Your Ultimate Guide to Starting a Profitable Dropshipping Business This 2020

Anyone who has ever done any research on building an e-commerce store has probably come across the term “dropshipping”.

Dropshipping is an online business model that has been around for some time, even used by established companies like Sears, Amazon, and eBay when they were starting.

Today, as much as 33% of the entire e-commerce industry use dropshipping to launch and operate their businesses. In 2017 alone, $85.1 billion in online sales were fulfilled with dropshipping.

But what exactly is dropshipping, and how does it work? More importantly, is it the right business model for you?

To answer this question, read the rest of this article to help you decide if dropshipping is worth pursuing for your online store.

What is Dropshipping?

Dropshipping is a business model that allows sellers to sell an item without keeping it in stock or having an inventory. 

Once a customer purchases from your store, you forward the order and shipment details to the supplier. The supplier ships the item directly to your customer to fulfill an order. This way, you do not have to handle the product directly.

In other words, you act as a middleman between the customer and the supplier.

To better understand how dropshipping works, you have to familiarize yourself with the main players in the dropshipping industry: the manufacturer, the wholesaler, and the retailer.

First off are the manufacturers, whose primary concern is product creation. Most of them do not sell directly to the public. Instead, they sell their items in bulk to both wholesalers and retailers.

Buying directly from the manufacturers is the most cost-effective way to do dropshipping. But to do that, you have to fulfill the minimum order requirements so that the manufacturer can sell you the products at a low cost. You might also need to stock and re-ship products when selling them to customers.

If you cannot fulfill the manufacturer requirements, your next best option is sourcing your products from wholesalers. They buy items in bulk from manufacturers, mark them up a little, then sell them to retailers.

Though many wholesalers also have minimum purchase requirements, they are usually lower and more lenient compared to manufacturers. Wholesalers also operate in a specific industry or niche and often have warehouses where they keep an inventory of their products.

Finally, there is the retailer, who is anyone who sells the product directly to the public at a markup. As a dropshipper, you are the retailer in the supply chain.

When a customer orders a specific product from your e-store, he pays you the retail price. Your store then automatically forwards the order to your supplier for fulfillment, paying the lower wholesale price. You make your profits this way, as the wholesale price is naturally more economical than the retail price.

What are the Pros and Cons of Dropshipping?

With the many advantages of dropshipping, it is no wonder why it remains to be one of the most popular business models for aspiring entrepreneurs. 

Advantages of Dropshipping

It requires minimal capital.

With dropshipping, you do not need to invest thousands of dollars in launching your online store. Because you do not have to stock up your inventory, you can enter the e-commerce arena with little money required.

Unlike the traditional business model, you will only purchase a product once your customer pays you for the sale. That said, it lessens the risk on your part.

Even as you expand your business, your overhead costs will still be lower compared to traditional brick-and-mortar businesses.

It is perfect for beginners.

Those who sell the traditional way have to think about stocking and tracking inventory, managing a warehouse, packing and shipping orders, and handling returns.

All these concerns get eliminated when you use the dropshipping model instead.

You no longer have to think about paying for a warehouse or shipping out your items because the product itself will not be coming from you. You also do not have to worry about ordering products and managing your stock level. You do not even have to handle inbound shipments and return requests.

Setting things up and running is easy, even if you do not have any prior business experience before becoming a dropshipper.

Dropshipping is flexible in terms of time and location.

A lot of successful dropshipping stores are run as home-based businesses, only requiring a laptop and internet connection to operate. 

You can work at times convenient for you and set your own pace. You can list new products whenever you want, adjust your marketing strategies, and automate your selling system. 

In other words, you get to be your own boss and set your own rules.

As long as you can communicate with your suppliers and customers with ease, you can literally run your dropshipping business anywhere in the world.

You have plenty of product options.

Since you do not have to pre-purchase any products, you can offer your customers a wide variety of trending items as long as your chosen supplier has stocks for them. 

Simply list the product you want for sale in your online store without incurring any additional costs.

You can test your products.

Many online store owners use dropshipping as a stepping stone in developing their own products. 

If you are planning to expand your e-commerce business in the future, testing which products your target market has an appetite for is a must. You can add new categories and product lines in your dropshipping anytime you want, then track your sales. 

Knowing what your customers want can help you figure out the products you might eventually want to sell for the long-term and develop before committing to stocking up a lot of inventory.

It is easy to scale.

When someone orders a large number of products from you, you do not have to sweat it out. 

Your suppliers bear most of the work in processing additional orders, so you can easily expand your operations with less work involved.

Disadvantages of Dropshipping

You have a low-profit margin.

Perhaps the biggest disadvantage of dropshipping is that your potential profit margins are low.

While it is easy to set it up and get started with minimal costs, you will find many competitors that will also sell the same items you are selling. Worse, they might sell at rock-bottom prices as they attempt to grow their revenue. With very little monetary investment in the beginning, operating on minuscule margins will not put them at a loss.

But despite this, you are pretty much in control of your profit margins as you can generally dictate your retail prices. You are not bound by any suggested retail price. 

To compete with low ballers, all you need to do is beef up your marketing efforts. Use a high-quality website and offer excellent customer service. Select a niche that is well suited for dropshipping and is not extremely competitive.

You might encounter inventory issues.

The good thing about having a traditional business is you can easily monitor your stocks. 

But with dropshipping, you have no control over your suppliers’ inventory. They may change daily since they also fulfill orders for other merchants.

Luckily, you can use apps that let you sync with your suppliers so that you can see in real-time how much inventory the supplier has for a particular item.

Shipping costs can shoot up.

Most dropshippers work with multiple suppliers, meaning the assortment of products in their online store are sourced from different manufacturers. 

Your shipping costs can get complicated when a customer places an order for multiple items coming from separate suppliers. This translates to higher shipping costs for you, but it would be unwise to pass this to your customers.

The best thing to do is to include these costs in your pricing. 

You might get blamed for supplier errors.

Low-quality suppliers committing mistakes in shipments, packaging, and product quality can damage your business’ reputation. But even if it is not your fault, you have to take responsibility for these and apologize to your customers.

You can avoid these frustrating problems by looking for high-quality suppliers. You also need to establish excellent customer support, even if it is challenging to own up to mistakes that are out of your control.

You have limited customization and branding options.

Because you are only sourcing products from suppliers, you do not have a lot of control over the product itself in terms of branding and design.

Though you might be able to find suppliers that can accommodate a few changes to your product, any amendments or additions usually require a minimum order quantity to curb the manufacturing costs.

How Do You Start a Dropshipping Business?

Before you launch your dropshipping business, keep in mind that while you do not have a lot of overhead costs, you need to commit an immense amount of time and effort to take it off the ground.

Here is a step-by-step guide on how to start dropshipping:

Step 1: Select a niche.

Several factors come into play when choosing a niche to determine the product you are going to sell.

One of them is your profit margin. A product that is too expensive may give you higher profits but will also entail more marketing and customer acquisition costs. A mid-priced product, on the other hand, might be easier to sell, although it might not be as profitable.

You also have to consider your shipping costs, as expensive shipping fees can be a huge turn-off for customers. Look for a product with economical shipping costs so that you can absorb it as an overhead cost and thus offer free shipping to your customers.

It is also good to consider products that trigger impulse buys and appeal to customers with high disposable income so that they will purchase on the spot. 

You can also research using Google Keyword Planner and look for products that people are actively searching for. Make sure that you consider the search location so that you can focus on what customers in your location want. Consider long-tail variations of your search terms for more specific insights into your niche.

Another tool you can use is Google Trends to give you more detailed insights into your niche. It will let you know your niche’s search volume over time, allowing you to see if the industry is growing or declining, or if your item is in demand on a specific season. You will also see the most popular queries being asked, which can help your search engine optimization and marketing efforts. 

Picking something that is not available locally also increases your attractiveness to potential customers.

And if you have the option to white label and sell your brand along the road, custom packaging and branding can make your products more enticing.

Step 2: Research your competitors.

Because dropshipping is generally easier than building a traditional online business, expect a lot of competition with other dropshippers. 

Use it to your advantage by performing competition research. Take a look at the products that your competitors are selling. If there is a tough competition, that only means that there is a high demand for that product. 

Avoid selling an item that has little to no competition because that simply means that there is not enough demand for it. You might get stuck with a product that does not sell. It might also have high shipping costs, poor profit margins, or supplier or manufacturing issues.

Step 3: Find a supplier.

One of the most important things that you should do is choosing a reliable and trustworthy supplier. Partnering with the wrong one can ruin your reputation and business, so make sure that you research diligently and do not rush this step.

Many dropshipping suppliers are located overseas, so one of your primary considerations should be communication and response speed. You should also ask questions about their production capabilities in case you want to scale your business in the future.

Step 4: Start building your e-commerce store.

Since you are just starting, it is wise to use a plug-and-play platform instead of outright hiring a web designer. Using a platform specifically built for e-commerce like Shopify, WooCommerce, or Magento makes it easy to build your online store for your dropshipping business. 

You can use these platforms even if you have no tech background. Plus, you can beef them up with apps that will help you increase conversions and sales.

Once you have built a revenue stream, then you can start thinking about designing and customizing your online store to your liking.

Step 5: Have a customer acquisition plan.

Now that you have your online site, it is time to create a plan on how to acquire customers. After all, a business without customers is not profitable at all.

One of the easiest ways to accomplish this is by running a Facebook ad campaign. With an average of 1.73 billion daily active users, Facebook is undoubtedly one of the best locations to place your ad. 

Facebook ads can place your offer directly in front of a hyper-targeted audience, giving you the ability to compete even with the largest brands and retailers out there.

Aside from using Facebook ads, you should also think about long-term strategies, like email marketing and SEO. These are great ways to generate revenue with minimal ad spend.

Step 6: Evaluate your metrics.

If you want to grow your business over time, it is vital to track all your data and metrics so that you know which of your strategies are working and which ones need improvement.

Remember, marketing is one of the few things that you can control in dropshipping. You cannot just set it and forget it, as the e-commerce world is continuously evolving. 

By tracking your metrics, you can test new opportunities and fine-tune your campaigns to maximize your revenue and scale your business.

How Do You Find the Best Products to Dropship?

Now that you have an idea on how to start your dropshipping business, it is time to put your focus on finding the best products for your online store.

There is no one-size-fits-all when it comes to product selection. Ultimately, it has to be something that appeals to your target demographics, which is why knowing your customer inside and out is crucial to your success. 

Here are some factors that you should consider in selecting your products:

Purpose

Once you have your ideal customer nailed down, it is easier to find a product that they can use for their businesses and hobbies. 

Targeting the right hobbyist niche and successfully connecting with enthusiasts can spell success for your dropshipping business. Similarly, clients looking for business products often order in large quantities and pave the way for a long-term, high-volume, and profitable relationship.

Price

The higher the price point of your product, the harder it becomes to sell.

Most people can comfortably place a $200 order online without the need to talk to a sales representative. But for products costing $1,000 and above, you might need to convince them more. Consider all the pre-sale services you will need to provide if you sell a high-ticket product.

If you are planning to sell a product with a high price point, make sure that you can offer sales and customer support.

You should also be aware of your manufacturer’s minimum advertised price (MAP) if they have any. This is the minimum price requirement manufacturers set for all their resellers, preventing price wars among retailers and ensuring that merchants make a reasonable profit.

It would be ideal to find a niche that enforces MAP so that you can compete based on the quality and value you are providing, not the price.

Marketing Potential

Can you brainstorm different ways to market your chosen product?

Perhaps you can write blog posts about it and share them on social media. Maybe you can do product giveaways and discounts. Or you can reach out to relevant communities where your target market hangs out and promote your product to them.

If you cannot think of ways to promote your item before launching it, then maybe you would want to reconsider it.

Upsells

Selling a product that comes with a lot of accessories is a great way to expand the items you are selling in your e-commerce store.

The profit margin for low-priced accessories is also generally higher than your profit margin in high-priced items. For instance, if you are selling a smartphone, you might only be able to mark it up by 5% compared to a smartphone case that you can mark up for as much as 100% or even 200%.

Plus, customers who bought your major product are more likely to buy their accessories from you.

Turnover

You might also need to consider evergreen products that do not get updated with new models frequently. Otherwise, site maintenance can suck up most of your time.

Unless you are already making enough revenue to hire someone who will maintain your website for you, it is best to steer clear of products with a high turnover rate. This way, you can focus on improving your website so that it becomes more informative and high-quality compared to its competitors.

You might also want to choose a product that needs to be reordered frequently, giving you the potential to build recurring revenue from a loyal customer base.

Hard to Find Locally

If you are selling a product that is just one trip away to the nearest supermarket, your dropshipping business might not be as profitable.

Selling an item that is not easy to find in your locale will increase your chances of success. Think of products that people typically look for in Google.

Smaller Products

Did you know that 79% of online shoppers in the US said that they are most likely to buy if there is free shipping?

Unfortunately, it is hard to give the free shipping option if you are selling large and bulky items that are costly to ship. That is why you should consider dropshipping smaller items as they are cheaper to ship, so you can add that overhead cost to your product while still offering free shipping.

Dropshipping may have its advantages and disadvantages, but it is still one of the best ways to start a low-risk, beginner-friendly online business. 

With careful planning, you can resolve the common dropshipping hurdles and eventually build a profitable and thriving e-commerce store.