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What is Drop Shipping and How Does It Work?

By ecommerceparadise | Podcast

Nov 12

If you’re looking to start an online business but don’t know where to start, this guide should be very helpful for you. I’ve been successfully running a dropship e-commerce businesses since 2011. In that time:

  • I figured out what works and what doesn’t.
  • I made a lot of newbie mistakes that were meant to be shortcuts but resulted in unprofitable businesses.
  • I created, grown, and sold a mid-six-figure business too.

In this post, my goal is to teach you how to get started with drop shipping.

What is Drop Shipping?

The term drop shipping is used amongst small manufacturers and big distributors to describe a method of order fulfillment in which a product is shipped directly from the factory to the end user and bypasses the third party that sold it to the consumer. This method of order fulfillment is used by big retailers and small retailers alike.

Retailers and even some distributors have been using the method of drop shipping to fulfill orders for over 100 years. Back in the day, the Sears catalog was the ultimate fulfillment house. Sole proprietors would often run ads in local newspapers advertising one line of products under a fictitious name and when an order would be called in or mailed in, they would simply use Sears or another stocking brand or distributor to fulfill their order.

Today, with the internet, fast mobile connections, and smartphones, consumers all over the world are able to order products from their favorite brands via e-commerce websites. These are websites built specifically to sell products and services. Apps have become increasingly popular as well. Apps for iPhones and Android devices provide a means for consumers to have a much better user experience than some non-mobile-responsive websites. The term e-commerce can be stretched beyond just buying products from Amazon. Ordering a ride from Uber is part of e-commerce just like buying something from someone over Craigslist is e-commerce.

Even today, big online retailers like Wayfair do a lot of their business with the drop ship business model. In other words, when you order something from them that isn’t their brand, chances are they won’t ship the order out themselves. Rather, they’ll send the order to their supplier (usually this is the manufacturer) and the supplier will ship the product directly to their customer.

Is Drop Shipping a Viable Business Model?

If you’re an entrepreneur, you continually train yourself to look for opportunities. With the knowledge of the ever-increasing popularity of e-commerce, you can see how lucrative it is to get into selling products and services online. Today, you don’t even need a physical “brick-and-mortar” storefront to open a retail business. There are many small brands and manufacturers out there that fulfill their own orders and are constantly looking for people to help them market and sell their products. This is an opportunity.

You can simply learn how to put together a nice looking e-commerce website and start reaching out to small brands to apply for a wholesale account with drop ship terms. You should be able to get approved for at least a few of the small brands in your niche. If you can’t for some reason, you can always sign up with a distributor at first just to fill your store with products, get some sales, and have some traffic to show them when you ask them for an account again.

The Pros of Drop Shipping:

Drop shipping allows you to run a lean business that’s focused on growth. You won’t need to pay tens of thousands of dollars for stock up front. You won’t need to lease a warehouse or storefront. You won’t need to hire employees if you don’t want to. Everything can be done from a laptop, which means you can work anywhere in the world where there is a wifi connection.

By running an online retail business, you take advantage of the same wholesale accounts that stocking retailers get, but you don’t need to pay for any of the overhead. You might get the same margins, sometimes they are less, but the fact remains that without the upfront investment, the barrier to entry with this business model is much lower than others.

By utilizing the internet and e-commerce to sell products, you open up a whole world of potential. If you can secure enough wholesale accounts with manufacturers, you can potentially scale your business way faster than a normal stocking retailer would be able to. The key is the lack of cash flow required to scale. Adding a product to your e-commerce store can take very little time and costs nothing extra. You can set up additional e-commerce stores for under $100. Most of what it takes to scale is time. Either your time or a virtual assistants time that you’ll pay for.

In 2014, I grew my e-commerce business from $100,000 in sales to over $500,000 in sales in just one year. This came mostly from creating content and expanding into selling the same products on eBay and Amazon. Unfortunately, with all that growth, I felt compelled to open a physical store later that year to attempt to capitalize on the local market and to get accounts with bigger brands. I didn’t expect the local market to be so lean and those big brands to ask for ten thousand dollar investments in stock just to be allowed to sell them on our website. Needless to say, I learned my lesson from that experience. I learned about myself as well. My strengths lie in e-commerce, not physical retail management. If you want to read more about my business, check out my story of how I became an entrepreneur.

The Cons of Drop Shipping:

Compared to other business models drop shipping is perfect for a start-up bootstrapping their way to success. However, the dropship business model comes with its own unique disadvantages as well. Like I mentioned before, you’ll sometimes get lower profit margins from brands to allow for fair competition between their stocking physical retailers and online-only retailers. This is common in product niches where the product needs maintenance and repair services after the sale. By providing an incentive to the consumer to buy their product from the physical store close to them, they take the work of warranty management, returns, and customer service off their back and lay it on the stocking retailer.

I’ve had suppliers offer me a 20% profit margin whereas they give their stocking retailers a 35% margin. Sometimes this isn’t the case, though. Each supplier is different.

The other downside of the drop ship business model is that you usually don’t have a direct connection to your suppliers stock levels. A lot of suppliers sell wholesale in bulk and drop ship for online retailers, so their stock levels can fluctuate daily. The newer the supplier, the worse their stock-outs can be as they learn how big the market is for their product and how to properly time their orders with their Chinese manufacturers.

Due to this disconnect, you’ll need to constantly be updating the stock levels on your site. Even with consistent updates, you might get an email from your supplier telling you that the 3 products it showed on their stock sheet are missing from their shelves. You’ll need to develop a system for notifying customers of stock out and procedures to offer incentives for them to substitute with an in stock product, like discounts, free gifts, or gift cards for future purchases.

The other issue with drop shipping is you’ll be relying solely on the manufacturer’s fulfillment warehouse to handle your order. People sometimes make mistakes and those mistakes can lead to a big headache for you. If the wrong item is shipped or a wrong quantity of the item is shipped, the blame will be laid on you and it will be up to you to make it up to your customer by offering similar incentives. This is another system you’ll need to set up so you can streamline your business processes.

Carriers can also mess up the delivery of your orders from time to time. If the item you sell is big and heavy, for example, the carrier might throw it around a lot and it might get damaged in shipment. When this happens, customers can get very upset, especially if they’ve never ordered anything online before or if they’ve never received a damaged product before. You’ll need to take the responsibility for such incidents and not forward them on to the manufacturer. This is one more thing you’ll need to develop systems and processes to work with as it is a normal part of doing business.

Is Drop Shipping Worth It?

With all the time it takes to start up a drop ship business and all the potential downside risks to doing business online only, is it really worth it? It depends on who you are and what you want in life. If you’re like me, a self-starter, a constant learner, and you’re excited to grow your wealth and travel the world while working from your laptop in internet cafes, then I believe it is for you.

Drop shipping is the best way to get started with an online business and start making real money, fast. You will basically keep the cash difference between the price you sell a product and the price it costs you to fulfill the order. If done properly, you can reap upwards of 10%-20% net profit margins or higher. Margins differ between niches and so does everything else.

If you want to get started selling products or information online then you’ve come to the right place. I have over 5 years of experience in e-commerce and internet marketing. I’ve successfully started, grown and sold a half-million dollar e-commerce site. The process of becoming successful online isn’t easy, and it takes a lot of time, but it’s worth it.

Business 101

Before you get started selling products or services online, you need to learn some general business concepts like accounting, marketing, selling, organization, management, leadership, and entrepreneurship. You can take classes at your local community college, or online at Udemy.

Starting A Business While Still In School

That’s is how I got started. I worked full-time while taking night classes at my local community college. But that wasn’t all I did. I also started an online drop shipping e-commerce site while I was taking classes. The benefit of doing this was that I could apply what I learned while I was learning. The truth is that learning by doing is much more powerful than just learning alone.

Start A Blog

While you’re doing this, set up a personal blog to document your journey. The point of this blog will be to keep a daily or weekly journal about your progress. Be sure to post consistently about things you learned, people you met along the way, and tips for others out there trying to learn themselves. When you get your site off the ground in a year or so, this blog will be ranking in the search engines and other blogs will be linking to it giving you the ability to start monetizing it with affiliate marketing offers. This will open an entirely new stream of income for you.

When you’re ready to start a blog, you can save a lot of money by signing up for a $1/month Godaddy hosting package.

Multichannel Selling

It’s important to have a big picture when you’re just starting out. You’ll need to set up as many sales channels as possible. You can think of each sales channel as a branch of your business, and each product listing online is like a salesman that works only on commission. You can make pretty much as many as you want to, so get ready to start marketing.

eBay, Amazon, and Shopify

When you’re first getting started, I recommend you open a free eBay account, sign up with Amazon seller central (also free) and set up a Shopify store. To learn how to set up an eBay seller account, read Ebay’s guide here.To set up an Amazon seller account quickly and easily, go to their website here.

Why Shopify?

  • 24/7 Support
  • Managed Hosting
  • Super Fast
  • User Friendly
  • Free Themes and Apps
  • All functionality included with monthly fee
  • SSL included
  • Checkout process is optimized for conversions
  • Mobile friendly themes
  • Integrations with Facebook store and other channels
  • $29 a month to start after 14-day free trial

Setting Up Your Shopify Store

Setting up a Shopify store is very user-friendly. Although, the process of customizing your site and setting up collections, products, pages and everything can be a bit confusing if you’re a first-time e-commerce store owner. If you’re willing to put in the time and effort to get one set up on your own, then this video by Shopify will be very helpful.

Once your store is set up with some test products, a beautiful layout, and high-quality content, you’re ready for the next step.

Click here to start your 14-day free trial of Shopify Now

Getting Legal

At this point, you’ll want to get your legal paperwork taken care of including any and all business licenses, tax permits, corporations set up, etc. You’ll need to consult your local business office website to figure out what you need for your specific country/state/province. This is important because the next step will require you have your state sellers permit to buy wholesale without paying taxes.

When you’re ready, set up an LLC now with Incorporate.com.

Finding Suppliers

Find some suppliers in your niche that will drop ship for you. Don’t look for wholesalers, instead, look for manufacturers of products that are at least $1,000 or more in value. This way you will make more money with every order. To do this, simply go to google and search for the niche of products you’ll be selling. Then click on the shopping tab and look for other stores selling that item. Look specifically for online stores that don’t have a physical presence. You can go to their contact or about pages to find this information.

While you’re doing this it’s good practice to keep a spreadsheet with the info organized into columns and rows. You can use Google drive to do this. Also, keep a bookmark folder hierarchy in your browser for easy access.

Once you find some future competitors that sell similar products that you’ll be selling, begin researching the brands they sell. Find the contact info for each one. Compile at least 20, but if you can’t find at least 20 brands/manufacturers, then it’s probably not a great niche to pursue because growth options will be limited.

Contacting Suppliers

Once you have your list of suppliers, begin contacting them. Explain to them that you are an internet marketer and you have a website in the niche of products that they sell. Tell them you have a lot of experience and your main goal is to make your customer’s experience amazing. Ask them if they drop ship and if they do for them to send you a dealer agreement or account application.

You should get at least 5–10 suppliers to agree to drop ship for you before you decide to move forward with your project. This way you’ll be sure that you can have enough potential to be successfully selling in this niche without fizzling out early on due to lack of products to sell.

MAP Policy

Be sure to make sure these suppliers also enforce a MAP (minimum advertised price) policy. If they don’t, then it’s a waste of time selling their products as you’ll always be undercut by your competition or the vendor themselves. It has happened to me and it is very frustrating.

This can take a month or more so be sure to have patience and continue to stay motivated. Possibly researching more niches, or trying to find more suppliers in the meantime will be great. Stay focused on studying more about business as well, because there is a lot to learn and apply. The more you learn, the better you’ll be able to serve your customers and your partners if you have any.

Once you get your paperwork finalized it’s time to apply for your vendor accounts. Once your vendor accounts are set up make sure you have all the info you need to add the products to your store and begin the work. If you don’t know how to do this, you can hire me to do it as well. I charge $50 per hour and can usually add about 2–3 products per hour depending on how much info is involved and how many variations there are.

Optimize Your Site

Once you’ve added your products, begin the site optimization phase by adding trust badges, limited time coupons, asking family and friends to do reviews or make fake ones, set up your social media channels and add links to your site, add like and share buttons to your site along with email signup forms, optimize your order confirmation email and abandoned cart email, and create bonus offers to incentivize your potential customers to order with you instead of your competition.

Get Traffic

Once you’ve optimized your site it’s time to get some traffic! The old days of creating tons of content and waiting for the search engines to rank you and send you free traffic are over. You also can’t rely on social media sites to send you potential customers anymore, unless you pay for their ads.

Paid Advertising

If you want to get some traffic fast, try placing some product listing ads with Google Adwords. These will send potential customers directly to your product landing page and if they’re ready to buy then they will convert quickly and easily.

Google Product Listing Ads

Use Shopify’s Google Adwords link and the custom coupon Shopify offers every new store to set up an Adwords account so you get $100 off after you spend $25. You’ll need a free Google account to get started. After you’ve set this up, download the Shopify google shopping app and begin the process of uploading your product feed to Google.

Once your product feed is on Google and has been approved, you can put up your Google product listing ads. Set up a campaign and start setting negative keywords for general search terms. Play around with your bids and budget so you don’t spend too much at first. Keep setting negative keywords and adjusting your bids and you’ll start seeing sales pretty soon.

Getting Your First Order

Set up your notification from the Shopify app on your smartphone so that when that first order comes in you can jump up and down in joy! You’ve started your journey towards financial freedom, location independence, and passive income.

Blogging and Email Marketing Sales Funnels

If you want to get traffic for free, then you have to do lots of proactive marketing to get noticed in today’s crowded marketplace. This means creating 5–10 pillar articles for your e-commerce blog to guide potential customers through the sales cycle, then repurposing that content into a series of emails and a free pdf offer. You can use the pdf to get email sign-ups, then send people the series of emails to get them to come back to your store when they’re ready to buy. You’ll want to send the free pdf report out to big blogs in your industry and ask them to do a feature on your report and your site.

Content Strategy and Getting Backlinks

Keep in mind that the best way to help potential customers make a purchase is to optimize your product listings, but the second best way is to have a content creation strategy in place to get potential customers to enter your sales cycle. Write down ideas for how-to articles, definition articles, list articles, technical blueprint articles, and theory or argument articles. These are the best types of content to engage readers. They should also be relevant for many years to come which will help build long-term traffic.

Once you have laid a foundation of solid content on your website, it’s time to get some backlinks to those articles. It’s important to understand that when it comes to backlinks, it’s all about quality over quantity. Simply reach out to non-competing websites in your niche and similar niches, especially blogs, and ask them if you can do a guest post. Write an article for them, including a link to your homepage or internal pages that are relevant to the context, and once it publishes it to their website you can share it in your network.

Automation and Outsourcing

Once you have your site running, optimized, getting traffic, and closing sales, you can start setting aside profit as your outsourcing budget.

You will want to keep in mind that systemizing and outsourcing your online business to a virtual assistant will be key to your success and happiness, but for now do it all yourself, especially if you are bootstrapping and are short on startup funds.

Simply document everything you do throughout the day to operate and grow your online business in the form of videos, written instructions, and checklists. You can use these later to train virtual assistants to do the work for you.

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