A few years back, there was a ton of buzz about dropshipping in the eCommerce space. Many entrepreneurs were thrilled to learn that they could harness the power of the internet to make money with minimal upfront costs.
This year, the buzz around dropshipping has died down a little bit and aspiring entrepreneurs are left wondering if there is still money to be made with this business model and whether it’s worth getting involved. The short answer? It depends.
In this post, we’re going to discuss what dropshipping is before we lay out the pros and cons of this business model. With that information in mind, we will determine what sort of entrepreneurs would benefit the most from dropshipping. To wrap things up, we will leave you with some actionable tips for finding success in dropshipping.
Table of Contents
- What is dropshipping?
- 8 pros of dropshipping
- 6 cons of dropshipping
- Who is dropshipping well-suited for?
- Top tips for finding success in dropshipping
- Buy and sell on Alibaba.com
- Final thoughts
What is dropshipping?
Dropshipping is an eCommerce business model that involves outsourcing order fulfillment to a supplier or fulfillment partner. Dropshippers do not hold any of their own inventory which helps them keep overhead very low.
With dropshipping, the retailer typically sells products that are developed, manufactured, and packaged under another brand’s name. Dropshippers can either sell on a B2B eCommerce marketplace, or on their own independent website.
Many opt for an established platform because they double as trusted search engines that buyers come to when they are looking for a specific product. This makes it much easier to drive traffic to your storefront, and ultimately, make sales.
Dropshipper can sell everything from shirts to car parts. As long as you can find a supplier to fulfill your orders for a specific product, you can sell it.
8 pros of dropshipping
There are many advantages of dropshipping which is why it became so popular among entrepreneurs. Let’s see why dropshipping has been such a hot topic in the eCommerce industry.
1. Cheap to get started
One of the most appealing aspects of dropshipping is that it is very cheap to get started. Since a third-party company manages your inventory, you don’t have to invest in any stock. Some eCommerce marketplaces, including AliExpress, let you start selling for free and only charge commission on sales that you make.
Some entrepreneurs claim to have gotten started with absolutely no money invested, but there are a few small investments that we recommend making. For starters, you need a reliable computer and Internet connection.
The first investment that we suggest is samples of the products you’re going to sell. You want to make sure that your supplier offers high-quality products, (or at least the quality that you’re expecting). Seeing them in person and feeling the materials that they are made of will give you a much better idea of the products’ quality.
It is also a good idea to register your business to create a legal entity rather than operating as an individual. This protects you in the event that there are any legal issues down the line. This also helps to keep everything straight for filing taxes. The cost of this varies by country and region, as most business guidelines are local. You can expect to shell out a couple of hundred dollars on this, but the protection that it provides is worth it.
2. Straightforward to set up
Another attractive aspect of dropshipping is that getting started is pretty simple. The main things that you have to do to set up your dropshipping business include choosing a niche, choosing products, finding a reliable supplier, setting up an online shop, and selling your products. This may sound like a lot, but when you take it one step at a time, it is very manageable.
Fulfillment and shipping can get complicated, so by outsourcing that part of the retail process, you’re saving yourself tons of headache and grief. This step alone requires a series of fine-tuned processes and monitoring logistics, so eliminating this makes getting started so much easier.
3. No inventory management required
Inventory management can be very tedious. You have to keep track of current inventory counts and study an array of reports to keep your inventory on track to meet current demands. You also have to organize and manage the physical products when they are in your warehouse. These things are not necessarily difficult, but they are time-consuming.
Outsourcing fulfillment means that you don’t have to worry about these monotonous tasks. Your fulfillment partners will handle all of the inventory management for you.
4. Testing products is simple
As an entrepreneur, a time may come when you want to expand your offerings and test new products. With standard eCommerce fulfillment, this carries a bit of a risk. You could stock up on a product and your audience may not be as interested as you anticipated.
However, dropshipping makes it easy to test products without any risk at all. All you have to do is see if your current supplier offers the product you want to start selling or find another one who does, and add it to your online shop.
This way, you don’t need to invest tons of money to see if the product will work or not. Since the risk is so minimal, you can experiment with as many products that you choose.
5. No physical location required
If you’re not holding inventory, you don’t need a fulfillment center. You can start a dropshipping business out of your studio apartment or even on the road. Not only is this incredibly convenient but it saves you a lot of money in rent and utilities or warehouse purchasing costs.
Dropshipping is a very low-risk business model. Since there is not much of an initial investment, you don’t lose much if you’re struggling to make sales or if you decide to get out of the business. The only thing you lose is the time that you’ve put in.
7. Build passive income
When they are properly set up, a dropshipping business can become a stable stream of passive income. This means that if you can master automation, you can sit back and watch the sales roll in and your bank account stack up.
The best way to do this is to use a reliable dropshipping plugin with your online storefront that automatically sends orders to your fulfillment partner. Hire a virtual assistant to be available to deal with any snags in the system and address any customer issues.
This only works if you partner with suppliers who are capable of holding up their end of the deal.
8. Easy to scale
Dropshipping businesses are relatively easy to scale because you don’t need to worry about coming up with the capital to buy a larger physical location, hire additional fulfillment staff, or invest in additional inventory. All you need is a fulfillment partner that is capable of large volumes of sales, and you can kick it into high gear.
You can scale your business by either expanding advertising and content marketing strategies or offering additional products.
6 cons of dropshipping
Although there are many positives to dropshipping, there are a few notable downfalls that we should point out. Let’s take a look.
1. Difficult to build a brand
Since a third-party company is manufacturing and fulfilling your order, your customers won’t have much contact with your brand after the initial order, especially if you’re selling on a large eCommerce marketplace.
Since the products delivered to your customers will likely have another brand’s name and logo on them, they may go directly to that brand’s shop if they want to make another purchase. Unfortunately, there is not much you can do about this as it comes with the territory.
This is one scenario where you can still make money without having a brand, but if you want to take on future projects or endeavors under the same brand name, you’ll still have to build from the ground up.
2. Limited control over the customer experience
Since you are not fulfilling orders, you have limited control over the customer experience. Shipments may come with missing items or with damaged packaging. Items may be delayed beyond their target arrival. This is all in the supplier’s hands.
The most you can do about this is choose a reliable supplier that you can count on to do the job right. We urge you to look into the reviews and testimonials for different suppliers so that you can see how well they’ve worked with other dropshippers.
3. No wholesale discounts
Since the supplier is paying for the warehouse, labor, and other expenses that go into order fulfillment management, they do not give dropshippers wholesale rates. This also has to do with the fact that a dropshipper who is experimenting with the business model or new products may not purchase their minimum order quantity over the course of their relationship.
Since the supplier won’t be absorbing these costs, the dropshipper will have to. This will raise the per-unit cost, potentially closer to retail rates than to wholesale rates.
4. Highly competitive
Since there is such a low barrier to get started with dropshipping, there are thousands and thousands of dropshipping businesses. Some of these retailers may have very similar ideas to yours. This creates very high competition.
However, if you get creative with how and where you present your products, it’s easier to rise above the competition.
5. Profit margins are relatively low
As we mentioned, starting a dropshipping business is pretty easy since your fulfillment partners handle the hard part of the job. That said, you pay for the convenience.
Suppliers that are taking care of fulfillment do not give dropshippers wholesale rates. That tack on additional fees for carrying out their end of the deal. These elevated per-unit costs decrease profit margins significantly as compared to standard eCommerce fulfillment.
6. Suppliers can drop off
There is always the chance that suppliers will leave you hanging. Some may go out of business and some may simply stop carrying the products you need. If you don’t plan properly, this can cause major issues for your business.
This is definitely an inconvenience if you don’t have backup options in place.
Who is dropshipping well-suited for?
There are many pros to dropshipping that outweigh the few cons for some entrepreneurs. This business model is unique, so it is perfect for some unique types of entrepreneurs.
Dropshipping is particularly well-suited for a few different types of entrepreneurs. Digital nomads, or people who travel the world and work exclusively online, find the dropshipping model valuable because it is sustainable for their “on-the-go” lifestyles.
It is also great for entrepreneurs that need a way to make some money to pump into other business ventures. New entrepreneurs can experiment with this business model to learn how to run a basic business while trying their hand at digital marketing.
Dropshipping is not for entrepreneurs that want to manufacture and sell their own products or build a huge brand. It is also not a great option if you are looking to “get rich quick,” because even though it is relatively easy to make your first dollar, the profit margins are not great.
Top tips for finding success in dropshipping
Dropshipping can be quite lucrative when approached with a well-thought-out strategy and backed by hard work.
There are no right or wrong answers when it comes to starting a business, and dropshipping is no exception. You can get as creative as you’d like. However, there are a few best practices that have helped others find success in the past.
Let’s take a look at a few of the top tips for starting or growing a dropshipping business.
Keep it simple
When you’re getting started with dropshipping, it is important to keep it simple and build as you go. This is especially the case if you’re new to entrepreneurship. Start with one supplier and maybe even one product if you’re still getting a hang of the business model.
You can always add more as things progress and you become more comfortable. You don’t want to overwhelm yourself from the start because that is a sure path to rapid burnout.
Partner with reliable suppliers
It is absolutely essential that you partner with reliable suppliers. This may mean paying them a larger cut, but if you want your business to do well, you need to keep all areas of the operation in check to the best of your ability.
It is also a good idea to choose a supplier that has similar values to yours. For example, if you value customer services, choose a supplier that also values this. You will never be able to control how they operate, but when your values are aligned, there’s a greater chance that their operations will be similar to yours in that respect.
Prioritize customer service
Building customer loyalty starts with providing great customer service. Have a phone line or email address available for customers to express their needs, file complaints, or report issues. If you aren’t able to stay on top of these lines of communication, hire somebody who can.
Your customer support representatives should have phenomenal people skills and be well-informed on your products and processes. If they don’t know the answer to a question, they need to be able to find an answer fast.
When you make customer services a priority, you set your business up for success.
Choose a hot product
The beauty of dropshipping is that you can jump on trends without assuming the risk. If there is a product that is currently doing numbers, find a supplier and add it to your dropshipping store. A good way to see what people are looking for is by using demand analysis and scheduling tools or Google Trends.
We recommend taking a glance at our list of the top 30 dropshipping products for 2021 to see some of the hottest items right now.
Always test your products
Every time you add a new product to your shop, make sure to test it. Order a unit for yourself so that you can see how it looks and feels in real life.
You can use these test units to take photos for your product listings and create promotional content, so it’s a win-win.
Prepare to take the blame
In the event that something is wrong with an order, you can’t just pass the blame onto the supplier. You have to own up to it and make things right with the client, even if you don’t feel like it was your fault. It’s your business, so it is your responsibility.
Even though your brand may absorb the shock of a bad customer experience, your wallet doesn’t have to. If your supplier was at fault, ask them to repay you for it. Do this in private and don’t share these details with the customer as making a scene will likely look bad on you.
Leverage generic items
If you can find a high-quality, generic version of the product you want to sell, we recommend going with that option. Oftentimes, multiple suppliers will carry the same generic brands, so if one supplier runs out, you always have backup options to keep that product “in stock” on your dropshipping store.
Get smart with routing orders
One of the advantages of online shopping for customers is convenience. Many online marketplaces have made millions or billions by perfecting the art of speedy shipping.
One way to cut down your delivery times and make your customers happy is by getting smart with routing orders. This comes down to choosing suppliers that have the capacity to fill orders at the pace that you need them to and are centrally located to your shipping zones.
You may even choose to work with multiple suppliers for customers in different regions to get them their packages faster.
Buy and sell on Alibaba.com
Alibaba.com is a business-to-business (B2B) eCommerce platform. Manufacturers, raw materials suppliers, wholesalers, and retailers come together on this marketplace to conduct trade from all corners of the world.
Since Alibaba.com is a B2B platform, it is not well-suited for building a dropshipping business. Most buyers come to Alibaba.com to purchase items in bulk at a wholesale rate. Dropshippers need a business-to-consumer (B2C) platform to connect with customers. AliExpress, also hailing from the Alibaba Group, is a great place for creating a dropshipping storefront.
However, Alibaba.com is a great place to connect with suppliers who offer fulfillment services. Not all sellers come to Alibaba.com intending to do fulfillment management, but you can find ones that do by making a post on our “Request for Quotation” (RFQ) platform. You can post what sort of products you’re looking for with some information about the support that you need and eligible suppliers can reach out to you directly with an offer.
Dropshipping is still alive and well with possibilities and opportunities for a variety of types of entrepreneurs. If you’re thinking about getting into dropshipping, we encourage you to carefully consider the pros and cons to see if it might be something that fits into your entrepreneurial vision.
If you are ready to find a supplier for your dropshipping business, sign up for Alibaba.com, and choose “Buyer” as your trade role. Post an RFQ or browse items listed on the marketplace to find the supplier that is right for you.