What is Dropshipping? How Does Drop Shipping Work?
Dropshipping has recently gained popularity as a way to run your own online business with limited upfront costs and no need for physical product inventory. While it may seem like an easy way to make money, the amount of competition in the dropshipping marketplace means that finding a product niche is essential to running a successful business long term.
What is dropshipping?
Dropshipping or drop shipping, is a retail order fulfillment method that doesn’t require physical stock or inventory. With a dropshipping model, the seller purchases items from a third party store and has it shipped directly to the customer. This way, the business doesn’t handle the product but instead facilitates the customer purchase.
While traditional retail models require storage for physical stock, dropshipping items are purchased on demand by the seller, removing the need for costly storage facilities, inventory management systems, and shipping logistics.
The pros and cons of running a dropshipping business
As with any business model, running a dropshipping business comes with positives and negatives. Before investing time, effort, and money in a dropshipping business, it’s important to consider both and decide whether this business model is right for you.
Advantages of running a dropshipping business
1. Be your own boss
As any business owner or entrepreneur will tell you, getting to be your own boss can be incredibly rewarding. As a business owner, you’re in the driver’s seat of your company’s success, and you get to call the shots.
2. No need for physical inventory
Another positive of dropshipping is that this business model removes the need for product inventory, so you don’t need to spend money on a physical store. In addition, because wholesalers ship products to customers directly, you don’t have to store or keep track of product inventory like you would with a brick and mortar location.
3. Smaller startup and overhead costs
Because there’s no physical store or storage facility involved, getting started with a dropshipping business can involve a lot fewer costs than a traditional store. You do, however, still have to pay for the hosting of your ecommerce website, as well as fees to your suppliers and payment gateway provider.
Disadvantages of running a dropshipping business
1. Highly competitive environment
While running a dropshipping business can save you money in overhead costs, it makes up for it in maintenance because dropshipping is a highly competitive market. Other business owners are always trying to beat one another in terms of product offering or price. Being able to stay ahead means continuously researching product trends and prices to maintain a competitive edge.
2. Low margins on sales
Dropshipping is known for having razor-thin margins. You’ll have to sell a lot of products in order to turn over a profit. That means you have to always be thinking of ways to attract and convert customers to generate income for your dropshipping business.
When you first start out, it will take a while to build up a customer base. However, if you already have another online business, rerouting customers to your dropshipping store can be one reliable source of traffic.
3. No control over supply chain
As a seller, the quality of your products, shipping speed, and inventory stock all depends on the wholesaler you are purchasing from. Because you are acting as an intermediary between the wholesaler and the customer, you have very little control about continuously getting access to inventory at consistent prices.
Ultimately, running a dropshipping business is a great option for people with all levels of experience as it involves fewer variables than running a physical business.
6 steps to get your dropshipping company off the ground
If reading the benefits and drawbacks of a dropshipping business has only reinforced your desire to open your own store, you’re on the right track. While opening a business requires time and commitment, following these steps can make it easier:
1. Choose the right company structure for your dropshipping business
As you begin to bring your business to life, it’s important to ask what type of business you want to have.
Are you running your business on your own, or do you have a business partner? How much space between your personal finances and the finances of a business do you picture having? Asking yourself these questions can help you decide whether a sole proprietorship or an incorporated company is the right choice for you.
A sole proprietorship is a business owned by one person who gets all the profits and is personally responsible for all the business’ financial and legal liabilities.
An incorporation is a business where directors make decisions for the company and owners are not personally liable for the business’ financial and legal liabilities, as incorporating a business means corporations are separate legal entities.
After you decide what type of business is the right one for you, it’s time to register your business. Registering a business helps bring legitimacy and awareness to your venture. Owner makes business registration easy, and comes with perks and resources to make your business a success. Learn more about sole proprietorships and incorporations through Ownr here.
2. Determine how you will manage your finances for your dropshipping businesses
As your business gets off the ground, it’s important to set it up for success by opening up business-only financial accounts and getting in the habit of reviewing monthly financial statements. Blending personal and business finances can cause administrative issues when it comes to tax season and can pose a unique challenge in a time of business growth, when you have less time for business administration. Getting started on the right foot can save a lot of headaches down the road.
Business chequing account
Getting a business checking account is a must for every new business owner. Owners should aim to have all business revenue and expenses come in and out of this primary account, creating a clear line of vision on financial statements and simplifying record-keeping for when it comes to accounting.
Business credit card
Because of the number of transactions involved in dropshipping, it is especially valuable for business owners to invest in a business card as it can lead to racking up perks and rewards. In addition, a credit card can serve as an emergency financial resource if something unpredictable happens to your business, like if your primary business account gets temporarily frozen.
3. Find the right products to sell in your dropshipping store
The most important part of having a successful dropshipping business is finding in-demand products to sell at your online store. This is because you make money by selling products for which there is a need. As a result, discovering opportunities for profit will mean looking at what people are looking to buy based on their needs or based on common interests like produce niches when it comes to finding the right product range for your dropshipping business.
Research products by trend
To discover what is currently trending in ecommerce, you have to continuously conduct research and adjust your offerings based on these trends. To discover what’s selling, you can search for how certain products and product categories perform over time using specific terms. This method works best if you have a rough idea of what you would like to sell, or when you start to form a hypothesis about what may be trending. To further test your theory, you can search for market reports based on a specific product that can provide market projections on sites like Statista.
For general trending ecommerce product inspiration, you can look to large companies like Amazon and see what some of the category bestseller products are, and use it as an inspiration for your own product selection.
Research products by niche
The key to dropshipping is to tap into a niche audience or product selection. A niche is a market that is a specific portion of a market that is united by a common interest or demographic. This is useful for dropshipping because in order to sell products, you need to find a way to stand out among the competition. Marketing a niche product can be an effective way to tap into an audience.
For example, the pet industry has been experiencing a boom in recent years, with millennial “pet parents” consistently spending increasing amounts on their furry companions. Tapping into specific trends within this niche category has a higher chance of having a return because there is proven demand, which means it is easier to make a connection with your audience. For example, animal stress beds have been experiencing a spike in sales as pet parents want the latest in bedding comfort for their pets.
Test your product idea
While capitalizing on a niche product can bring ample returns, it’s important to research the market to ensure there is a large enough audience to market to before making an investment in selling the product as part of your dropshipping offering.
Whether you’re choosing to sell products based on trends or by finding a specific niche, before committing to your idea, consider testing it by conducting a competitive analysis of other businesses that are offering the products you are looking to sell. You can check for product reviews and social media engagement across your competitors to give you a good idea of what is and isn’t working with product experiences in this area.
Considerations for finding the right product to sell
When selecting products for your store, consider looking at upcoming trends and higher-margin items to help boost profits.
Getting in on trends early
When it comes to dropshipping, getting in on trends early can lead to a higher payout. It’s good to get into the habit of regularly conducting research to be one of the first to offer products before they hit it big.
Focusing on high-margin items
When you’re researching products to offer at your dropshipping business, it’s a good idea to focus on carrying high-margin products. This means that you will have to sell fewer units to receive a return on your investment (ROI).
4. Find a supplier for your dropshipping business
In order to turn a profit, you need to have reliable access to product supply. This is why finding the right dropshipping supplier, also known as a wholesaler, is key to your business’ success. When looking for a supplier, there are many strategies you can employ, like contacting manufacturers, looking for suppliers on Google, or using supply intermediaries.
1. Contacting manufacturers
This strategy works best if you already know the niche product you are looking to carry. Once you have your product shortlist, call the manufacturer directly to find out what supplier offers it. By calling the manufacturers of a few comparable items, you can reverse-engineer a shortlist of the top suppliers for the product you’re looking to sell.
2. Finding suppliers using a Google search
Another strategy for finding a dropshipping supplier is to look for suppliers directly by conducting a Google search. Because suppliers are not sophisticated in their marketing efforts, this usually means having to go down a significant number of Google pages to locate them. When you do discover a supplier with a website, don’t judge a book by its cover and try to look for reviews online to help gauge their authenticity. This is a time-intensive and laborious process, but it can help you stumble upon suppliers with superior cost savings.
3. Using dropshipping supplier intermediaries
Another option to finding a supplier is to go with a reliable supplier intermediary like Oberlo and Spocket. These companies connect you with a catalogue of products and suppliers to choose from. In addition, they offer useful automated features like order fulfillment and automatic price updates. While these platforms charge you a monthly membership fee, they can save a lot of time finding reliable suppliers for your dropshipping business.
4. Spotting an inauthentic dropshipping supplier
When looking for suppliers, it’s important to compare the price points of multiple wholesalers before committing to help weed out inauthentic suppliers. Wholesale stores tend to offer significant cost savings, while retail stores posing as wholesalers tend to deliver only a fraction of the retail price, and even subpar products that can spark customer complaints.
Fake wholesalers can cause supply issues and even endanger you if the products they sell are not industry or safety compliant. This is why it’s important to thoroughly research every one of your suppliers. An authentic supplier will:
- Ask you to show evidence of your business, such as proof of registration
- Charge a small per-drop fee for placing an order
- Require a minimum order product quantity
However, they will not offer wholesale prices to the general public. This is a sure marker of a retail store posing as a wholesaler.
5. How to build a website for your dropshipping business
As a digital business owner, choosing an intuitive website platform is essential to helping your business perform its best. Some of the website builders that are suitable for dropshipping include Shopify, Big Commerce, and 3D Cart. While all of them cater to dropshipping to create customizable websites for businesses, there are some functional differences between them.
Ecommerce website builders that cater to dropshipping businesses
Ecommerce website builders develop integrations with suppliers and shipping partners to simplify parts of the dropshipping process for their sellers, which vary between each website. The type of product you are looking to sell will help decide which option is right for you.
- Free 90-day trial
- Convenient user-friendly admin panel for managing your store
- Integrations developed exclusively for Shopify, including Oberlo, a marketplace that makes it easy to find products to sell online and access to MXED, a marketplace for licensed pop culture merchandise
- Free 15-day trial
- Open SaaS where users decide future of platform upgrades
- Platform integrations including dropshipping suppliers Wholesale Sunrise and AliExpress Dropshipping
- Free 30-day trial
- Hundreds of customizable built-in features
- Platform integrations including Doba, a dropshipping supplier, Worldwide Brands, a wholesaler certifying company, and InventorySource, a dropshipping supplier directory with metrics integration
While Shopify delivers an intuitive user experience, Big Commerce and 3D Cart put more control in your hands when it comes to accessing suppliers. Being able to find up-and-coming suppliers is especially important for niche products that are trending.
All three providers shown here are equipped with POS integration that allows you to track Purchase Orders (POs) to ensure a smooth transaction with your customers. In addition, they provide monthly reports and automation features that can save the hassle of doing order fulfillment manually as your business grows.
Features every dropshipping eCommerce platform should have
Because dropshipping is a specific type of business, it’s important to create a dropshipping website that satisfies the needs of your customers and yours as the business owner. Some things to look for when selecting and building your website include:
- The platform where your website lives should be simple to use and affordable to maintain
- Look for platforms that support the plugins and integrations you want
- Look for platforms with scalable features and price models to prepare for business growth
Because migrating your website from one platform to another is time-intensive and can result in having to rebuild your customer base, it’s important to make the right choice for your business from the ground up.
Creating a brand for your dropshipping store
Creating a visual identity for your brand can go a long way in the success of your business. Not only is creating a brand for your dropshipping business a great way to stand out from the competition, but it helps add professionalism and bring awareness to your venture.
While it’s up to you to decide how much time you want to spend branding your business, investing in core foundations to create a look and feel for your store can help you connect with your audience and lead to higher order volumes.
Branding elements for your drop shipping store
At a minimum, your dropshipping business should have a registered business name and a logo. You can create a business logo with automated logo generators like Ownr’s. It allows you to customize iconography and choose a colour palette for a style that’s completely your own. Keep in mind that a logo that stands the test of time is one that is:
In addition to creating a logo, consider your product niche and how the customer experience can be factored into your brand look and feel. Creating a consistent brand experience across multiple brand touchpoints is an important part of building a long-standing relationship with your customers.
Another popular branding tool is a value proposition canvas. It is a visual tool that is composed of a chart with a square on the left and a circle on the right, with both divided into three sections. A value proposition canvas is a strategic business tool that can help you ensure that your product is meeting customer needs by examining your value proposition at a glance.
For a more extensive dive into building your dropshipping business brand, check out Ownr’s brand checklist that helps you create a memorable brand that stands out above the rest.
6. Choose your product payment gateway
Payment gateways are designed for secure and reliable payment transactions between wholesalers and sellers, and sellers and their customers. While the list of available payment gateways is extensive, here are five that offer integration features with wholesaler websites:
|Per Transaction fees||Per Transaction fees|
|Payment Gateway||Fixed Monthly Fee||Flat $ transaction fee||Percentage transaction fee|
While payment gateways like PayPal, Stripe and Square offer superior brand recognition and customer support, smaller providers can offer an edge. For example, Adyen’s variable percentage transaction fee can work in favour of sellers who sell products specifically within certain product categories. In contrast, Payoneer’s lower per-transaction fee can benefit businesses with higher volume ordering by saving them the percentage transaction fee.
Troubleshooting your dropshipping store
No matter how much planning you do, there are bound to be speedbumps in running every business. See how you can be prepared for two of the most common ones when it comes to dropshipping.
3 ways to manage shopping cart abandonment
Cart abandonment happens when a customer places an item into a shopping cart but does not complete the order by finalizing the payment. While cart abandonment is an issue for online stores of every size and industry, there are steps you can take to decrease the frequency of its occurrence and encourage your customers to complete their orders.
Some of the top reasons for cart abandonment include:
- High additional costs (ex. taxes or shipping)
- Time-consuming checkout
- Forced account creation
Thankfully, dropshipping website builders are aware of the issue of cart abandonment. To address it, they offer features that can help encourage purchase completion. Here are some of the features you can build into your shopping experience that nudge your shoppers to complete the sale.
Deals help create a sense of urgency for the customer. Limited-time savings or per cent off deals send a “now or never” message to your buyers that can encourage order completion.
2. Coupon codes
Coupon codes that are served up during the shopping process within the platform can also encourage sales completion by offering a percentage-off discount that feels like a deal. You can also submit codes to coupon code aggregate websites like Retailmenot to drive customers to your store from external sources.
Offers help encourage sales completion by adding value, such as free shipping or offering a percentage off discount for the customer’s next purchase.
However, moderation is key. Nudging the shopper too many times can be perceived as forceful and lead back to the same problem you are trying to avoid – leaving you with an abandoned cart.
Making time for customer service
In comparison to other business models, dropshipping businesses can be prone to customer service complaints because there are more players involved between the product supplier, the seller, the shipment provider, and the customer. While customer service issues are impossible to eliminate, it’s important to plan for customer support for those making purchases through your dropshipping ecommerce store.
Dropshipping businesses are in a unique position because the wholesaler that ships the product is invisible to the customer, so any complaints go directly to you, the seller.
Website providers will alert you when there are issues with your order, but ensuring they are dealt with in a timely and effective manner is up to you. As a business owner, it’s important to set aside time to address and resolve customer concerns.
The general rule for addressing customer service is that any inquiries from customers should be responded to within 24-48 hours of the issue being brought to your attention.
4 useful tools for running your dropshipping business
Dropshipping is a business model that includes a lot of moving parts. Here are four tools that can help simplify different parts of your business.
1. Using Google Trends to research dropshipping patterns over time
Google Trends allows you to conduct free market research on the popularity of key terms over time by the search volume. In addition, it allows you to look at key term popularity in specific industries and countries. Google Trends is part of a drop shipper’s essential toolkit when looking to discover product trends and find niche keywords to optimize searchability. Last but not least, Google Trends offer a seasonality search feature that can help you discover what products people are looking for based on their mindset during a specific time of year.
2. Using Title Builder to optimize dropshipping product keywords
Using the right keywords is an essential part of product discovery for your dropshipping business. Websites like Title Builder help you discover the right keywords to use in your product titles that help make the product searchable and help customers find what they are looking for.
3. Using CamelCameCamel and Keepa to track dropshipping product pricing
Product prices are volatile in the dropshipping business, and customers are always looking for a great deal. Websites like CamelCameCamel and Keepa help you track real-time products and their prices on Amazon and eBay to make sure your sales price helps you stay ahead of the competition.
4. Using Trello to stay organized running your dropshipping business
Trello is a visual card-based project management tool that can help you manage tasks by category. It allows you to create task lists by project, subject, or week, with easy drag and drop functionality that can help you stay abreast of shifting business priorities.
Top frequently asked questions about dropshipping
“Is dropshipping legal?”
Yes. Dropshipping is legal but choosing suppliers that are authentic is important. As the seller, your reputation rests entirely on the product quality, timely shipping and legal compliance of the vendors you buy products from.
“Can I make money doing dropshipping?”
Yes. While the amount of profit every person makes varies, it’s possible to build a dropshipping business that can take the place of your full-time job over time.
“Am I responsible for shipping the products?”
No. If your website is integrated with wholesaler supplier websites, your order will be shipped to your customers automatically.
“Will I have to deal with customer problems?”
Yes. You are the point of contact between the customer and the supplier, so you will have to manage customer complaints and concerns on an ongoing basis.
“Do I have to deal with refunds and returns?”
Yes. You can choose to accept the item yourself or connect your customer with the supplier to sort out the return directly.
Get started with your own profitable dropshipping business
Starting a dropshipping business can be a highly profitable venture. However, setting up a dropshipping business requires time and effort to set it up for success, and staying on top of selling the right products at desirable prices requires regular maintenance. All things considered, a dropshipping business is a great way to start your own online business.
Ready to start your business? Ownr has helped over 35,000+ entrepreneurs hit the ground running quickly – and affordably. If you have questions about how to register or incorporate your business, send us a message via live chat, Monday through Friday from 9 am to 5 pm EST, or email us at [email protected]
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.