When the pandemic virtually halted in-person shopping, it further pushed global consumers toward the convenience of eCommerce. Many savvy entrepreneurs leaned into dropshipping as a low-risk online business model. Here’s an introduction to dropshipping and why it could be a great opportunity for digitally-driven entrepreneurs.
First, what is dropshipping?
The dropshipping business model allows you to sell products via online without having to own or manage the physical location where those products are stored and processed. You essentially promote and market products online. When a customer purchases from you, you notify a third party to ship orders directly to customers, and the rest of the process is their responsibility. In other words, you can open an ecommerce storefront and sell a wide range of products without having to manage the physical inventory and fulfillment.
Why is dropshipping a great opportunity?
Dropshipping allows e-commerce retailers to sell products without inventory, with suppliers shipping directly to consumers. Because it is inventory-lite and doesn’t involve manufacturing, warehousing and shipping, this business model continues to attract many who are seeking opportunities with low barriers to entry, flexibility in business operations, and scalability. In 2022 the dropshipping market was valued at USD $225.9 billion. It is projected to reach USD $476 billion by 2026.
Dropshipping is particularly compatible with social retail, especially as social media platforms are increasingly integrating ecommerce into its publishing capabilities, allowing retailers and influencers alike to embed direct links to purchase. For those interested in starting a dropshipping company, the following steps cover the basics.
1. Choose a Business Concept
Begin by defining what you’re selling and to whom. Discover whether a market exists for your product. Often dropshipping suppliers will offer data to help you make informed decisions. Focus on a clear demographic and a limited product range initially. Spend some time here as what you choose ultimately forms the foundation of your future business.
2. Choose Products to Sell
Before you develop a store, research products, shop around, and check reviews. Decide whether you wish to sell ready-made products or want to offer something customized. Order samples and ensure the quality is in alignment with your business concept as either a discount seller or as a purveyor of quality goods. Consider also the keys to successfully selling a product online. Are there quality images or digital assets to help your marketing or will you need to create those?
Remember that even the most well-researched product is not a guaranteed success. The process of dropshipping is full of trial and error. You may need to adjust or switch products entirely – especially if you are new to dropshipping.
3. Select Suppliers
Finding a reliable supplier is crucial – and challenging. About 84% of ecommerce retailers say finding a reliable supplier is the biggest challenge they face in starting a dropshipping company. With some effort, it is possible to get a direct source supplier, but most choose online marketplaces, such as Alibaba and Megagoods, instead as they tend to require less of dropshippers and offer a wider variety of products.
Factors like reliability, profitability, and return policies are important when choosing among various suppliers. Ordering samples, checking customer reviews, and researching a company’s history and market experience will help you find reliable suppliers. Ask about shipping times and confirm whether a supplier routinely keeps things in stock.
On average most dropshippers earn a 15%-20% margin on their products. When choosing a supplier, include their shipping costs and transaction fees in your calculations to ensure a profit is viable. When possible, choose a supplier that offers a return policy (keeping in mind that many do not). You will want to consider your own return policies based on what your supplier offers.
4. Build an Online Store
To start, acquire a custom domain name for your business, like .biz. Ensure your store features an easy and intuitive sales process and built-in payment pathways. For dropshipping, it is helpful to automate sales with orders to the supplier to avoid unnecessary work and to avoid human error. While your business site is the central hub, consider selling across multiple channels, like social media, Etsy, and Amazon to increase brand awareness and boost sales.
5. Establish Your Business
Set up your dropshipping company legally, and separate it from any personal assets. At a minimum, create a legal name, file for an LLC, acquire a tax identification number (TIN) and register for relevant permits. Remember that most states require that you pay sales tax on all sales, and the rate will differ by state. Failure to run a business legally or to pay necessary fees and taxes can result in significant repercussions, so you may wish to consult a professional for guidance.
6. Market Your Business
You cannot expect the right customer to just magically stumble on your business. Marketing will require strategic and deliberate efforts to attract customers and drive sales.
Join and network with groups that are relevant to your business. Build a presence on the social media platforms most often used by your target customer. Offer useful content to create additional value where you can, like answering questions on community boards. These efforts establish your expertise and authority on the products you sell.
In addition to the inbound marketing strategies listed above, you can also invest in traditional advertising efforts like Facebook ads and sales. Whatever tactic you use, devote some time and resources each day to attract attention and drive sales.
7. Scale Your Business
Dropshippers are constantly sampling and testing new products and seeking new opportunities for growth and sales.
As you become familiar with the process, introduce new products, and expand your reach. Communicate with suppliers to stay informed about new products and opportunities, especially those that compliment your existing product offering or that have relevance to your target customer. There aren’t limits to this sort of business.
Like any entrepreneurial endeavor, dropshipping is not without risks. The low barrier to entry, though a perceived benefit, may also result in intense competition and low margins. Additionally, customer service can be a challenge due to limited recourse with suppliers.
Despite the challenges, the benefits of dropshipping often outweigh the cons, making it a growing business opportunity if you invest the time and effort.