Is Dropshipping the Right Model for Your Startup?

| August 17, 2012 | 1 Comment

One of the best ways to launch an online retail start-up is by using a dropship model. Dropshipping is the act of partnering with wholesalers who will stock and ship products on a retailers behalf. As a retailer, you take orders from your customers and then order from a supplier who ships directly to your customers for you.

Most wholesalers charge the retailer a small fee (usually under $10) for the processing, handling and shipping of the products on top of the wholesale cost. This dropship fee covers the additional overhead of handling individual orders/products instead of their more profitable bulk orders.

The Dropship Advantage

Whether you’re planning on selling on eBay, Amazon or opening your own e-commerce site – dropshipping products is a great way to get started.

While dropship retailers pay a little more, you gain the advantage of not having to order in bulk which reduces your start-up investment. Dropshipping reduces the risk of investing in product lines that may not sell. You can experiment with promoting any product a supplier offers without having to purchase that product in bulk.

You also don’t need to warehouse any inventory. This makes it possible for you to operate your online business from anywhere at any time. We all dream of having the flexibility of a “4-hour work week.” If you’re tied down to your inventory and shipping out products, the chances of jetting off to Bali are significantly diminished. I’ve never been to Bali, but I have filled orders while in line at Disneyworld’s Tower of Terror. That’s what makes dropshipping great.

The Perils of Dropshipping

The dropship model is not without its disadvantages. The dropship fee drives your price and cuts into profit margins. This limits the markets you can enter as a dropship retailer. Successful dropshipping retailers focus on products with higher price points ($100 – $500) where the profit margins are good and not eroded by the dropship fee.
It wouldn’t make sense to open a niche e-commerce site focused on selling wrapping paper. The profit margin on a roll of wrapping paper would be…well…paper thin. In fact, it’s unlikely that there are any wrapping paper supply companies that offer dropshipping. That model just doesn’t work.

On the other hand, what if you opened a niche e-commerce site that focused on GPS units that retail for between $150 and $500? A 20% profit margin would mean you averaged between $30 and $100 for every sale. Even with a dropship fee of $10, you would still be making $20 – $90 on every sale. That’s a simplified view as there are other costs like merchant fees that need to be factored into the equation, but you can see that products that cost more are better for dropshipping.

Managing customer service in the dropship world presents challenges too. You will be relying on your supplier to manage the timely arrival of your orders. If they do a poor job it’s going to reflect on you and your business, not your product source. This has been our company’s biggest challenge as a dropship retailer. When you are waiting for tracking numbers to share with your customers and details on the status of orders from suppliers, your customer is likely growing impatient and frustrated.

Some suppliers are terrific to work with and embrace the role of dropshipper. For others, it’s an afterthought and their processes aren’t structured to support dropshipping effectively. It’s a good idea to find multiple sources for your product lines. That way if one supplier ends up being a little flakey, you can still fill your customer’s orders.

Getting Started

There are a few ways to find wholesalers who dropship products. In my experience, the two best places to find dropship suppliers are Worldwide Brands and SaleHoo. These two membership sites provide training, wholesale and dropship supplier contact lists and community forums for online retailers.
Your other option is good old Google. Search for the products you’re interested in + “dropship” to locate potential suppliers.

Summing it up

For entrepreneurs looking to get into the e-commerce game, dropshipping is a great option that requires minimal upfront investment and maximum flexibility. Focus on a niche where the product cost offers a suitable profit margin and understand that you will need to manage your customer’s expectations around product delivery since the shipping process is out of your control.
Worldwide Brands and SaleHoo are a convenient way to find suppliers willing to dropship but require a paid membership. If you’re willing to do some online research, you might be able to find suppliers on your own in the search engines.

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Category: Business Tips, guest post, Startups

About the Author ()

Interested in learning more about dropshipping and e-commerce? Check out Rob's info-packed e-commerce guide, E-Commerce Blueprint: The Step-by-Step Guide to Online Store Success, available at Amazon’s Kindle Store now. You can follow him on his e-commerce blog at http://misterecommerce.com.http://misterecommerce.com.