If you’ve ever purchased an item from an online seller, chances are better than not that you have encountered drop shipping. Drop shipping is a common method of selling goods to consumers, whereby the merchant acts as a middleman between the buyer and the wholesaler. The low initial investment of getting involved with drop shipping makes economical sense for e-commerce merchants of all shapes and sizes.
How Does Drop Shipping Work?
Most consumers don’t realize they’ve purchased a drop shipped item, simply because the process goes seamlessly. In a drop shipping transaction, a buyer makes a purchase from an online store or the marketplace of a bigger retailer, such as Amazon or eBay. In turn, the seller places an order for the same item from their supplier. The supplier then takes care of fulfilling the order, shipping the item directly to the consumer.
Exploring the Benefits of Drop Shipping
Drop shipping represents a number of unique benefits over traditional sales methods. For one, merchants don’t need to keep a running stock of inventory to keep up with customer demand. Not only does this represent a significantly lower financial investment for the merchant, but it also gives the buyer access to a wider range of potential items to purchase.
Relying on drop shipping partners can also help merchants to focus on growing their customer base and generating additional sales, rather than diverting their attention to order fulfillment. The drop shipper handles all packaging and shipping for the item ordered. This takes pressure off an online merchant’s shoulders and allows another company to shoulder the load.
Is Drop Shipping a Profitable Business?
With two parties taking a piece of the same pie, many would-be merchants wonder if drop shipping is even profitable. In short, yes!
Nearly every item available for sale online or in a traditional retail store travels down a supply chain before reaching the consumer. In the case of a drop shipment, the wholesaler still makes a sale to a merchant partner, but the item travels directly from the supplier to the consumer. While the chain changes direction slightly from the traditional sales path, the end result is exactly the same.
Most online merchants aim for a profit margin of at least 20% on the various items they sell. Of course, this figure varies widely across the board, but in theory, this should provide enough margin to cover operating expenses and generate a profit. Of course, because merchants utilizing drop shipment services don’t need to pay staff to fulfill orders, smaller margins can still prove profitable.
Examining the Future of Drop Shipping
Online business isn’t slowing down; if anything, online retail is accelerating at increasing speeds. Hundreds of millions of purchases are made online each and every day. Many large online retailers, such as Amazon, stock their goods in warehouses across the nation. Naturally, these sellers have an established logistical system in place to help them accept and deliver orders as quickly as possible.
So, how does a small merchant compete with the big boys? For one, even destinations like Amazon are full of drop shipped items. Merchants of any shape and size can set up a selling account on the online behemoth’s marketplace, in turn selling their goods to the masses. Other auction sites and online marketplaces can also be used as a platform for generating additional sales.
How to Get Started with Drop Shipping
If you’re thinking about dipping your toe in the waters of drop shipping, there are several different things you’ll want to keep in mind. You can read my updated guide to: Starting a Dropshipping Business
Find the Right Items to Sell
Your first goal is to identify the right products to sell for a profit online. Of course, the options are practically limitless. From home electronics to clothing, books, and auto parts, you could theoretically find yourself selling thousands of different items as you establish yourself as a drop shipping merchant. Rather than struggling to find a product to sell, however, most stores that use drop shipping to fulfill their orders instead encounter the challenge of finding items that have high enough margins to keep them profitable.
As you prepare to begin your drop shipping journey, you’ll need to do plenty of product research to determine what avenues you could potentially exploit for sales growth. Earning a dollar or two per sale may feel invigorating in the short term, but ultimately, you’ll need to generate more profits if you want to scale and grow your business.
Many of the most successful drop shipping sellers identify products they’re passionate about and then begin to build relationships with suppliers who can help them procure those products at a cost that lines up with their sales goals.
Identify the Right Suppliers
The next step in starting a drop shipping business is to build partnerships with suppliers or wholesalers who can fulfill the orders you intend to place. Many first-time sellers try their hand at retail arbitrage before going deeper into the game of drop shipping. Retail arbitrage refers to the act of buying a good from a retailer at its sticker price, before selling it on to another consumer with a markup.
Many merchants who do this will frequent clearance sections and closeout sales to get items at a rock bottom price. These can, in turn, be resold with a healthy margin. Of course, in a drop shipment business, this doesn’t work quite the same way. Instead, some sellers use stores like Costco to fulfill orders, since these clubs typically offer goods at a lower price than a traditional big box store.
While retail arbitrage can be one way to get your feet wet, you’ll want to create relationships with traditional wholesalers to take your margins higher. In order to do this, you’ll likely need to set yourself up as a business and obtain and tax ID number. The specific protocol will vary based on where your business is located, but it’s relatively easy to get the paperwork in place to begin drop shipping online.
Remember, you will likely need to build relationships with multiple merchants, rather than just one or two. As your product base grows, you may find yourself working with dozens of drop shipment suppliers to get your orders fulfilled.
Selling Your Items Online
There are two ways you can attempt to sell goods online. Firstly, you can create listings on large marketplaces and wait for sales to materialize. It’s relatively easy to create a seller account on these sites and you won’t need to focus on traffic generation, as sites like eBay or Amazon already receive millions of visits each and every day.
Unfortunately, selling in this manner is not a magic solution for creating a profitable drop shipping business. When you utilize one of these platforms, you’ll be hit with a commission for every sale you generate. Additionally, many marketplaces charge fees on things like payment processing and listing creation. Others charge a monthly fee for the right to continue selling on the site. All of these costs eat into your profits, and with many drop shippers already operating on rasor-thin margins, this can prove problematic.
The alternative to selling on one of these sites is creating your own online storefront. There are a wide variety of tools available that can help you do exactly this. From registering a domain name to finding a shopping cart platform and marketing your items, creating your own store does involve more initial setup. Some drop shipping merchants find they’re able to turn a profit in this manner, as longterm margins are higher when you’re not paying commissions.
Fulfilling Online Drop Ship Orders
The final component of building a successful drop ship business is making certain that all orders placed are quickly fulfilled with your supplier. As soon as you receive notification that a sale has been made, you’ll need to initiate a purchase with the wholesaler. Ideally, you’ll work with a drop shipment partner that doesn’t place their own invoices or documentation inside the packaging, as this can tip off the consumer to the drop shipment relationship.
When selecting a supply partner, you’ll want to do your research to make certain you’re working with a company that fulfills quickly. Modern consumers typically expect their online purchases to arrive at their doorstep within a few days. The right supplier should be able to promptly dispatch the order from their warehouse and should be responsive to your concerns.
Should You Try Drop Shipping Online
Drop shipping represents a number of unique benefits for online entrepreneurs looking to start making sales. Because of the minimal startup costs and the low fees associated with getting started, it’s easy to try your hand at drop shipping on the Internet. By carefully doing your research, you should be able to identify the right avenue to explore for your drop shipping experiment. With a lot of hard work and a bit of luck, this could prove to be a profitable business endeavor for nearly any motivated seller.
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