than they pay for the product with a 3rd party supplier. This means that the dropshipper will earn any ‘mark up’ on products or services they sell.
To give you an example:
A customer buys a watch from dropshipping store for $100, this watch actually costs $50 from a 3rd party wholesaler. The dropshipping company or website will receive $100, then place the order for the watch, this will cost $50 plus a few dollars for shipping, lets say that is $10.
- The customer gets their watch for $100
- The 3rd party supplier gets $50 for their watch
- The dropshipper will earn $50, ($100 [customer] – $50 [supplier])
Is Dropshipping A Legitimate Business?
Dropshipping is really a ‘fulfillment model’, one used by many global retailers, and it is perfectly legal. Like with any business, satisfying customer expectations and building a brand that resonates with the right audience is still key to long-term success. Dropshipping does however have to abide by the same laws as everyone else, for example selling drones in the USA can be troublesome if you source these drones from Asia, this is due to legislation around specified hardware that is required for drones to operate within the United States airspace.
If you plan on operating your dropshipping store close to the lines of legality, we would recommend consulting a lawyer to find out exactly what you can and cannot do. At Passive Income Tutor, we give courses on worldwide programs and can not take individual scenarios into account, it is your responsibility as a dropshipper to do your own research into specific products and trading practices.
So Finally, Is Dropshipping Worth It In 2020?
As we mentioned before, dropshipping has a success rate of around 10%. The main reason why people fail is that they jump into this without doing the necessary background research. The older methods which are shown across videos on YouTube are nearly all doomed to fail. Don’t let the ‘get rich quick’ ideas get in the way of creating and growing a successful dropshipping business. Our guide to dropshipping will explore and compare all the different aspects you must take into account to help you become one of the successful dropshippers in 2020, 2021, and beyond!
To get started dropshipping, or find alternative means of creating a passive income. View our passive income courses section to browse the courses we offer.