How to Start a Dropshipping Business
Which of the following describes you?
I Want To Start An Online Business...
...But I Have No Idea How!
If the thought of starting your own online storefront excites you, you're not alone. With recent live-altering events Coronavirus, we've seen the resilience of how online storefronts are virtually bulletproof to the issues that plague brick-and-mortar businesses.
But...what's the best way to sell stuff online? Is there anything better than affiliate marketing? The answer is a huge YES, and it comes in the form of Dropshipping and Wholesale. Do you have the brains and determination to write great content and beat out local businesses in your area in Google? Are you available to run a website that virtually "runs itself" with proper ongoing maintenance?
If so, you might be ready to ditch the poor payouts of affiliate marketing for the real deal success that can be found in dropshipping programs and wholesale projects. Below, we'll go over every facet of these programs - their pros and cons, ins and outs and everything in between. At the end, you'll have a clear thought process about what you want for your future business idea. Let's get started by comparing the 3 sales methods of affiliate marketing, dropshipping and wholesale.
3 Methods of Selling Products Online
If you're looking to sell products online, there are three main ways to do it. You can "suggest products" and point people to a storefront that does the rest of the heavy lifting. You can host an eCommerce site that sells products that are fulfilled by a 3rd party for you. Or, you can get greedy and take all the profit by selling wholesale out of your own home. All three have distinct bonuses and shortcomings, and you'll undoubtedly know which one will accommodate your comfort level.
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 Associates and eBay Partner Network. There are affiliate marketers 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).
These days, the likelihood of being a successful full-time affiliate marketer is slim as Google has tightened its algorithm, and affiliate marketers are finding the possibility of ranking their site to be more difficult than ever.
How It Works
An internet user clicks your affiliate link on your website, and they are taken off of your website 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 hard drive. That cookie tracks their purchases, and gives you the proper commission for each item sold for a given date range.
Cookies Determine Your Fate
Unlike with dropshipping and wholesale, affiliate marketing relies entirely on "cookies," the hidden files that are downloaded through a browser. Those cookies track a customer's purchases throughout a set time period.
If a customer blocks cookies, clears their cookies in their browser, or clicks on another link that overwrites your cookie, you will lose all chances of getting a commission on what they have purchased.
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, if a user wins an auction after clicking your link within that time period, you'll get a fraction of the fee the seller paid to eBay after selling the item.
If a user has your cookie on their system (say, an Amazon link), and they click the link of another Amazon affiliate site (one of your competitors), 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. There's $0 overhead on your part, and no work whatsoever aside from creating and maintaining your affiliate website.
How Search Engines View Affiliate Marketing
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 for Google to blackball your site, making it incredibly hard to survive in search engine results. As the years went by, affiliates saw Google simply giving away their old rankings directly to Amazon and eBay themselves -- an unfair and devastating circumstance.
This has lead to many affiliate marketers migrating to dropshipping and wholesale, which have a greater chance of ranking in search engine results.
(+) Affiliate Marketing "Pros"
- No Packing, Shipping or Purchasing: You don't have to do a thing aside from getting people to click a link -- everything else is taken care of by the company running the affiliate program. How you get that feat accomplished is up to you, as long as it falls under the terms of service of the program(s) you use.
(-) Affiliate Marketing "Cons"
- Worst Conversion Rate: In order for a product to be sold through affiliate marketing, a customer has to search for a product on a search engine, find your site, read through your landing page, click your affiliate link, and get taken to the storefront that you're an affiliate of. But wait, it's still not over...they will then have to add a product to their cart, possibly create a new account and fill out all of their information, then pay for the product.
A rule of thumb in digital sales is that more steps that have to be taken = less likelihood for a conversion (or 'sale'). You're counting on this entire chain of events to work out so that someone can buy something through the cookie that was dropped from your affiliate link, and the likelihood of that happening works against you unless you have a large number of clicks each day.
- Low payouts: Affiliate programs notoriously have very poor payouts. You'll need a LOT of clicks to make a "conversion" (sale) - usually, thousands of clicks per day to achieve significant returns. This is immensely hard to achieve if you're starting a new website from scratch that is nowhere to be seen on Google.
Major affilaite programs, like that from Amazon, keep giving lower cuts to their affiliates. In April 2020, Amazon dramatically cut their affiliate commission structure to its lowest all-time rate. Amazon doesn't need to care about its affiliates. It doesn't need them.
- You'll have to hustle...hard: Affiliate sites have a heavy burden to bear in organic search. Google's prerogative is that the storefront offering the affiliate program should get the good rankings - not its affiliates.
Successful affiliates these days rely little on organic search, and more on networks they've built over the years on social media, YouTube channels or elsewhere. This takes immense time, patience, networking and luck - and it is not an option for those who need quick results.
- Paid search issues: Utilizing paid search (i.e., Google Ads) to do affiliate marketing is a very illogical choice as there will be no way to track the success of your ad campaigns.
You'll never know if you're making a profit or loss from the keywords you're bidding on, or how they have even contributed to a sale, because there will be no way to put a Google Ads tracking script on the affiliate store's end.
What Is Dropshipping?
Dropshipping requires you to apply to a program that is being managed by a supplier or warehouse. This supplier usually does little to no marketing or sales themselves, but relies on people like you who opt in to their dropshipping program, create websites and promote their products. 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.
How It Works
You want to start a new website that sells faucets. You've found a dropshipping service for faucets. You sign up for their dropshipping program and agree to their terms. You work with their support team to learn about their terms of service as you complete your website. Your website will exist to basically "take new orders" and those orders will be sent to the supplier regularly (they'll tell you how this works).
It is now up to you to get your website to rank for niche terms relating to your faucet. You can also pay to appear in Google Shopping results, and outprice the lowest prices currently seen on there. You find that brands like Home Depot and Lowes are impossible to beat, because they are masters at wholesale and buy quantities far above and beyond anything you ever could. So, you do your best to beat other dropshippers you see on there.
You're now selling all of the faucets available through your dropshipper. Their list price for the faucet is $170, and you decide to sell them for $250 on your site. You make $80 on each faucet sold, minus whatever the dropshipper takes as a cut.
Every day, a digital list of products sold on your website gets sent to the dropshipper, where they pull those products off the shelf, then package and ship them to each customer. You verify that the products were sent out on time by the dropshipper. Your contact information appears on each package, in case the customer needs to make a return, has a question, or has an issue - in which you'll have to take care of the scenario.
(+) Dropshipping "Pros"
- No Fulfillment Work: 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 the post office.
- Good Search Engine Rankings Outlook: Dropshipping sites enjoy a higher success rate of appearing in Google search than affiliate sites.
- Decent Profit: Your earnings with dropshipping are similar to that of 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 less than that of wholesale, but still far greater than affiliate marketing.
(-) Dropshipping "Cons"
- Babysitting Your Supplier: Since the supplier does all pulling, packaging and shipping, there are times where they could make a mistake, not receive an order or some other situation could come about. It is up to you to make sure that a customer's order is being fulfilled and sent on time. Many times, this isn't a problem, but it could be an occasional issue that comes about.
- Customer Service & "Putting Out Fires": In dropshipping, you will be responsible for customer service regarding an order that was damaged in the warehouse, in transit, or didn't meet someone's expectations for some reason. You'll have to deal with issues -- albeit, rare -- with chargebacks. You will also be directly responsible to resolve complaints from customers by having to reach out to them directly - and quickly.
What Is Wholesale?
This sales 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 individually at markup (a price of your choosing, i.e., 1.5x the cost of the wholesale price), then package and ship the items yourself as they're individually sold.
How It Works
You want to start a new website that sells faucets. You've found a wholesale service for faucets. So, you purchase 100 faucets at $100 each. This huge bulk shipment gets sent to your house, and you store it in your basement. You have set up an eCommerce website for faucets, and have added a product page with a maximum quantity set to 100 for that bulk order you just made.
It is now up to you to get your website to rank for niche terms relating to your faucet. You can also pay to appear in Google Shopping results, and outprice the lowest prices currently seen on there. You find that brands like Home Depot and Lowes are impossible to beat, because they are masters at wholesale and buy quantities far above and beyond anything you ever could. So, you do your best to beat other wholesalers you see on there.
To expand your reach, you decide to sell bulk on eBay and Amazon, even though those two sites take a massive cut in your profits. You decide this is still a good idea for the extra exposure it gives to your business.
You're now selling 1 type of faucet, and you decided to set the price to $250. You're making $150 profit per faucet, since they cost $100/each. Every time an order comes in, your website subtracts "1" from the quantity left, either in the backend or visible on the product page itself. You immediately take one faucet out of your bulk order, package and ship it to the customer, including a receipt plus any coupons or other inserts you decided on.
When your inventory decreases to a certain amount of your choosing, you decide to place another bulk order for 100 more faucets. Some time goes on, and you see that you're placing bulk orders more often than ever - you decide to start purchasing quantities of 500 faucets instead, and you enjoy a bulk rate discount vs. when you were purchasing only 100. As a result, you make a higher profit per faucet sold.
(+) Wholesale "Pros"
- Best Profit Margin: 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 (see the cons below).
- Branding Possibilities: 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 QR or coupon code. Packaging and branding means a lot for your business, and wholesale is the only route that will give you control over how it turns out.
- Ranking In Search: Wholesale sites have tons of opportunity for ranking in Google. Since they're seen as true storefronts, they won't have the 'ball and chain' on your ankle that an affiliate storefront will have. You'll be able to bid to appear in Google Shopping results, and you can also expand your business on to sites like Amazon and eBay where you can include a quantity of products that can be replenished as you get more inventory in.
(-) Wholesale "Cons"
- Tons of Relentless Responsibility: Make no mistake, this is very much like owning a storefront business. 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 back orders.
It is a 24/7/365 business that can never take a break—and you'll need 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. You can alleviate much of this by hiring a local fulfillment service, though.
What Will I Earn With Affiliate Marketing vs. Dropshipping vs. Wholesale?
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 60% of eBay's cut, which is $20 * 60% = you've earned $12.00
- As An Amazon Affiliate
A $200 lamp sold through Amazon's affiliate program earns you 3% of the item's price, which would be 3% of $200 = you've earned $6.00
- As A Dropshipper
A $200 lamp sold through dropshipping [let's say the supplier's set price of the lamp is $170 -- you sell it for $200] earns you $200 - $170 - $10 supplier cut = you've earned $20
As a Wholesaler
A $200 lamp sold through your website. You paid $100 to buy those lamps in bulk. $200 - $100 = you've earned $100
Dropshipping vs. Wholesale: Pros and Cons
The difference between these two sales methods mostly comes down to 1) the amount of work involved on your part, and 2) the amount of money you'll make per sale:
(+) Dropshipping "Pros" vs. Wholesale
- You'll never have to buy bulk products, store them in your basement, pull them, inventory them, package them or ship them.
- You'll never have to buy and manage a supply closet full of collapsed cardboard boxes, packaging styrofoam, tape, envelopes, or print and track labels (all of this stuff is expensive, and moves constantly and quickly).
(-) Dropshipping "Cons" vs. Wholesale
- You'll share profits with your dropshipping supplier. Their "cut" varies depending on their terms. While it might not be a gigantic percentage, it will be significant enough to make you wonder how much you might make if you sold wholesale.
A Dropshipping Example Case Study
How a Typical Dropshipper's 'First Run' Goes
Here's a fabricated scenario helping you understand the day in a life of an individual who runs a dropshipping eCommerce store, selling a fictional "Product X":
- Finding A Supplier
I find a dropshipping supplier that sells Product X, and I apply to their program. 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.
- Subscribing to A Payment Gateway
I register for a payment gateway 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).
- Building An eCommerce Site
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.
- Making The 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.
- Placing The Order
The information for the order is sent from my eCommerce site to the dropshipping supplier.
- Order Fulfillment
The supplier acknowledges, picks, packages, ships and tracks customer's order. 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?
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 personal 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 start dropshipping, although it is highly recommended. Many dropshippers do all of their business on sites like eBay and Amazon. Note that the competition of being on these sites are extraordinarily high: you'll find that dropshippers on eBay and Amazon tend to sacrifice their profit margin for the sake of beating other dropshippers in search results on those sites, and it becomes a competition of "who can sell it for less."
What Should I Have to Start Dropshipping?
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 (most will choose an LLC). Doing so will prevent anyone from suing you and tapping in to your personal assets, like your house, car or bank account. Only your company's assets (whatever's in your business bank account, business-owned equipment and real estate) would be at risk.
- 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.
- A Registered Trademark
Serious business owners should consider trademarking 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!
Sketchy Suppliers will Hurt Your Credibility
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 Unqualified Dropship Suppliers
There's a 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.
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. This is why services like Alibaba have gotten so much slack throughout the years.
Dropshippers from other countries may fall back on their promises, or potentially steal and replicate your good ideas. This is why it's so important to choose a reputable source.
Other Scams to Look Out For
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 shot.
How To Find A Legitimate Dropshipping or Wholesale Supplier
Most suppliers are hard, if not impossible, to find via Google search. Keep in mind, they are not marketers, nor do they need to be.
A notable supplier directory can help you find suppliers for almost any product you can imagine (notably WorldWideBrands, which has a strict pre-qualification process for its suppliers).
Sort through supplier lists to see how much product diversity you can have for your site. From there, all you'll have to do is submit a request to join a program, and they'll help you set up the rest!
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.