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Last updated: 10th March, 2021

Online Business Academy

A detailed guide to dropshipping

Dropshipping is widely considered to be a simple and profitable business idea for budding entrepreneurs. This article describes what it is, how the various aspects of dropshipping work and how you can build a successful dropshipping business.

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In this article we’ll cover the following:

What is dropshipping?

Dropshipping is a retail fulfilment method that allows people to sell products without managing their own inventory – and therefore avoid holding stock. People work directly with suppliers such as manufacturers and wholesalers to source products they sell to customers online.

A simple way to look at it, is that of a physical shop. There are pictures of products in the window, but the shop doesn’t stock them, it just orders them in when you want something.  Go back far enough, and retail was a premises-based endeavour. You had a shop where you sold items that you made or bought to sell. In the internet age, the entire shop can move online, allowing people to browse, ask questions, pay and organise delivery online. Businesses have been able to reach international markets and reduce costs. This has driven down prices, increased convenience and allowed thousands of businesses to grow into the market.

Due to the lack of upfront costs and ongoing overheads, many enterprising individuals have used their experience of a niche market or product to set up an online shop, turning it from a side-hustle into their full-time job – or even an early retirement plan!

How does dropshipping work?

As described above, dropshipping businesses are the ‘shops’ that bring products directly from suppliers to consumers. These shops curate products that are otherwise hard to source, often building successful brands through which people discover new products.

The key thing about dropshipping is that it removes an ‘expensive’ part of the process – buying and holding stock – which allows the business owner to sell products cheaply but still make a margin. This also reduces the capital needed and eradicates the risk of owning products that may not sell.

Another key part of dropshipping is marketing. Dropshipping businesses are often competing against other shops – including supermarkets, Amazon and high street names. As such they need to promote their shop to ensure they get the clicks, gain the customers and get the revenue. This marketing is done through a range of activities from Google and Facebook ads to blogging and social media. This is the main investment needed to start a successful dropshipping business.

This last point answers the question: what do suppliers get out of dropshipping? And: why don’t suppliers build their own ‘shops’? Because building and running online shops takes time and costs money. And, because dropshipping allows suppliers to sell to audiences who may not otherwise have found the suppliers through traditional routes.

What is the dropshipping process?

Someone searches for a product online and comes to your site. They click to buy that product and pay you. You send that order to your supplier, who then fulfils the order, delivering it direct to the customer. The product is marked-up, so that you still make a profit after paying the supplier and any shipping and marketing costs.

How do dropshippers make money?

Shops make money by marking up products. Some of this mark-up will cover the costs involved in running a shop (staff, marketing, rent, stock), while the remainder is profit. Dropshipping – as with other online-only shops – removes many of these costs and means businesses can afford to offer products at lower prices, while still making a profit.

For example: You source a watch maker selling a product for £100. You sell it for £150. Facebook ads cost £10 and shipping costs £10. You make £30. From this £30, you don’t have to pay for your premises or any staff.

It is worth noting that this example doesn’t take into consideration:

  • The set-up costs of starting a dropshipping business, for example: building an online shop, and content you have created to build you brand and reach your commercial audience
  • Your time (based on the example above, if it took you 30 minutes to administer the sale of the watch, your rate is £60 per hour).

What are the pros and cons of dropshipping?

Advantages of dropshipping

  • You don’t need much capital to start a dropshipping business
  • There is low financial risk
  • It’s easy to get started
  • It’s low-impact – you don’t need to worry about managing or paying for warehousing, packing and shipping orders, tracking inventory for accounting reasons, handling returns and inbound shipments
  • Overheads and ongoing costs are very low (and potentially zero)
  • It’s flexible – you can run a dropshipping business from anywhere with an internet connection
  • There is a wide selection of products to sell
  • You can gain valuable market insights before starting a physical shop, for example demand for specific products and price point information
  • It’s easy to scale.

Disadvantages of dropshipping

  • You can’t control the actual product – for example, you can’t brand it
  • It can be a highly competitive market with other dropshippers as well as high street and Amazon vying for the sale
  • There are low margins – essential to the competitive edge, but meaning you need to sell a lot to make a sustainable income
  • Potential issues with inventory – as you don’t actually have the things in your shop the process can break down if your supplier is out of stock
  • Shipping
    • This can be complex if you use multiple suppliers (if a customer buys three products from three suppliers, how will you calculate their shipping costs? You may not be able to pass on multiple-purchase shipping savings onto the customer)
    • This can take longer depending on the location of your supplier
  • Supplier errors
    • Ultimately, you are responsible for your shop, and if your supplier messes up, you are still accountable. Poor quality products and services can damage your brand and allow competitors to take more of the market.

What products should I dropship?

There are many things to consider when choosing what to dropship, and the results of each will be different for everyone. Here are some tips to help you get started:

  • Choose your niche. Most drop-ship businesses will focus on one topic area. This is because large retailers are more likely to reach a wider audience with broad needs
  • Focus on products that have the highest profit margin
  • Compare the price from the supplier with the price you can sell for – and don’t forget to include shipping costs!
  • Focus on products with repeat purchase. If the product one that the customer will need to replenish when used up? If so, they may come back to you for more
  • Avoid products from established brands. Many brands demand reseller licences and mainstream retailers are more likely to get the sale
  • Avoid products that have sizes – for example, non-stretchy clothing. These are more likely to be returned for exchange or refund
  • Avoid products of larger than 60cm x 90cm if shipping from China, due to specific shipping costs
  • Don’t just sell the thing, sell accessories for the thing. Generally, margins on lower-priced accessories are significantly higher than those of high-priced items.

Dropshipping product considerations

Price point

  • Will people pay X amount for your product? The higher the price, the less competitive; but the lower the price, the less you make
  • Does the service you offer match the price you’re asking? For example: do you answer calls about the product? Can you offer package tracking? What is your returns policy?
  • Has the manufacturer set a minimum advertised price (MAP)? If so, you must not sell the product for any less than the specified price. While this may stop you being competitive on price for certain products, it might also level the playing field and allow you to sell for a reasonable price – beating the competition because of your advertising and/or website quality.

Marketing potential

You need to be sure that you can reach the people who are likely to buy your products, and you need to know how. For example, will you use social media advertising, SEO, affiliates, competitions, influencer outreach, PR? If your potential customers fail to see your products and your shop, you won’t sell anything.

Trending vs perennial

Find a ‘trending’ or ‘hot new’ product to beat the competition to the market. If you can, choose products that are not subject to fashion, so that you don’t have to keep updating your website.

Restricted access

Consider whether people have access to the product at local shops. This runs in parallel with the ‘niche’ product approach. Some things will be hard to come by at local retailers – sell those things!

How do I find a dropshipping manufacturer or wholesaler?

As online-only businesses and dropshipping companies take a bigger stake in retail markets, new and changing services are popping up to support these entrepreneurial endeavours.

Traditionally, manufacturers would deal with wholesalers and distributors, who would sell into individual shops and retail chains – so that the manufacturers didn’t have to.

Some manufacturers have adapted so they can sell individual items – not just bulk – delivering them direct to customers on behalf of the ‘shop’.

The traditional wholesaler/distributor model has also shifted to allow individuals access to small volumes of low-price goods to take advantage of this growing market.

Dropshipping is already a relatively mature market and many businesses have emerged or changed to accommodate dropshipping businesses.

You may be able to dropship directly from a manufacturer, but if not, the best way to source a supplier is to call the manufacturer of your product and ask who their wholesalers are. You can then contact these wholesalers to see if they dropship and inquire about setting up an account.

Here are some useful links to help you find suppliers:

  • SaleHoo – “SaleHoo is a powerful research tool, supplier directory, and online community for drop-shippers, wholesalers, and e-commerce stores”
  • Oberlo – “Oberlo lets you find products, add them to your Shopify store, and ship them directly to your customers”
  • Worldwide Brands – “The Industry Standard Wholesale and Dropship Directory”
  • Sunrise Wholesale – “Brand Name Drop-ship Products on Automated Marketplaces”
  • Wholesale Central – “Your Source for Wholesalers, Distributors, Importers, and Manufacturers”
  • Wholesale 2B – “Search and find dropship products”
  • Doba – “Instant access to hundreds of drop-ship suppliers and millions of products in one catalogue”
  • Wholesaledeals – allows customers to buy products for up to 95% less than retail price
  • Esources.co.uk offers many high street brands and more at wholesale prices.

Other businesses supporting the dropshipping market:

  • Shopify an ecommerce platform that allows anyone to set up a free online store and sell their products
  • eShipper is a delivery service that picks up products from manufacturers and delivers to customers.

8 steps to online shop success

  1. Find a niche
    The internet has allowed even the most niche products to find a market, so find a specialism that you know and care about. Knowing the product and understanding how people use/feel about it is important.

    You might choose an area where there aren’t established brands synonymous with a product or market so you’re not competing against big names. You don’t want to sell the same products that people can get from a multitude of different retailers.
  2. USP: Curation is key
    If you’re an enthusiast, maybe you can introduce your market to new products. Finding a true niche product is hard, but you may be able to build a brand around curation. For example, you can buy most make-up products online, but you might create a web shop around make-up for clubbing – and curate a great range, putting together bundles for specific looks.
  3. Do your research
    Make sure there is a demand for your product and room for you in the market.
    • Use Google Trends to see if people are looking for your product, and whether the trend is up or down.
    • Google your product and see who is advertising on Google for this product. It will tell you whether there is a market, and who your competitors are.
    • Research your target market and buy trending products that sell well.
  4. Turnover is vanity, profit is sanity
    You may choose to focus on high-price items to make more on each item. This also reduces the amount of work that goes into selling and sending each item, saving time as well as money.
  5. Put your customer first
    Offer quality, value and good customer service and you’re on track for success.
  6. Build relationships with suppliers
    You’re relying on your suppliers to give you quality, value and good customer service so only work with those who are reliable and provide quality products.
  7. Build a brand
    Unless you’ve invented and patented something unique, there’s no reason someone wouldn’t buy the product you’re selling from someone else. But if you build a successful brand, people will discover the products through you, because they already know about you or can see that you’re ‘cool’, credible and professional.

    In the competitive online space, building a brand that inspires purchase will be your biggest challenge. It can take years to build a brand and many companies with large budgets still fail to do so successfully, but here are some tips to building your brand:
    • Define the purpose of your brand, and turn it into a neat little mission statement, for example: ‘The cheapest shoes on the web’, ‘sustainable snacks for all the family’, ‘TV accessories picked by the professionals’
    • Create a brand personality. If your company was a person, who would it be? Maybe it’s you.
    • Then create a brand tone of voice for your company. Base this on how your customers want to be spoken to about the subject.
    • Create a unique and striking visual identity. It should suggest what you do, but not be exactly like your competitors.
    • Ensure your branding flows through everything you do.
  8. Reach your customers
    It’s essential that you’re able to reach potential customers, and there are a range of methods available to individuals as well as enterprises, for example:
    • Facebook advertising
    • Google search ads
    • Google display network
    • Creating content that answers commercial and informational searches in Google. For example, ‘best summer styles for women’
    • Affiliates
    • Sponsored content and native advertising.

These tactics will help ensure that your business gets the click, and not your competitor.

Dropshipping through eBay and Amazon

Amazon is an online shop. So, how can your shop – a dropshipping business – make money from another shop potentially selling the same product? As well as holding stock, Amazon is also a marketplace; a search engine for shopping. People come to Amazon and search for products that they can buy, either directly from Amazon or through third-party vendors.

You could be one of these third-party vendors.

Does Amazon charge vendors?

Yes. Amazon sellers can choose between a Professional or Individual selling plan.

  • Individual sellers pay $0.99 (around 76p) for each item sold, excluding variable closing fees ranging from $0.45-$1.35 (around 35p-£1.05) which are charged for each item sold
  • Professional sellers pay $39.99 (around £31) per month as well as variable closing fees and referral fee percentages (6%-25%) but are exempt from the $0.99 per item fee

What are the advantages to using Amazon?

  • You will reach a ready-made, commercial audience for your products.
  • You will have access to Amazon’s analytics service
  • You can earn positive reviews for good products and services that can help you build your brand.

eBay

Dropshipping is allowed on eBay but YOU must fulfil the order. Listing an item on eBay and then purchasing the item from another retailer or marketplace that ships directly to your customer is not allowed. eBay’s message is: “You’re still responsible for the safe delivery of the item within the time frame you stated in your listing and for the buyer’s overall satisfaction with their purchase.” In essence, you must have the item shipped to you before sending to the customer.

Does eBay charge vendors?

Yes. Fees can be 10% or more of your product’s price.

What are the advantages to using eBay?

  • Reach a ready-made, commercial audience for your products.
  • Earn positive reviews for good products and services to help you build your brand.

Why is dropshipping still profitable in 2021?

Dropshipping is not new, but many market analysts see further growth as the marketplace changes and matures. Statista.com shows that worldwide e-commerce business transactions amounted to $2.9bn in 2020 (around £2.2bn), up 5% year on year. The number of people buying online is 3bn, up 10% year on year.

Worldwide interest in dropshipping over time (based on Google searches)

Why is dropshipping still a viable business model in 2021?

  • Upfront costs are very low
  • The world has embraced e-commerce
  • Ubiquity of smartphones means more people are buying online than ever before
  • Manufacturer and wholesalers understand dropshipping and work with retailers (it is, after all, a new revenue stream for them)
  • Secure online payments are easy – using international money transfer apps for businesses such as PagoFX
  • Access to online marketing tools such as Google Ads and Facebook advertising allows retailers to reach in-market consumers.

You may also be interested in our step-by-step guide to starting an online business.

Sources:
https://www.salehoo.com/blog/low-cost-products-with-high-profit-margins
https://www.cloudways.com/blog/trending-products-to-sell/#home-security-ip-camera
https://www.cloudways.com/blog/is-dropshipping-business-dead/

This article is provided as general information purposes only and is not intended to cover all aspects of the topic. We recommend that you take professional and specialised advice before taking, or refraining from, any action based on the content of this publication, as this article is not intended to constitute expert advice. We do not guarantee, explicitly or implicitly, that the content of this article is accurate, complete or up-to-date. The information in this article does not constitute legal, tax or other professional advice from PagoFX or its affiliates.