How to Start a Dropshipping Business
How to Start A Dropshipping Business
Researching the realm of dropshipping? This page makes it all easy to understand for any newbie.
Regardless if you're an affiliate marketer looking to make more, or if you're starting from scratch: my dropshipping guide will help you understand it quickly and easily!
Which of the following describes you?
Intro to Dropshipping
What this page is all about
The prospect of starting a dropshipping business is an option for the "work from home" crowd. It seems simple enough, but there are pros and cons to running a dropship business versus using affiliate marketing or other means of selling or referring products online.
This page was devised to let you understand the entire process from someone who has actually been involved in it (that's me). I hope this helps clear most of your questions, concerns or fears about dropshipping and wholesale!
3 Methods of Selling Products Online
What Is Affiliate Marketing?
Affiliate marketing is the practice of "suggesting" goods or services. You start by joining an affiliate program, which provides you with special product links -- called "affiliate links" -- that contain your account ID within them. The two most popular affiliate marketing programs in the world are Amazon and eBay. There are affiliate marketers out there who are making a living just by creating web traffic that migrates people over to these sites, making commissions on whatever gets sold (this is easier said than done, and it requires a master level understanding of search engine optimization, web design and copywriting).
How it works: an internet user clicks on an affiliate link of a website, they are taken off of that affiliate site and on to the actual supplier (i.e., Amazon.com or eBay.com) itself. The page they are taken to will drop a 'cookie' file on their system. That cookie tracks their purchases, and gives you the proper commission for each item sold for a given date range.
Different affiliate programs have different cookie expiration rates. For instance, Amazon's cookies last 24 hours, so, you'll make a commission for anything a user purchases over the next 24 hours as long as your cookie is on their system. On eBay, cookies last 7 days, so, you'd earn a commission on anything they purchase over the course of a full week. If a user has your cookie on their system (say, an Amazon link), and they click the link of another Amazon affiliate site, your cookie gets overwritten and the other affiliate will get the commission.
Commissions are usually a percentage of a seller's fee on an auction site, or a set percentage of a sale on an item. You never have to see or store products in affiliate marketing. You also have no need to contact the affiliate program supplier.
Since 2012, search engines like Google have been greatly discriminating against affiliate marketing websites. Many feel as though the mere presence of these links on your site is enough to put an "X" on your site, making it incredibly hard to survive in search engine results. This has lead to many affiliate marketers migrating to dropshipping & wholesale, which have a greater chance of ranking in search engine results.
What Is Wholesale?
This method involves joining a bulk wholesale program so that you can purchase products in "lots" (i.e., lots of 25, 50, 100, etc.) at wholesale prices from a distributor. You then receive shipments of these lots and store them at your home. You then re-sell these products at markup, then package and ship the items yourself as they're individually sold.
Your earnings are the difference between the wholesale price and the mark-up price that you set per item. Wholesale always has the absolute best profit margin -- but it comes at a toll: you are responsible for order fulfillment (packaging and shipping the items from your home or office), and for regularly re-stocking the items you are selling, so that your customers aren't being subject to backorders. It is a 24/7/365 business that can never take a break -- and you'll have to have a backup plan in case you ever get sick or go on vacation. Additionally, you are responsible for having a contact phone number, ticket system and/or email address and it is your responsibility to handle customer complains and customer service.
Another bonus for going the wholesale route is that you'll be able to have complete customization over your packaging. You can use fancy, branded boxes and materials to ship your products in. You can include a custom packaging slip, drop in a custom a sticker with your brand's logo, or include a postcard with a coupon. Packaging means a lot for branding your business, and wholesale is the only route that will give you control over how it turns out.
Wholesalers, unlike affiliate marketers, are considered a true storefront or eCommerce business. They receive favoritism in search engines, as well. Wholesale offers the shortest supply chain, from purchase to shipping.
What Is Dropshipping?
Dropshipping requires you to apply to a dropshipping program being managed by a supplier/warehouser. This supplier usually does little to no marketing or sales themselves, but relies on people like you who opt in to their dropshipping program. When you sell something, they receive a daily list of sales you've made. They'll pull these products off the shelf, package them, and ship them to the customer.
It requires a relationship to exist between you and your supplier, as you'll both benefit from sales: you earn money from sales, and they reduce inventory and also earn from dropshipping fees that you'll pay them per product sold. In a dropshipping program, you never see or store the products you're selling, and you also don't ship them or have to deal with any shipping costs. You will, however, be responsible for customer service when a customer has a question about a product or a shipping date.
Your earnings with dropshipping are similar to that of bulk wholesale: the difference between the supplier's price and the mark-up price that you set per item. Since you'll have to pay your supplier a percentage of a dropshipper's fee, the profit margin is lesser than that of wholesale, but still far greater than affiliate marketing.
Dropshipping vs The Other Alternatives
Dropshipping vs. Affiliate Marketing
The Pros & Cons of Dropshipping vs. Affiliate Marketing
With dropshipping, you're making more of a profit than you would be with affiliate marketing. Your online storefront has more credibility, as you will no longer be sending purchasers off of your website and on to a third-party site. Instead, you'll be using a shopping cart system. On that same note, your customers will have to jump through less hoops to buy a product than they would have through an affiliate sale.
Dropshipping does involve some manual processes. You will receive payment verifications, then log in to your distributor's site and "order" the product for your customer, paying the dropshipper and submitting the shipping address for each item that was sold, each day. With affiliate marketing, you have no involvement whatsoever in regard to packaging, shipping or customer service. However, with dropshipping, you will have to provide customer service if your supplier is not sending items out in a timely fashion, or if the customer did not receive their product...or received it damaged.
Some Rough Math:
For example's sake, let's assume we're selling a $200 lamp. This is what you'd earn by selling that lamp through the top two affiliate programs (eBay & Amazon), versus selling that same lamp through dropshipping:
- As An eBay Affiliate
A $200 lamp sold through eBay's affiliate program earns you 55% of the seller's fee to eBay, which would be 8.75% of the first $25 (or $2.19) plus 3.5% of the remainder, or $6.19 + $2.19 = $8.38 earned.
- As An Amazon Affiliate
A $200 lamp sold through Amazon's affiliate program earns you 4% of the item's price, which would be 4% of $200 = $8.00 earned.
- As A Dropshipper
A $200 lamp sold through dropshipping [let's say the wholesale price of that lamp is $170, and you successfully sell it for $200] earns you $200 - $170 = $30.00 earned.
A small dropshipping fee will be deducted and paid to the supplier. If you sold the lamp wholesale, you keep it all.
Dropshipping vs. Wholesale
The Pros & Cons of Dropshipping vs. Wholesale
With dropshipping, your supplier packages and ships products to your customers. This is opposed to the wholesale method, where you have to purchase products with your own money, store and keep an inventory of them at home, and package/ship the products as they are sold. In turn, you also have to make sure that your inventory is sufficient and in synch with your website at all times, so that you don't sell 3+ items when only 2 are left in inventory.
In wholesale, you have to buy and maintain your own inventory of mailing materials: cardboard boxes, labels, postage, tape, styrofoam chips, etc. This is not the case for dropshipping, since you're not doing the mailing.
Dropshipping has a lower profit margin than wholesale, because the cost per item is higher on a dropshipping list than on a wholesale list. Also, dropshipping requires a dropshipping fee that is charged to you by the supplier. In wholesale, there are no fees. You're also able to offer free shipping as an incentive with wholesale, whereas this feature is only available via dropshipping if your supplier provides it.
In dropshipping, the lifeblood of your business is the reliability of your supplier. If they're horrible, your business will suffer as your customers will not receive items on time, or will be purchasing products that are no longer being stocked. The negligence of your supplier can not only hurt your own business, but create a customer service nightmare that you'll have to tend to yourself. That's why you'll have to choose a very reliable dropshipper with a great reputation -- finding one the hard way is difficult.
A Day In The Life Of A Dropshipper
Case Study: Dropshipping, From Day One
How A Typical Dropshipper's 'First Run' Goes
Here's a fabricated scenario I've written up to help you understand the day in a life of an individual who runs a dropshipping eCommerce store, selling a fictional "Product X":
- Find A Supplier
I find a legitimate dropshipping program through a verification service like Worldwide Brands. I find a dropshipping supplier that sells Product X on there, and I apply to them. My application is accepted. They ask for information including but not limited to my full name, address, phone number, email, Tax ID#, and the bank routing number for my small business bank account. They need this because they take the wholesale cost of the items I sell directly from my account, and I keep the rest.
- Subscribe to A Payment Gateway
I register for a service like Authorize.net or Paypal, which allows me to accept credit card payments online (Most people go with Paypal, because the fees are much less than using Authorize.net, which has a monthly fee + a per-transaction fee).
- Get An Online Storefront
I build a website using an eCommerce content management system, like Wordpress, Magento or OScommerce. My dropshipping company gave me a database of their products, and I upload it into the CMS, populating the site with their products. I spend time visiting every individual page, making sure everything looks and sounds right, and I re-write some of the copy so that it looks more unique. I install a shopping cart plugin. I finish building the site, and launch it to the public.
- Get Your First Sale
Someone buys something on my site. They buy Product X, using a Visa card. An automatic email is sent to me, notifying me of the transaction. Another email comes in, telling me the details of the person who purchased it: their name, address and the final price of the transaction.
- Place The Order
I visit the dropshipping supplier's site and go to the "shipping" section. I "buy" the product that was just sold at wholesale price, but I enter the purchaser's name and address for shipping. The dropshipping supplier automatically deducts the wholesale price of that item from my bank account. The rest of the customer's payment (the difference between the wholesale and markup price) is mine to keep.
- Order Fulfillment
The supplier ships the item to the customer. The supplier sends me an email notifying me about this, and attaches the tracking information. I forward this message to the customer* so that they can keep it for their records. (* this varies from program to program: some suppliers auto-generate the tracking information and send it directly to the customer)
- Quality Control
Unless the product is on backorder or is lost in transit, the transaction is complete. Otherwise, it is up to me to do "quality control" to explain what has happened to the customer, and it is also up to me to do whatever it takes to get the product to the customer as fast as possible.
What Must I Have to Start Dropshipping?
Requirements You'll Need to Take Care of, First...
Since we're technically talking about starting a "real" business and not simply referring people somewhere else with tagged links, a little more is involved in taking things to the next level as a dropshipping retailer.
- A Business Bank Account (also called a "merchant account")
Ask a rep at your favorite bank to set you up with a business bank account, it's a must-have if you're planning to dropship. Without it, you will not be able to accept payments online via credit card. An alternative is to accept payments only via PayPal. A business bank account is an entirely separate thing from a regular checking or savings account.
- A Payment Gateway Account
As mentioned before, services like Authorize.net & PayPal will enable you to accept credit card payments online. Most gateways (except PayPal) will require you to already have a business bank account before accepting you.
- A Means Of Being Seen Online
You technically do not need your own website to be in dropshipping. Many dropshippers simply do all of their business on sites like eBay and Amazon. Note that the competition of being on these sites are extraordinarily high, and they also take a large cut of the profits.
What *Should* I Have to Start Dropshipping?
The "Nice to Have" Options that Aren't Technically Required
You do not need the measures listed below. However, if you want to be seen as a fully functional business, it would be foolish not to acquire any of them!
- An Established Business Entity
Most eCommerce business owners will formally establish themselves as a business, such as an LLC or an S-Corp. There are pros and cons to each. However, doing so will prevent anyone from suing you and taking your personal assets. Only your company's assets (whatever's in your business bank account, business-owned equipment and real estate) would be at risk, rather than your house, car and personal savings account. Learn more about starting an LLC.
- A Trademark
Serious business owners should trademark their company name and logo. It prevents anyone else from using either in commerce, even if their usage is "confusingly similar" to your trademark. It helps greatly to have this government-recognized layer of protection for your intellectual property!
- A Website
If you want to be taken seriously as a real brand and a reputable company, you should manage a website for your eCommerce business. Websites also open the door to more sales due to the greater level of search engine visibility they get, over simply using sites like Amazon. Alternatives include participating in trade shows or starting your own catalog/mail ordering service. They're really affordable too, and that includes affordable options like using Wordpress themes to build a site, and making your site go live with VPS hosting.
Dropshipping From Multiple Sources Gets Painful
The dangers of diversification
Most who pursue dropshipping tend to choose as few suppliers as possible. The more suppliers you go with, the "messier" it will get. For instance, if your site sells products from multiple suppliers, that means your customer will be purchasing products from one of several different suppliers who may charge different shipping rates.
Also, it becomes difficult to manage transactions that come from more than one supplier -- you'll have to maintain good relationships with all of them, and "babysit" each one on a regular basis to ensure they're keeping everything in stock and shipping items on time. The more services you use, the more of a hassle it becomes to manage your business. Therefore, it would be best to use one supplier, if they can provide everything you need.
The Dangers of Dropshipping: Common Scams
If you're just starting out in dropshipping, the biggest suffrage you'll endure is finding a supplier who isn't a off-shore scammer, let alone one that will frustrate you with a language barrier or an attitude problem. Remember: when you deal with suppliers in foreign places, they're not bound to the trade laws of your home country.
Be Careful With Un-Qualified Dropshippers
There's a staggering number of dropshipping programs that prey on the "get rich quick" crowd -- people who are typically very new and under-educated in the business -- by offering wholesale prices that are suspiciously low. Two infamous sources that have many 'shady' dropshippers are Doba and Alibaba, neither of which pre-qualify their members.
Unqualified programs will provide a "hit or miss" experience. It's hard enough to put your trust into a domestic supplier and hope they're continually doing the right thing, but far more difficult in doing so with an international one. Dropshippers from other countries may fall back on their promises, or potentially steal and replicate your good ideas. This is why it is *so* important to choose a reputable source.
The most common scam in the dropshipping business is the insertion of a "middleman" between the retailer (you) and the dropshipper, who takes a portion of earnings as their own commission. The presence of a middleman is entirely unnecessary in a dropshipping scenario, but is a common scam with off-shore programs. Many times, it is extremely difficult to detect the presence of one, even when reading the fine print of your contract.
A second major concern are dropshippers who simply don't do their part. They might list products as "in stock" when they are not, and simply never re-stock the product. It also consists of suppliers who fail to fulfill (ship) products to customers, or do so in such a late time frame that the credibility of your company is killed.
Get a clearer picture of the dropshipping industry
These three free dropshipping eBooks are a good primer, giving you industry-level examples of what to realistically expect if you're serious about becoming a dropshipper:
- Starting Your Internet Business Right: Dropshipping expert Chris Malta describes typical pitfalls, traps and scams involved in choosing dropship suppliers.
- Finding Real Products to Sell Online: This free e-book touches on the process involved in identifying and researching a niche to pursue as an eCommerce venture.
- Understanding the Internet for Home Business: Beginners only: a back-to-basics guide about the technical terms, buzzwords and processes of ecommerce and starting a storefront website.