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What is Dropshipping?
Dropshipping is an effective and simple way to get into e-commerce. It is a strategy that is employed by many online sellers today to be able to lower their stocks on hand, cut down their delivery time and decrease shipping costs. It literally allows owners of websites to be able to send a single order or low quantity orders of customers to the companies who make or distribute the products. These manufacturers or distributors then deliver to the end customers.
The process of dropshipping involves three parties who take a product from manufacturing to market. They are a manufacturer, a distributor, and a reseller. By definition, dropshipping is a method of selling and distributing goods wherein the distributor or supplier of the product (the dropshipper) ships the product directly to the end user (your customer) on the retailer's behalf (that's you). The retailer makes their profit on the difference between the wholesale and retail price.
Let's use a specialty scrapbook as a sample product to demonstrate the process:
- ABC Crafts makes specialty scrapbooks. They do not sell directly to the public or supply the retailers who ultimately sell the players to the end user. They prefer to use distributors to handle the task of taking their specialty scrapbooks market. ABC Crafts sells scrapbooks by the truckload to distributors who pay $20 per scrapbook.
- EFG Distributing (dropshipper) is the company that purchases specialty scrapbooks in bulk from ABC Crafts and supplies them to resellers at a cost of $28 each. The distributor does not ship scrapbooks to the reseller, but ships orders directly to the reseller's customers as the scrapbooks are sold.
- Sheryl, a stay-at-home mom and owner of XYZ Crafts, sells specialty scrapbooks to the public from her online webstore. She orders the scrapbooks from EFG Distributing as she sells them (usually one at a time) and has EFG ship the scrapbooks directly to her customer. Sheryl sells specialty scrapbooks to the public for $35 each, which means that for every scrapbook sold she nets $7.
What are the steps involved?
- You open an online webstore with a shopping cart and the ability to accept credit cards.
- You find a distributor who is willing to dropship the products you want to sell.
- You establish an account as a retailer with the supplier you choose.
- You receive images and descriptions of the products you want to sell from the supplier and post them on your webstore.
- You market and promote your webstore.
- A customer surfs to your webstore and falls in love with a product that you have priced at, say, $80. They purchase the item with their credit card. Your webstore charges their credit card $80 plus your shipping fee.
- You turn around and email the order to your supplier, along with the customer’s name and address.
- The supplier sends the product directly to your customer, with your webstore’s name on the package.
- The supplier charges you the wholesale price of, say, $45.00, plus shipping.
- Your customer gets a cool product from your store shipped to their door.
What are some dropshipping advantages?
As distributors or wholesalers, dropshippers are able to purchase products in large quantities. This lowers the cost of their products, which in turn lowers the price you pay for the products you offer. They also do a large volume of shipping, which gives them better rates with the shipping companies. In both these situations, the dropshipper is able to obtain something called a volume discount. This volume discount is something you as a smaller retailer would never be able to obtain. So by utilizing a dropshipper, you are able to tap into this “discount” and either pass it onto your customers in the form of lower prices or use it to improve your bottom line.
Another benefit of utilizing dropshippers is the added flexibility you have in developing a product offering. This allows you the opportunity to offer a broad array of products from possibly several dropshippers to better serve your customers. No additional capital investment is needed and the risks associated with carrying large amounts of inventory are minimized.
Without the hassles of acquiring, managing and shipping inventory, you can focus more time understanding the market and analyzing customers’ needs and wants. This also frees up valuable time so you can also promote and market your webstore.
Things to consider
Unfortunately, like many aspects of business, there are unscrupulous people out there that would like nothing better than to scam you out of your hard earned, precious money. Dropshipping involves several risks that should be considered and weighed before making the decision to proceed with this type of business model.
Don’t be impulsive. Do your homework. When selecting a wholesaler or distributor, study as much as you can about them before acquiring their services. Scour the search engines to see what people are saying about them. Understand their policies, paying particular attention to the fine print. Sometimes buried within the fine print are policies and fees that can really cause you and your customers problems. As you will be trying your best to offer the best service to your customers, you should likewise look for dropshippers that endeavor to offer you the same treatment.
Know the costs. Again, pay attention to the fine print. In addition to the product price, what other charges will you as the retailer receive? Knowing the “whole story” will give you a complete picture of your own cost structure. This will enable you to implement a more profitable and effective pricing strategy.
Understand the paying schemes. For example: will you need to pay the dropshipper at the time of each order placed with them, or will they allow you make monthly payments on your account? Knowing this will enable you to better plan the use of your precious financial resources. Most will have you pay with each order, but some do allow you to pay each month.
Insist on integrity and credibility. A dropshipper is like a business partner to you. As mentioned previously, you want to offer your customers a superior level of customer service and support. This sets you apart from your competition. But if your supplier, your dropshipper, does not live up to that same level of integrity, it makes it very difficult for you to do the same for your customers. Insist on fairness and honesty. While it is a big process to change product offerings, or even just product suppliers, do not be afraid to do just that if the company you are using is not living up to your expectations.
Don’t expect something for nothing. The concept of checks flowing into your mailbox with minimal work on your side just isn’t true – especially when it involves dropshipping. The use of dropshipping does eliminate a lot of work on your side. But all it really does is provide you more time that should be spent on marking and customer support activities. E-commerce competition is fierce, and marketing is key.
When it comes to profits, do not be fooled by some dropshippers’ outrageous claims about cheap wholesale prices and huge profits. Unless your business has a lot of capital to invest in inventory then you will never see extremely cheap wholesale prices. Consider this as the price you pay for not having to carry inventory or worry about order fulfillment. In return, what you do get is the opportunity to make a more modest profit on the products you sell. Despite this scenario, dropshipping is a viable business model and can be quite profitable.
Link to Product Sourcing video lessons
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