02Nov
By: Justas Markus November 02, 2016

It is a long way from any idea in the basement to a real thriving business on the Internet. But things all start from the basics. So does an online dropshipping business, which starts with the question: “What is dropshipping?”

If you are seeking an online business opportunity, you have got to know about dropshipping – a modern online business model that requires very little initial investment. So what is dropshipping and why you should go for this model to realize your eCommerce entrepreneur dream?

Let’s round up all the basics – learn the things you must know before getting started.

dropship

What is dropshipping?

Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.

Instead of keeping products in stock, you will only list products on your web store. When there is an order placed, you will purchase products from the wholesalers and have them ship directly to your customers. Basically, you act like a middleman who introduces products to potential customers and closes the sales. The wholesalers will take care of everything else, and you as their retailer never have to hold, handle, and ship the ordered products.

Now that we have a clear answer to the question what is dropshipping, it sounds simple and potential as an online business without investment at first. Dropshipping has both advantages and drawbacks that you should take into consideration before getting started. Let’s get down into further details about the pros and cons and basic things about running a dropshipping business.

What are the benefits of running a dropshipping business?

Required almost nothing to start off, dropshipping is a highly potential business opportunity with a lot of advantages that attract eCommerce entrepreneurs who want to start out small before going big.

Almost no capital investment:

Because of the nature of dropshipping as an order fulfillment strategy, you do not have to put up-front investment into stocking goods. Instead, you only purchase the products from wholesalers when people place orders and forward you the payment.

Free of inventory and supply chain management:

Dropshippers never physically see, hold or deliver sold goods to customers. Thus, they don’t have to manage a warehouse and take care of the whole supply chain workflow, including packaging and delivery of items.

That being said, dropshipping business owners save a great amount of cost on maintaining a physical location for stocking products and human resource to run the whole supply chain system, compared to conventional e-Commerce businesses.

Low risks:

Since you do not have to acquire products beforehand, you are free from the risk of excess in inventory. Since no money is required to paid upfront on the stock, the only thing you would lose if your business does not come out as success is what you put into building your website and marketing to get traffic.

Wide variety of product offerings

In dropshipping, you can list a wide catalogue of products from as many wholesalers as you can thanks to the freedom from stocking products in inventory. No more worries about analyzing sales history to limit your inventory to best-selling product lines only. Instead, you can list any product lines you want to sell on your website, as long as they are hot items your potential customers want to buy.

The ability to scale up

Without requirement of capital investment, human resources, and warehouse location, your dropshipping business is highly scalable, depending on the traffic growth, marketing efficiency and conversion rate.

Is dropshipping easy and simple as it may seem?

Looking solely at the benefits, running a dropshipping business seems to be quite simple and free of headaches. However, like any other business models, dropshipping method has its own downside that you should be aware of before getting started.

High competition due to low barriers to entry

A wholesaler can partner with a lot of retailers to sell their products. Plus, low capital investment, freedom of risks, high scalability and wide product selection are all the low barriers to opening a dropshipping business. Thus, there are many other dropshippers providing the same products as you, making dropshipping a highly competitive market. If you enter the dropshipping world, it could be very hard and challenging to stand out as a unique brand.

Tight profit margin due to high competition

The nature of dropshipping is that you will not sell unique products. A lot of people have asked themselves: “What is dropshipping?” before you. The high competition in this market drives the price down since the supply side is plenty. Thus, profit margin is usually low. If you cannot find product lines or provide outstanding service that differentiates your brand from others, you as a small business in a large market will not able to compete on price.

Challenge of logistics when business expands

Though dropshippers does not have to directly deal with preparing, packaging and delivering products, they have to make sure the workflow goes smoothly, from sending customers the right tracking number, to ensuring the products are delivered on time.

Since they do not have any control over the process and have to fully trust the wholesaler, there could be a big challenge to solve when the business expands. If the number of orders placed in a day reaches a few hundreds, and products are ordered from many different wholesalers, the logistics system must be able to handle all orders without errors.

dropshipping order package

Key elements if you want success in dropshipping business:

Don’t be discouraged yet by the downsides of dropshipping. There’s still much you can do to build a highly profitable dropshipping business if you focus on optimizing these key areas that can promise you success in this business model:

Partner with the right wholesalers

Just as competitive as the retailer market is the wholesale market, where there are tons of wholesalers that you can find in any popular product lines. Researching and finding trustworthy suppliers to partner with is thus of paramount importance even before you set up your business. Make a checklist of criteria to select the best dropshipping suppliers for your business, make sure your partners are professional, reliable, responsive and have standards in their product offerings.  

Focus on getting traffic and optimizing conversion

While you count on your wholesale partners to manage and deliver products, all you have to focus on is driving traffic to your site and optimizing the sales conversion. If you are bootstrapping your business and playing the one-man show, take SEO strategy and social media as prioritized initiatives. Increasing SEO rankings of your website by focusing on keywords that your target customers search for will bring you organic traffic from Google. Social media is becoming more important, as eCommerce-focused platforms (Facebook, Instagram, Pinterest) are making it more and more easy to reach users.  It could be very hard to get the first customers when you start off. You need to dedicate most of your time, investment and efforts to testing potential channels of traffic in the first 4-6 months.

marketing-channelsAt the same time, measure and improve the conversion funnel on your website, from increasing  add-to-cart rate, checkout rate to minimizing cart abandonment rate. Map out the sales conversion funnel from the moment customers land on your site to the moment they leave, analyze and fix the steps at which your customers drop. Step by step, you will see your conversion lift up and sales grow.

Offer selling points that add values

In eCommerce, brands that merely sell physical products cannot go big and compete. Successful businesses offer much more than that: they sell added value like top-notch services, information, emotional values, and solutions to customers’ pains. In the dropshipping market where you have so many competitors, stand out from the crowd by helping your customers to solve their problems with your products and its added values.

Now you know what is dropshipping

The question “what is dropshipping?” and all the basic things one should know before getting started have been answered. Now it’s your turn to sleeve up and turn your dropshipping business plan into action. You may start small at the beginning with uncertainty and perhaps fear of failure, but all the successful entrepreneurs used to be at the same starting point. Draw up a strategic plan, evaluate opportunities and costs, and make your business dream happen.