Dropshipping Business Model: What Is It and How To Get Started
Newcomers in commerce who want to start their own online store, are often challenged by the need to invest quite a budget into advertising, hiring staff, custom software development, and renting a warehouse. In addition, there’s always room for doubts about the market niche.
But, there is a way out which is also great for testing your niche.
Once you decide to launch a web store and choose the niche, there are normally three patterns you’ll most probably be going for:
- Run the production and inventory on your own;
- Purchase products in bulk and then resell;
- Transfer the storage of goods and logistics to the supplier, while only setting up the online store and product marketing.
The last scheme which doesn’t require your website to be tied to a warehouse is called dropshipping. Dropshipping business is often viewed as a relatively easy business model by ecommerce entrepreneurs. However, it has its pros and cons.
NEKLO has prepared the below material to help figure out how the model works and what it takes to start a dropshipping store.
What Is Dropshipping?
Consumer preferences have been changing a lot over the recent years. As it is noted in the article on Forbes, consumers now appreciate companies that:
- Provide useful and necessary services;
- Focus on customer needs despite the crisis;
- Care about product safety;
- Give importance to hygiene.
A dropshipping business model will definitely be the right path to follow if you want to stay in touch with consumers adopting the new lifestyle and behavior patterns.
What does the term mean? The dropshipping definition is simple. Dropshipping is a business based on the sale of goods from more than one seller, implemented through one online store functioning as a mediator. The mediator online store (which is a reseller) attracts visitors, converts them into buyers, and passes the completed order to the original seller (the dropshipping store).
As a reseller, you don’t need to:
- Rent a warehouse for the storage;
- Purchase products for your online store;
- Register a company;
- Register equipment.
In other words, the dropshipping model allows online store owners to sell someone else’s products under the online store’s brand. Additionally, it allows to easily expand product assortment as dropshipping suppliers can be multiple, as well as the categories of goods they provide.
How does dropshipping business model work?
The cooperation between the supplier and the reseller (dropshipper) can be described with the following scheme:
- Your customer places an order on your online store website;
- The order from your online store gets automatically sent to the corresponding original supplier;
- The dropshipping supplier gets the order ready for your customer;
- The dropshipping supplier ships the order to your customer directly.
If you’re still in two minds about the niche for your ecommerce business idea, NEKLO custom web application development company has good material for you to study as an example. Learn the core features, peculiarities, as well as pros and cons of the article on medicine delivery app development.
The Benefits of Dropshipping as an Online Business
Dropshipping is an optimal option to try and experiment on for aspiring entrepreneurs, ecommerce enthusiasts with marketing background, and those who just can’t afford to invest large amounts of money at the initial steps of business launch.
The main and most valued benefits of dropshipping ecommerce include:
- Ability to start with a low budget. No need to purchase goods in bulk. You can choose to pay for the product only after the customer on your website completes the purchase. Moreover, you do not invest in production.
- No need for having or renting a storage. No need to spend time looking for a warehouse to buy or rent. Maintaining the appropriate conditions for goods storage is not your task either. All you need is a PC or even just a smartphone with a high-speed Internet connection, as one of the main activities for you will be brand promotion.
- No expenses on packaging or delivery. Dropshipping stores and sellers will do it for you and on your behalf, which will also help to advertise your online store’s brand.
- Ability to cooperate with multiple suppliers. If it’s not prohibited by your specific contract conditions, you can work with several suppliers at the same time. Through expanding your product range, you will also increase the number of customers.
- Flexibility for you as a drop shipper. You can manage your online store’s website from anywhere in the world, offering virtually any type of product and changing the assortment according to your customer preferences.
Challenges of Dropshipping and How To Avoid Them
As a retail strategy, Dropshipping is often viewed as a specific and challenging activity. The main reasons include potential communication problems with the suppliers and a number of others.
Our team at NEKLO has done research on this topic and gathered 4 major disadvantages of dropshipping to get you prepared for potential issues.
1. The need to depend on third-party suppliers
Probably the main reason for hesitations. When placing an order, the customer may want to talk to the online store representative to clarify product features, agree on delivery, and ask for a gift wrapping.
In most cases, you cannot be 100% sure of the quality of products you offer through your online store as a dropshipper. Many things may turn out to be unsatisfactory like:
- Out-of-stock goods;
- Goods packed poorly;
- Deadlines of the delivery missed;
- Defective goods delivered;
- Product price increased by the supplier.
It might become more challenging if you have a large assortment and several suppliers. Customers in their turn will claim these issues to the rep of an online store which has sold the product.
To avoid these problems, you should be constantly monitoring the operations. It’s also important to keep track of the exact number of goods in stock and their price.
2. Low upselling opportunities
Upselling is a source of additional sales in online retail. Upselling helps to increase average checks without additional advertising costs. Tempted by a discount, related products window, or a pop-up with appealing offers, consumers tend to purchase more items. Various statistics say that about 30% of customers would do so.
Theoretically, a dropshipper can negotiate it with suppliers. However, they may not have the right products in stock to offer as “related”, which fundamentally breaks the whole upselling scheme.
3. Revenue may swing or be lower than you expect
To get profit with the dropshipping business model, you will need to simply sell more. This is where expertise in marketing, branding, and attracting customers will come in handy. For example, selling in bulk purchases is a working strategy.
4. Inevitable costs on advertisement
Well, you don’t really have to buy the goods you sell through your online store or spend money on the rental of storage facilities and logistics. But how to attract customers to a new online store without ads?
Advertisement is an ecommerce engine requiring quite an investment.
If you are only at the very start of your ecommerce activity, NEKLO Team has composed a quick guide on how to start an online store applying its practical knowledge in custom app development to help you launch yours faster.
Besides, we’ve managed to get an industry expert quote from Brian Connolly who is an experienced ecommerce professional with a demonstrated history of working and growing Amazon businesses.
Currently, Brian is also a leading Amazon business freelancer on Jungle Scout (www.junglescout.com), the solution supporting 9 global Amazon marketplaces.
Brian has lots of experience with dropshipping. This is what he had to say:
“Dropshipping is a great way for new sellers to get started with ecommerce. It requires only a very small investment upfront. For example, a Professional Amazon account. No need to purchase inventory in bulk.
The biggest challenge is that dropshipping has become very popular which creates competition for sellers and increases the demand for ecommerce.
A big risk is spending much on advertising without receiving any sales. You still need to reach customers. Educate yourself on proper advertising techniques as well as product research.
Another risk is shipping times. Spend the time to find a supplier that can provide you with faster shipping times to avoid dissatisfaction from your customers.”– Brian Connolly, ecommerce expert and writer for the Jungle Scout ecommerce platform (LinkedIn)
How You Can Get Started With Dropshipping?
Before you opt for a dropshipping model, we suggest you define a strategy for business development.
Here’re five core steps on your getting started:
Step 1. Find your niche and elaborate a growth plan
Market analysis is necessary to see who your competitors are, see what they excel at, take into account their mistakes in order to do better.
It’s worth selecting a category of goods that is close to your area of interest. This will make it a lot easier to run the processes, making you involved in an interesting business instead of a boring routine.
Today, virtually everything can be sold through the internet. Niches that traditionally do not really depend on the competition include:
- Household products;
- Products for children;
- Car goods and accessories;
- Pet supplies;
- Clothes and shoes;
- Cosmetics and perfume;
- Appliances and gadgets;
- Bags, watches, original accessories.
Step 2. Create your dropshipping website on the relevant platform
A dropshipping website can be launched on most of the famous ecommerce platforms such as Magento, BigCommerce, and Shopify. As experts in customized software development for ecommerce, NEKLO Team has elaborated a detailed guide on how to select an ecommerce platform that will suit your needs. So, check it out.
Additionally, as a dropshipper, you can’t go without launching another sales channel on social networks where the target audience is gathered in thematic groups.
As experts in web app development services, NEKLO specialists believe that both the strategies are reasonably good if you can execute them properly to help serve your needs. To help adopt the right channel matching your specific demands, here’s an overview of the key pros and cons of marketing your business online through a website and a page in social media.
Step 3. Add products and microservices to handle finances
To hit the audience, make sure to provide engaging quality content. An online store and an ad campaign will require HQ product photos. Showing a product from different angles and a product demo video will add more to customers’ delight.
Additionally, check the ability of your suppliers to handle finances. In some cases, you might need to go for the services of a software vendor and order custom development of the required microservices.
Check your suppliers’ compliance with the declared working conditions, the quality of products, delivery options, and tax rules.
Step 4. Start to work with suppliers to fulfil orders
When choosing a supplier, pay attention to the following:
- Payments. Learn about the types of ongoing contributions. In most cases, suppliers make a profit from the sales from your website, so there is no need for additional costs from your side.
- Origin of goods. Study whether the products come directly from the manufacturer or through an intermediary. The latter option may increase the markup.
- Information provided with products. Make sure that the supplier company uses the information about your brand and contacts that lead to your website properly.
- Service quality and response speed of the manager. Speed matters a lot in online sales. Try to contact the supplier company representative by email or phone. If you cannot reach out, this is a reason to reconsider working with this company.
- Delivery methods. Learn about the delivery options your suppliers can offer, whether they cooperate with courier services, or implement the buy-online-pick-up-in-store strategy. Afterward, make sure to inform your website visitors of all the available delivery methods.
- Product data updates. It’s good to have your suppliers always updating the information on the availability of goods and any changes in time.
Step 5. Get ready to handle returns and refunds
Our advice here is to work with several suppliers. By working this way, you will secure yourself, your customers, and brand reputation against sudden out-of-stock goods and similar issues.
We recommend studying the working conditions thoroughly. Pay special attention to how the supplier acts in case of a product being reduced: provides a refund or asks for an exchange.
Dropshipping business will suit anyone who doesn’t want to deal with the storage and logistics of goods. The scheme is perfect for selling unique and custom products.
Let’s see how we can help you to handle everything properly.