One of the best ways to start an online business is to adopt a drop ship model. This means that you don’t carry any inventory when you make a sale. In a drop shipping business model, you list an item for sale on your website and when a customer makes a purchase, you order it from your supplier and have them ship it directly to the customer as if it was coming from you. The beauty of this model is that you don’t carry any of the inventory risk. In other words, you list a bunch of items on your site and if some of them don’t sell, you aren’t stuck with that inventory. Your supplier is the one taking all the risk of carrying the inventory, storing it and paying for it.
So why would a supplier allow you to do business with them in this fashion, especially when they are the one assuming all the risk? We’ll discuss this in detail below. Let’s look more closely at the steps involved in starting a drop ship business.
In this post, we will cover the following aspects of drop shipping:
- What is drop shipping?
- Steps to Start a Drop Ship Business
- Benefits and Disadvantages of Drop Shipping
- Common Drop-Shipping Mistakes to Avoid
- Top Questions to Ask Before Using a Drop Shipper
- Is Drop Shipping a Proven Business Model?
- The Best Types of Products to Sell Through Drop Shipping
What is Drop Shipping?
So, what is drop shipping and how does it work? In this model, you offer items on your website without having to carry any inventory. When an item is sold, you order that item from your supplier and have it shipped directly to your customer as if it was coming from you.
In short, drop shipping Involves the following Steps:
- You find a supplier that offers the types of products you are interested in selling.
- You open an account with the supplier and get a list of their products.
- You list those products for sale online.
- A customer buys an item from you.
- You purchase the same item from your supplier (i.e. the drop-shipper) and ask that they ship the item to your customer.
- Your supplier ships the item directly to your customer.
In the drop ship model, your profit is the difference between what the customer paid you and what you paid for the product minus any fees.
So why would a supplier agree to do business with you when they are the ones carrying all the risk? It is mainly because in today’s competitive landscape suppliers are realizing that they need to offer drop shipping to gain more customers. These open-minded companies offer dropshipping to break down barriers for their customers and to make it super easy to get started. It’s a win-win for everyone because you now have a viable business model and they gain a legitimate reseller for their products.
So, in drop-shipping you become a retailer. However, the difference is that you no longer carry any inventory. This is a huge barrier that is removed. Traditionally, if you wanted to become a retailer you had to carry the inventory, and thus, take the inventory risk. If you got stuck with that inventory then you were out of luck. In drop shipping, you only buy what you sell so you don’t bear any inventory risk. In short, it’s your supplier’s job to create great products and it is your job to offer an outlet to sell those great products with the understanding that they will ship directly to your customers when one of their products are sold.
Steps to Start a Drop Ship Business
Here are some steps to follow when you decide to start a drop ship business:
1. Choose a Niche
Figure out what you’re going to sell by doing some research and browsing around to see what solutions are in demand in the marketplace.
2. Find Your Competitors
Find other companies already selling the types of products you’re also planning to sell. See how these competitors operate and try to learn as much as you can about the viability of your proposed product line.
3. Build a Site
Create an online store with your own domain name so you can gain credibility when you contact suppliers to open an account. They want to know that you are a legitimate business. This doesn’t mean that you can’t sell on marketplaces like eBay or Amazon but you want to at least have a basic website so you can look established when looking for drop ship suppliers.
Thankfully, these days it doesn’t take much to open your own website. There are several options available at extremely low prices to get you started. One of the best options is Shopify where you can get a basic site for around $30 per month. Another option is WordPress, which is best known for being a blog platform. WordPress offers a plugin called WooCommerce that allows you to build an ecommerce store on the WordPress platform.
4. Start Opening Accounts with Suppliers
Start to contact suppliers that offer the types of products you want to sell and begin opening accounts with them.
5. Begin Loading Products for Sale
Once you have secured some suppliers you need to begin loading their products on your site for sale. Once you are experienced you can also begin to offer those products on other marketplaces such as Amazon or eBay. However, before you begin offering drop shipped products on these marketplaces make sure that your supplier is reliable. These marketplaces have very strict rules about shipping times and product quality and you don’t want to get suspended because your supplier dropped the ball on drop shipping (no pun intended).
6. Generate Traffic to Your Store
Get diversified sources of traffic from various forms of advertising and/or through search engine optimization (SEO). You want to start planning ways to drive traffic to your site from many different channels so you can maximize your exposure and your sales. There are several ways to generate traffic to your store. Traffic generation is beyond the scope of this post but read our other posts about traffic generation to gain a better understanding of the various methods available to you.
7. Automate Your Processes and Outsource Tasks
Once you build your site and begin operating as a real business you’ll want to start incorporating some automation and outsourcing so you don’t do all the grunt work. You should try to automate as many tasks as you can so your operation becomes as efficient as possible. You’ll also want to reach out to sites such as Fiverr (or other virtual assistant sites) and have other people do some of the low-value tasks that may take up a lot of your time. You want to focus your time on more important activities that bring you a higher return.
The Benefits and Disadvantages of Drop Shipping
Just like any other business model, drop shipping has its benefits and its disadvantages. Here are some of the pros and cons of a drop ship business model.
The Benefits of Drop Shipping
Location Independence – Since you aren’t carrying any physical inventory, you can literally run your business from anywhere in the world because you won’t need to worry about storing your merchandise anywhere.
No Inventory Costs – You only buy your merchandise after you sell it so you don’t have to lay out any money for inventory. As a retailer inventory is one of your biggest money outlays so being able to avoid tying up your capital in inventory is a huge advantage.
No Warehouse Costs – You don’t have to store the inventory anywhere.
You Can Test Products Lines with Little Risk – You can offer to sell all types of items until you figure out what products are most in demand. All you do is simply offer them for sale so you can see which ones are the best sellers.
Easy to Scale – It is very easy to scale a drop-ship business. Once you learn the basics, you can easily repeat the process with additional product lines.
Your Business Becomes an Asset – A website with real customers and real traffic has value. Once you are established you can sell your business for a profit. For example, a store making a $1000 per month in net profit can garner a $20,000 selling price.
The Disadvantages of Drop Shipping
Smaller Margins – It is likely that selling someone else’s products has less profit than selling your own products.
Limited Control Over Your Inventory – Since you’re not actually carrying any inventory, you run the risk of losing sales if your supplier runs out of stock. You’ll need to wait until your supplier replenishes their inventory before you can sell that item again.
Minimum Control Over Shipping Times – Shipping time has become one of the most important metrics in ecommerce. Many marketplaces measure your shipping time very carefully and penalize you if you fall short. Therefore, you need a drop ship supplier that can ship your orders as soon as they come in.
Increased Competition – You’re likely to have a lot of competitors. With drop shipping, other people will probably sell the same products that you’ll be selling.
Common Drop-Shipping Mistakes to Avoid
When you first begin, it will be easy to get tempted by a lot of shady companies trying to take advantage or your lack of experience.
Here are a few pitfalls to avoid:
- Never pay for access to a supplier. Good suppliers won’t charge you to become a customer so if somebody wants to charge you an entrance fee then you’re probably asking for trouble.
- Only work with suppliers who enforce Minimum Advertised Price (MAP) policies. That means that everyone is required to sell the product at or above a specified price, which evens the playing field and makes it possible to compete on other factors rather than just on price. If everyone sells a product at the same price, then it allows you to compete based on customer service, shipping time and other factors.
- Don’t buy someone else’s template store. One way to avoid starting from scratch is to buy an existing business. While there is nothing wrong is buying a well-established business, it is easy to fall victim to a lot of scams. Do not buy turn-key drop ship stores that are for sale and are already loaded with products. These are just a copy-and-paste of other template stores. If you do buy a business, make sure to do your due diligence to see if the site that you are buying has real value.
Top Questions to Ask Before Using a Drop Shipper
Here are some important questions to consider before working with a drop ship supplier. For a more detailed explanation of each of the points listed below, make sure to read my post entitled, “14 Key Questions to Ask Before Using a Drop-Ship Supplier.”
- Is there a drop-ship fee?
- Can your potential supplier handle drop shipping?
- Will they ship out in one business day to satisfy the 24-hour shipping deadlines set by Amazon, eBay and other top marketplaces?
- Is tracking number retrieval automated or do you need to manually contact your supplier for each order to get a tracking number?
- Can they give you an inventory feed to load their products?
- If they do have an inventory feed are their products neatly categories into clear categories and sub-categories?
- Can they give you good pictures for their products?
- Are their products correctly listed?
- Do they have an IT team that can assist you with setting up the products?
- Can they give you a daily (or hourly) feed to update your inventory quantity?
- Do they have enough inventory on a regular basis?
- Are they giving you a good price so you can compete?
- Will you be a small fish among a sea of drop-ship customers? If so, how will you differentiate yourself?
- How do you place orders with your suppliers? Is it efficient and automated or manual? Is it very time consuming?
Is Drop-Shipping a Proven Business Model?
If you operate your drop ship business efficiently and effectively, drop shipping can be a viable and profitable business model. There are thousands of successful small-to-medium sized businesses generating millions of dollars through a drop ship model. Moreover, drop shipping isn’t just limited to small businesses. There are a lot of large companies doing millions of dollars in business through drop shipping. Some examples include Overstock.com and Wayfair.com who each generate close to a billion dollars a year in revenue.
On the flip side, if you don’t treat your drop ship business like a real business, then your chances of success dwindle. You need to constantly focus on keeping costs down while growing your business through effective streamlining, automation and outsourcing.
The Best Types of Products to Sell Through Drop Shipping
When it comes to drop shipping, you’ll want to generally stick with products that have a strong Minimum Advertised Price (MAP) policy. This means that everyone is required to sell a product at or above a specified price point (i.e. the MAP price). Suppliers set aggressive MAP policies to protect their brands from eroding. Therefore, try to find suppliers that have a strong MAP policy and who enforce it very aggressively. This aggressive monitoring helps filter out any competitors who break MAP. This is a benefit to you because it helps eliminate competitors and allows you to compete based on customer service, shipping time and other factors.
Once you find a good niche, you’ll want to consider the price points at which you’ll be selling. It is often better to sell more expensive products but this is not a requirement. To illustrate this point, let’s compare an inexpensive product such as a cell phone case to a more expensive product such as a professional triathlon bicycle.
The cell phone case is probably in high demand, it is small and easy to ship and it is not terribly risky to sell. In other words, if something goes wrong with the sale you aren’t exposed to too much risk.
On the other hand, the professional triathlon bicycle is bulky, it is difficult to ship and it sells at a high price, which exposes you to a greater degree of financial risk if something goes wrong.
Let’s look at the economics of selling these two types of products. If you sell the cell phone case for around $10 with a gross margin of 30%, then you’ll be able to keep $3 per sale. On the other hand, if you sell the triathlon bike for $1000 with the same 30% gross margin, then you’ll be able to keep $300 per sale. In each scenario, you’re putting in the same amount of work so you might as well make more profit for each sale.
Let’s look at another metric called Target Monthly Units Sold (TMUS). Imagine that we want to achieve $3000 in profit every month. With the cell phone case, we will need to sell 1000 units (at $3 profit per sale) to reach $3000 in profit every month. With the bicycle, you would only need to sell 10 units to achieve the same $3000 monthly profit. That’s a pretty big difference.
To take this example even further, let’s look at it in terms of conversion rates. The typical conversion rate for a pretty optimized website is around 2.5%. Conversion rate is basically the proportion of people that buy something after visiting your site. Therefore, at a 2.5% conversion rate, to sell 1000 cell phone cases, you’ll need to bring in around 40,000 visitors to reach your $3000 profit goal. With the bike, you’ll need 400 visitors to achieve the same profit goal.
There are other benefits to consider when selling higher ticket items. For example, selling fewer units means having to deal with less customer service issues and questions. You also have fewer orders to process, which gives you more time to do other important things.
However, this doesn’t mean that you can’t sell lower priced items. If you find a product that sells well, then go ahead and sell it. The examples above were meant to illustrate the basic economics used to evaluate a potential product. There are no written rules when it comes to choosing your niche.
Conclusion
One of the best ways to start an online business is do drop-shipping. Drop shipping allows you to offer a large variety of products without having to take the risk of investing money in purchasing those products. Just like any other business model, drop shipping has its benefits and its disadvantages. Before you jump in, review the information listed in this post to determine if this model is right for you. For example, before you list a supplier’s products on your site you need to determine if their products are worth listing. Remember, while you don’t have any inventory risk, there is a cost associated with managing your items. Nothing is free and drop-shipping is no exception. You still need to spend time and money posting items on your website and marketing them.
As you will easily find out, many suppliers are simply not equipped to handle small orders. However, to compete in today’s ecommerce landscape, many traditional suppliers are reluctantly agreeing to drop-ship without realizing the enormous effort and planning required to do it correctly. While some of them get it right, many fall way short and end up causing enormous heartaches for ecommerce merchants.
Therefore, make sure you do your homework before you embark on this journey. To assist you in this planning, make sure to review my post entitled, “The 3 Cs and 4 Ps – A Critical First Step in Business Planning.” With the right planning, you have the potential to build a successful and profitable business through the drop ship model.
Business Consulting Services: If you’re a small business owner looking to start or improve an online business then let me show you how to benefit from my experience. I have helped several online resellers grow their businesses by developing an online strategy to sell on Amazon, eBay or any other marketplace. Call me at 310-574-2541 or email me at Pez@Pezlogic.com for a complimentary business review.
4 thoughts on “How to Start a Drop Ship Online Business”
Great post