So do you know what drop shipping is about ? Got to be honest, until I recently watched a webinar about it, I had totally no idea.
According to Wikipedia………’Drop shipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers the customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer.’
Drop shipping has become popular due to the low barrier of entry and the limited overheads in getting started. This is great for the startup online marketer but there is a certain amount of skill involved in the choice of products chosen to drop ship.
It is a marketing system that appeals to those with limited space to store stock, as you as the drop shipper will not need to hold much stock, if any. It solves any inventory management issues for trailing new stock without the overheads of stock that may not sell.
Introduction To Drop Shipping
Easiest way to show how drop shipping works is with the drawing below.
Your customer purchases the product from your online store. They pay you the price you have set in your store. You take your profit from that price then pay your drop shipper who posts the parcel to your customer. You never see the product and do not have to have any stock yourself.
Sounds perfect ! Win win situation!
What Are You Going To Sell?
I was going to continue the theme from the last sentence and move onto how you will charge for your products, but maybe first we need to work out what you are going to sell… Your niche industry will have a huge bearing on what you decide to go for. If you are at the very beginning of your new business, deciding on your niche comes before you work out your product.
Go read my article on Niches and follow the information there to find your niche.
The sort of product you are deciding to sell, depends on the kinds of marketing strategies, profits you are likely to achieve. You will have experience/skills/passions/hobbies that will start you out in deciding the types of products you are going to drop ship. Understanding what you are selling, the market for that product, what profits you can achieve from the product are questions you need to answer before you start the process of building your dropshipping website.
If I was going to drop ship, I have skills in various fields – elite sport (tennis), ice skating, triplets, travel… I have experience and skills in all these fields. Choose your drop shipping products carefully, use your skillset, you can branch out once you have your business network established and any issues ironed out.
How Is This Going To Work?
As there is no single pricing strategy, you need to consider how much it will cost to run your business, how much it will cost to buy the product from your wholesaler (there could be added costs here), how much returns will affect you, shipping costs etc.
Getting your pricing right is as important as choosing the right product. If you don’t get that right, the product you have researched will be irrelevant as your business will not be sustainable.
Price Discount Breakdown
This is the finance side of things…. So the way you make a profit is that you charge your customer more than your wholesaler supplies you. You take the profit.. easy!! Sounds straightforward but I will walk you through the main drop shipping pricing strategies you can implement in your business to increase your profits.
Fixed Markup On Cost (FMOC) is the standard pricing strategy for setting product prices. This is the way that preset profit margins are added to the cost of the products. Generally the FMOC is 10-20%. There is not actual set rule, but gauged by looking at your competitors in your market. You don’t want to be setting it too high, thinking high profits and pricing yourself out of the market completely.
So the pricing would work something like this as an example…..
Lets say you sell glass chess sets….
Your wholesale price is $100. With a FMOC of 20%, you would have a retail price of $120
Once you have the retail price, a little research on your competitors would be required to ensure that you have not overpriced your product and will have trouble selling.
As a start-up I would recommend being cautious about your FMOC. Get the traffic to your site with a steady stream of purchases before pushing your margins to the limit. Drop shipping has its limitations and one of them is the shipping.
Shipping
Shipping costs have to be factored into the price of your products so that needs to added onto the overall cost. Bear in mind also that if items are sold internationally, the shipping times will be dramatically increased. Some customers will not wait the increased shipping times, but this doesn’t mean that drop shipping is a dinosaur that should be buried, customers accept longer shipping times, if they are getting a good deal on price.
For this very reason, some drop shippers add the shipping cost to the product price and offer ‘free’ shipping. The shipping isn’t actually free as you have added it to the price, but as far as your customer is concerned, they feel that whilst they have to wait for their product, they are getting the shipping for free.
Another alternative is to try and source your products from drop shipping suppliers who charge no shipping costs. This would be the perfect scenario, no need for you to add it to the price of your product, no shipping costs, you can offer your products at much more competitive prices.
Returns
Think about your returns policy and ensure that this is prominent in your business so all customers know the policy before they purchase. This is an unknown cost to your business that you will have to factor into your calculations going forward, not something you will know, percentage wise at the outset of trading. Will returns be free? Does your drop shipper offer free returns? Once you have an idea on what percentage is returned, you can factor in a percentage onto your pricing to reduce the deficit.
One reasonable policy I would recommend, if at all possible, is to get a sample of your product, from your drop shipper so you can inspect the quality before you start promoting it. Clearly if its a large item, that would not be possible so do research into anyone else selling the same product, where they get it from and what their customer feedback is like.
How To Set Up Drop Shipping
These are the first steps that you need to have completed before starting to approach the drop shipping suppliers.
Decided on the products you are going to drop ship….
- You have done your research.
- Know your products well.
- Have looked at competitors prices.
- Confident that these products will bring you in a satisfactory profit.
Do these steps before looking for a drop shipping supplier that has your products, that ships to the countries you are selling, rather than the other way round. Its easy to get sucked into promoting products you see they have without the research that’s really necessary to make a success of your business.
Locate A Supplier Who Will Drop Ship For You
There are tons of suppliers out there and they all want your business ! So again research here is imperative. Some suppliers don’t charge a fee for joining, others may charge a one-time fee, a monthly fee or an annual fee. There are also agents that offer to find you a drop shipper and will charge a fee to give you a huge database of drop shippers – handy if you are struggling with deciding which to use.
Ive listed a few drop shippers here…. I have not tried them out, as I don’t do drop shipping, but they are the best known and some for you to start with. You can search for more drop shippers in your niche on Google, but these three are the top drop shippers. Decide what you want from the suppliers –
Do they ship to the country you’re promoting?
How long does shipping take?
What do they charge for shipping?
How reliable are they – search for reviews.
Do they have good reviews for their products? Are they good quality?
Do you want to send for samples of the products first?
Ali Express – One of the biggest ecommerce platforms in the world. Brings chinese manufacturers and buyers together from across the globe. Items are offered at low prices and platform allows customers to purchase single items. Free worldwide shipping with an express shipping and packet shipping times of 7-14 days/range of products/follows trends/no fees.
Salehoo – Supplier of Dropshipping Directory. They provide drop shippers details for your products. They offer access to their directory/access to their market research labs/members forum/email support. They charge $67/year for membership but support you with reliable drop shipping suppliers and take that strain away.
Doba – Will take you from having no products and no niche, all the way through to finding you niche products to promote. Offers as much support as you require including quick start training for $399. If you want to try them out for a month, its free, after that there are various plans you can choose, the most basic being $29/month. Would be good if you have no idea at all and dont have tons of free time, but can afford to pay that bit extra for the support they offer.
Once you have found a drop shipper who you are happy with and drop ship your products, set up an account with them.
Build Your Store Online
You can drop ship without an online store – you can use Ebay for starters, no store required, simply set up an account with Ebay and list your products. There is a disadvantage to this though, you will be in direct competition with others online selling a similar product and you are all listed together, one after another.
Building your own web store is not difficult. You could either join a drop shipper who offers the facility or choose a host that supports web stores.
You can also go to Wealth Affiliate – a platform that supports new businesses and offers tutorials, articles, webinars on the very job of setting up your own website, how to find and encourage traffic to your website (got to have customers ), making it SEO and Google friendly, basically all the ins and outs of running a successful online business (like this one!).
There is a fee involved but this is no more than you will pay anywhere for hosting of your website, so you get the added advantage of all the support for free.
Follow this link to know more about WEALTHY AFFILIATE.
Benefits of Your Own Drop Shipping Webstore
- Greater income – shoppers prefer purchasing from an online store – builds trust so conversion rate increases.
- Less competition – No other Ebay or Amazon listings in direct competition on the same platform.
- You have full control so can offer good customer service and build a brand that is widely trusted.
- Good returns service, with after sales so reducing the need for returns.
- You can follow your own analytics and see which products sell the best.
What Do I Think Of Drop Shipping – Pros and Cons
Drop shipping is a easy, quick start for someone who is still working full time but wants to start a new business without taking up a lot of time and energy in the start up. Its low cost, so minimal outlay in the initial stages. Clearly as business starts to pick up you may want to pay for advertising or use Google Shopping Campaign to increase traffic. The website is easy to run from anywhere around the world. Its easy to expand and change products at any time, following trends within your niche, and gives you the time to think about where your business is going, how you want to grow it. Maybe that perfect drop ship product isnt there, maybe its one that you drop ship but you know has a flaw you can easily solve and you want to work with your drop shipper to develop the product that meets the demands of your customers – you have the scope to do this.
There are always negatives to anything. Drop shipping can be thankless, even with profits. You can see that if you’re selling travel adapters at $3, you’re not going to be making enough profit to go on that holiday. But if you are selling infra red grilles, then the profit margin will be higher.
So choosing the right niche products is key. The shipping time can be a problem today… 20 years ago we were all used to waiting a week or so for something to arrive but now, with Amazon’s next day delivery, everyone expects things to be immediate. That won’t happen with Drop Shipping… so the carrot is cost. You might not make so much profit but if you sell 10 with shipping at week, for a moderate profit rather than 1 at a higher profit, you can see its worth it.
People are prepared to wait for a bargain and if they’re not, then they’re not your ideal customer!
Thanks for your review of Drop Shipping. This is definitely a blast from the past. I did drop shipping approximately 10 years ago via eBay and Amazon. Wow, how things have changed.
Do you yourself actively participate currently in Drop Shipping? How are you doing with it? What platform do you use?
Thanks for your comments Brian, I don’t drop ship but it has fascinated me for a long time. If there were 48 hours in a day, I would do it ! It is simply lack of time supporting that as a business and this business. I like the thought of doing the product research and I would use salehoo I think, they are very supporting and I enjoyed researching the process of drop shipping..
Well now I know what drop shipping is. I sort of had the idea, but this really explained the ins and outs of what it really is. Sounds like a very interesting way to make money. I can see a lot of people liking this idea. The shipping aspect, I could see as a bit of a downfall competing with different next day shipping sites. Job well done
Thanks Coralie, yes the shipping is the issue, but you deal with it by offering competitive prices. The world is full of people all wanting different things, it will not stop them buying your drop shipped product because they want it cheaper than the exact same one that will come tomorrow. Each to his own I say and appealing to the thrifty souls out there with drop shipping prices really works !
How interesting! I had never seen this shipping format. I believe this is really beneficial when doing online business. Though I have a question: Is it possible to apply this when selling books online all over the world? Or does it apply only to certain continents>/? It wasn’t all that clear to me. I would like to try it ut.
Thanks Linda for your comments. Most certainly it can be used all over the world, the only thing to check is that your drop shipper ships to the countries you have in mind. I do mention about checking that your drop shipper ships to the countries you are promoting in the section on ‘How To Set Up Drop Shipping’. Best of luck!
I have looked at drop shipping before and at this stage I feel a little bit lacking in knowledge to go ahead but as I learn more in Wealthy Affiliate, I know this could be a viable option for my future income
This is a really informative post and I have learned so much more than I knew before so will bookmark and come back to read again and gain to become more familiar
Thank you
Thankyou for your comments Vicki, I understand the reluctance at an early stage to jump into drop shipping when you are on a huge learning curve with other online business issues, but something definitely to keep in mind for the future.
Highly informative yet concise article Quinn. Really appreciate how you cover almost everything I need to know about drop shipping in a few words.
I know a couple of friends who are running extremely success drop shipping businesses from Asia and wanted to jump on the bandwagon. Can you please let me know if I need to set up a company in the US to do Amazon drop shipping.
Thanks
Joshi
Thanks for your comments Joshi. If you want to drop ship in the USA with Amazon.com you don’t have to have a company in the USA. You need to have a website, a way of attracting customers, along with your amazon.com account, but when you set the account up they ask you, for tax reasons, whether you are exempt from paying tax in the USA, and clearly if you are not a USA resident,( I am not), I do not pay tax on any earnings through Amazon.com.
Thank you for information on drop shipping. I honestly had no idea either. I spend a lot of time building websites and writing content so to cut out the inventory and time it takes to ship sounds appealing. I appreciate you explaining FMOC. I think if I was starting out I would target a 10% profit margin and nudge my way up from there. Returns are definitely something to consider and keep an eye out for free returns. I’m really glad to learn that there are tons of drop shippers out there as competition naturally works in our favor. It seems like it’s all about bargains. I’ve bookmarked your site to refer back to these shippers, thank you!
Definitely about bargains but that comes from researching your products carefully to start with, that way you are offering a competitively priced product that will sell. I also feel that checking out the quality of the products you want to sell as being vital – this will reduce the returns for poor quality, so cutting down on one of the biggest reasons products get returned.
Prior to reading your blog, I only had little knowledge of dropshipping. But because you laid out the different moving parts of the biz model, I finally understand how it works. And I just realized that it creates more headaches compared to the biz model I’m currently using (such as the pricing, shipping, returns, customer service).
Now that I’m thinking of it (actually, I’m overthinking it), I’m having trouble with finding a niche to specialize in using the dropshipping model. Can I use the hot niches like the ones applicable for affiliate marketing? I plan to master affiliate marketing first then move on to dropshipping in the future.
Thanks for your comments Dominic. The drop shipping model will work for any niche, but thats the word – niche – for you to be competitive you have to have the niche that will take you there. Clearly you can see that if you had a niche in highlighters that glow in the dark for example, you aren’t going to make as much profit as say these new resin river tables that are all the rage right now. So the first step is find that niche that sets your world on fire, find those products, set your website, and go for it !
Nice article! Great detail.
Thank you for this in-depth look at how dropshipping works and how to get started. I tried drop-shipping when I had an eBay store years ago. I wished I would have read this post before I tried drop-shipping. It was very hard to make enough profit to make it a viable business practice. I didn’t research products wholesale price and shipping costs first. This was my downfall. Products were being sold cheaper than what I could buy them for. I sometimes would buy them at auction and resell them on the same platform (eBay). It was a learning experience for sure.
Do you recommend an online marketer to drop-ship from their website? I may have to rethink about drop-shipping as a viable business plan.
Thanks Kenneth, very interesting to hear your experience with Drop Shipping. I do honestly think that a website is best, you can still use Ebay as well but a website gives a store front to the customer and they feel reassured by that, they can see you are branded and it goes a long way in trust to have a real website, rather than just selling on Ebay. It is not something that will make you rich quick, the research and choice of products is key.
Hey Quinne,
You have led down nicely the whole drop shipping process. But Personally, I prefer affiliate marketing over dropshipping. Dropshipping can be a very risky business for many reasons.
You entire drop shipping business is dependent on another service, i.e drop shipper, on which you do not have any control. It is out of your control, how effectively he delivers your product, or is it he deliver on time? If he doesn’t even a single time, it adversely affects your business.
But if one wants to start a Dropshipping business, how much money do I need to start a drop shipping business?
Regards
Thankyou for your comments. Yes you do highlight one of the negative points I bring up in my article. The shipping times can be long… but then it is up to the customer to decide if they want to spend more on the same product and get it 3 days later or wait another week and get it so much cheaper. I think you will still have a lot of customers, the world is huge and we all have different opinions on how long we will wait for our purchase. You do not need very much money at all to start a drop shipping business. A website is all, no stock and some of the drop shippers do not charge for registration onto their books.
Really enjoyed the article. Can you tell me what your opinion the best place to start for drop shipping would be? It sounds like something I would love to learn more about. You made it sound real interesting. Does it cost anything to start a drop shipping business? The detail about how to drop ship was elaborate, I would enjoy knowing a little more like places I can start to build my own drop shipping business online and exactly what are some great products you would consider as well to sell. Thank you for the informative information on the subject a lot of people want to learn about.
Jessica Sharma
Thanks jessica, If I was going into Drop Shipping I would head off to Ali Express or Salehoo – these struck me as being the most comprehensive as far as the new starter in drop shipping is concerned. They take you through the process and support you. They also support you in discovering your niche, although I do think it is better to have an idea about what you want to drop ship to start with, it has to be something you enjoy, because this isnt a way of getting rich quick, it does take time and effort and using products you are passionate about makes the whole process so much more enjoyable.
Hi, Quinn. I never knew how drop shipping really works. Thank you for clarifying in this article. I’m wondering if we need our own website to sell products and our customers doesn’t need to see information of drop shippers? Do you have a sample of website that does drop shipping? Thank you!
Thanks for taking the time to comment… You dont technically need a website to drop ship. You could just use Etsy or Ebay where a website isn’t necessary but to be honest, that would be quite limiting to your business, taking away potential customers by not having an online presence with a website. Your customers do not need the information about your drop shipper. If you have done your research well, you will know how your drop shipper works and frequently they will give you tracking numbers that you can pass onto your customer so they can track their product online. I don’t do drop shipping, but you can find tons of them on Amazon, thats another place to sell.