Dropshipping runs on a simple principle called C-R-M-C, decoded as:
C: Customer visits the retail website/online store and places an order
R: Retailer receives the order and for processing forwards it to the Manufacturer (Retailer does not stock any goods)
M: Manufacturer ships the order directly to the customer
C: Customer receives the goods and further service requests are handled by Retailer
The retailer thus completely saves on warehousing and logistics.
How does Dropshipping work?
Let’s assume customer orders a console game from an online store. The online retailer (also called a dropshipper) receives the order and forwards it to a manufacturer for logistical execution. The manufacturer packs the ordered products for the customer and ships them. The packaging here is kept in the branding of the seller or dropshipper. At no time does the customer learn about the dropshipping model, instead the customer has the feeling that he is receiving all services from a single source – i.e. the retailer.
Dropshipping offers multitudes of benefits to retailers, such as:
- Low investment costs as warehousing and logistics are handled by manufacturers
- Low capital commitment as no need to stock goods
- Large assortment possible as the model easily operates with multiple suppliers
- High scalability in a short time
- Ability to internationalize
As true for any business, Dropshipping has its own set of challenges, such as:
- Low margins
- Difficulties in cross-selling
- Difficulty in calculating shipping costs
- Not controllable inventory
- Uncertain delivery situations
- Low control over shipping route and delivery time
- Difficulty in handling returns
How to start Dropshipping business?
The art of dropshipping is to find suitable partners and to automate all processes as far as possible. It is an interesting business model with which online retailers can expand their articles, their assortment and earn good money.
Follow this 5-step process to build and run your e-commerce business smoothly:
- Choose your niche: While you build your business plan and do competitor product research, it is equally important to arrive at your niche market. It helps you gain expertise and traction while establishing your business as a specialist.
- Find reputable and trustworthy suppliers: This is imperative to your success in dropshipping business. Make sure you choose reputable partners with a good amount of experience and expertise in the field.
- Build your online store: You can easily build an online store with e-commerce builders like Shopify, WooCommerce, Oberlo etc. This step-by-step guide will help you to set up your e-commerce site, thoroughly. (link)
- Market your dropshipping business: Well thought out marketing strategy is crucial to your success. Start with defining the target audience, figure out the right traffic channels and persistently build your brand presence. Here you can learn How to market your dropshipping business. (link)
- Analyse and improve your store: When it comes to growth, constantly analysing and improving your store setup, inventory, suppliers, and services is a must. Here you can learn How to optimise your online store. (link)
However, dropshipping is neither easy nor inexpensive. Without certain capital cover and initial investment, a solid e-commerce business model can hardly be realized, contrary to the promises of many providers.
How much does it cost to launch a Dropshipping store?
Dropshipping naturally involves costs for online retailers. These includes:
- Shipping fees: Shipping fees are relatively transparent and only standard market shipping costs are estimated. In most cases, wholesalers make use of special conditions offered by parcel services, which results in favourable terms.
- Handling fees: Handling fees, sometimes also called “pick-and-pack fees”, are usually charged per item. They cover the costs of picking and packing individual shipments.
- Low-quantity surcharges: You may also be faced with surcharges for small quantities. This is a relatively widespread practice among wholesalers, who use it to protect themselves from small orders.
How to find the best Dropshipping suppliers?
Follow these steps to identifying the right dropshipping suppliers:
- Research on the Internet: The challenge here is to distinguish reputable wholesalers from unserious suppliers. An important characteristic for seriousness is the wholesaler sells exclusively to resellers and not to end consumers. Such wholesalers usually also require proof that you are running a business. Another factor is the payment model. One-time or monthly fees are not a sign for serious partners.
- Use supplier search engines: In addition to general Internet research, specific supplier directories such as Yellow Pages, Alibaba and Europages also provide interesting insights. However, you must search specifically for your product or product area here. The generic search term ‘dropshipping’ will not yield useful results.
- Consider dropshipping marketplaces: Dropshipping marketplaces such as eBay and Amazon are another business model. On these B2B platforms, products are generally offered directly for purchase or inclusion in the online retailer’s portfolio. Wholesalers usually pay a transaction fee here, while you as a retailer do not have to bear any costs for the basic version. However, there are also models where monthly fees are charged for merchant access with an extended range of functions.
To get started in online business, you can also dropship via Amazon or eBay as an alternative to your own online store. This way you can sell your products, earn money, and eventually open your own webshop with this money. In the long run, it is less worthwhile to sell only through Amazon and eBay because of the commissions that accrue. However, for beginners, it is a good way to get started.
- Visit offline events: Even in the age of e-commerce, building networks in ‘real life’ should not be underestimated. Visit a trade fair, for example. Here, all the important contacts in the industry are right there and you can find out specifically how the individual providers are doing on the subject of dropshipping.
5 Effective dropshipping strategies for beginners
These strategies will ensure your successful entry into dropshipping!
- Maintain correct inventories and prices: The main problem in dropshipping is incorrect inventories and prices. So, the goal must be to transfer inventory data to your store system without delay. The optimum is real-time synchronization so that your customers always have access to absolutely reliable information. If, on the other hand, your store incorrectly indicates that an item is available and the customer still does not receive a delivery, trust is lost.
This means that you should only work with partners who enable data synchronization at short intervals or in real-time. If you already know that your supplier only updates the data at longer intervals, you should at least build in a sufficient buffer of time. Also, make sure price updates are communicated as soon as possible.
- Communicate accurate shipping status to end customers: Once the goods have been shipped by the wholesaler, the end customer must receive a shipping notification from your online store and the shipping status must be updated. It is therefore essential that the wholesaler transmits a shipping notification. If this is done exclusively by e-mail, you will reach the limits with this manual procedure after a certain sales volume.
You should therefore always ensure that shipping notifications are processed automatically. It is practical here if a unique tracking number is used in the process.
- Provide reliable time information: You should specify realistic delivery times in your store – even and especially if the delivery times of your stock items and the dropshipping items differ from each other. If experience shows that your supplier’s delivery times fluctuate, it is better to choose a more generous time.
If delivery times are consistently too long, you should consider changing service providers to avoid jeopardizing customer satisfaction.
- Use neutral packaging and documents: Optimally, your customer will not notice that they are receiving the goods from a dropshipping service provider. However, this only works if all packaging and accompanying documents are either neutral or even in your corporate design. It is best to provide the dropshipping service provider with your own material.
If it is not possible to enclose the invoice, you can also send it together with the shipping confirmation by e-mail.
- Make the returns and complaints process customer-friendly: Returns regularly raise questions for online retailers such as Where should the customer return? Who is responsible for handling it? For simple returns, the retailer is usually the first point of contact. In the case of a shortage or defect, it depends on what your service agreement with the supplier looks like. Affected goods will then either be returned to the supplier or must be sent directly to the manufacturer. In any case, make sure that the return address is marked on your shipping documents.
Good dropshipping service providers offer a reasonable regulation for handling returns. This means that you should also be able to return items.
Is Dropshipping Legal?
Yes! However, different states have their own rules and laws that regulate dropshipping businesses. Make sure to look up the laws in your particular state. To ensure the smooth functioning of your dropshipping business don’t forget to acquire a business license (if required by law), pay taxes on time and be careful to avoid copyright infringements.
Is Dropshipping worth it?
You might feel that the market is saturated and that’s true. However, many retailers are still making a handsome amount of money with dropshipping. It is estimated that the industry will continue to grow and by 2027 it will be worth $ 591.77 billion. Your success will majorly depend upon your niche and the marketing efforts that will help you to stand out from the crowd.
As you gear up to start your e-commerce business, it would be beneficial to use an ERP system in the background that supports dropshipping and connects to store systems via intelligent interfaces.
weclapp ERP seamlessly connects to your Shopify, WooCommerce and other stores and synchronously processes your important merchandise data such as payments, stock levels and shipping orders.
You can explore the weclapp system for free for 30 Days.