Online sellers turn to dropshipping for all sorts of reasons. It could be to launch a new business, diversify your product line, or outsource your shipping. No matter what your reason is, it’s a popular business model.
Despite its popularity though, dropshipping isn’t always easy for sellers to undertake. It’s not a guaranteed way to grow your business, either. In fact, it can ruin your business when done wrong.
That’s why we put together this helpful guide. We’ll walk you through how to build a successful dropshipping program and how to avoid any common pitfalls.
What is Dropshipping?
So, what is dropshipping exactly?
Dropshipping is a fulfillment method that allows online sellers to sell products without actually owning the inventory themselves. Instead, you rely on a third-party supplier like a wholesaler to ship products to customers.
Here’s how it works:
- You establish a relationship with a third-party supplier like a wholesaler or manufacturer that carries products you want to sell.
- You offer these products on your online store or marketplace.
- Your customer places an order. You notify your supplier and they charge you the wholesale price of the product.
- The supplier handles shipping the product to your customer.
The best part is that the third-party supplier is invisible to your customer. It appears you shipped the product to them.
The Pros and Cons of Dropshipping
Unlike traditional business models, dropshipping has different advantages and disadvantages for your business.
Benefits of Dropshipping
Fast and Easy to Launch: The main advantage of dropshipping is not having to store and ship inventory. You don’t have to invest thousands upfront in inventory that you’re not sure you can sell. You don’t have to think about warehouse management, inventory tracking, returns, or shipping.
Sell from Anywhere to Anywhere: Since you’re not in charge of inventory, you can run your dropshipping business from anywhere. At the very least, you need an internet connection and a laptop to manage your online store and supplier relationships. Dropshipping also means you can sell anywhere, as long as you can find the right supplier.
Low Risk: It’s a relatively low risk business model. You won’t be stuck with an overload of inventory you can’t sell. It’s also a strategic way to test a new product line or market without fully committing your finances and operations to support it.
Grow without Hassle: In a traditional business, a significant increase in sales can be a serious burden on your operations. It can lead to hiring more staff, increasing warehouse space, automating processes, and more. With dropshipping though, you pass that extra work onto your suppliers, while your processes stay manageable.
Disadvantages of Dropshipping
While dropshipping is a low risk option, it’s not risk-free. You should be aware of challenges like:
Low Profit Margins: While dropshipping has low overhead costs, it also has low profit margins. For every sale you make, you pay most of that money to your supplier.
It’s also a highly competitive space to sell in. Since it’s easy to get started with, a lot of sellers try it out. Depending on your product selection, pricing becomes a race to the bottom, which means low profits for you.
Unreliable suppliers: Your business will rely on third-party suppliers to ensure in-stock items, accurate shipping, and an easy returns process. Unfortunately, not all suppliers are as reliable as others. What do you do when the shipment doesn’t make it to a customer or the product quality isn’t as expected? You’ll have to deal with a third-party to fix it.
Customer Experience Control: Outsourcing your inventory and shipping can make sense for your business. But, you do give up some control of your operations, and consequently, customer experience.
Remember that your supplier is invisible to the customer. When something does go wrong, your customers will look to you to fix it. It’s a tricky situation explaining to your customer that you must wait for the supplier to address an issue.
To avoid problems in the future, the most you can do is try out another supplier. If you owned the fulfillment process completely, you would have more control and say on how things work.
Dropshipping Dos and Don’ts
Now that you know the ins and outs of dropshipping, here’s how to set up a successful dropshipping business from the beginning.
The success of dropshipping hinges on the products you choose to sell. It affects your market size, profit margins, and shipping costs. It’s a big decision that you want to get right.
Do: Select a focused product niche with a known demand. Once you have a few products in mind, research their:
- Demand – Are there enough customers out there looking for this product? Is this product hard to find locally and customers want to buy it online?
- Shipping costs – Size, material, and storage life all affect shipping costs. Remember that higher shipping costs result in smaller margins for you.
- Price points – Does the price point work well for eCommerce? Will you have to provide pre-sales support before someone is confident to buy?
- Marketing potential – How will you reach customers online? Is this a product that customers are already searching for online?
Don’t: Just pick a product that you’re passionate about. It’s important to evaluate whether a product also meets your business goals and will make you a profit. For example, you might want to stay away from large, heavy equipment that’s hard to ship.
Supplier Due Diligence
There’s plenty of suppliers to choose from across product categories like apparel, electronics, shoes, handbags, and jewelry. The challenge is scanning through them and avoiding ones only posing as wholesalers. These sellers are looking to take advantage of new businesses who don’t know any better and will pay full retail price for their products.
Do: Make a point to vet your suppliers before working with them. Your supplier should have positive reviews, a healthy business (like few returns), and be reliable to fill the products you need.
It’s also a good idea to consider working with multiple suppliers. Doing so ensures you always have in-stock products, select the best prices for different products, and ship from the nearest location to customers. You can learn more about finding suppliers here.
Don’t: Be aware of listing products or taking orders before you know a supplier will fulfill them. Don’t get stuck with orders, but no products.
It’s not a good idea to drop ship from retailers like Walmart, Target, Bed Bath and Beyond and more. It’s an easy shortcut that can lead to big problems. You’re not setting up a real dropshipping relationship. Who covers shipping damage problems? What happens if they stop carrying that product? Remember that Walmart doesn’t know (or cares) who you are. They don’t see you as a dropshipper and have no relationship with you. So they won’t help you deal with damaged products or returns and won’t give you a heads up if inventory is running low or if they plan to discontinue a product you’re selling.
Never list products on a marketplace or on your site if you don’t know who is going to fulfill them. It’s a sure way to end up with unfulfilled orders, unhappy customers, and lost selling privileges.
Consider Financial Processes
While dropshipping makes fulfillment easier, it does complicate your accounting a bit. How do you know the supplier received the purchase order? How do you know the supplier shipped the right item and quantity? Even more important, how do you know the supplier charged you the right amount?
Dropshipping requires an accounting concept called the “three-way match.” You need to be able to (1) reconcile your purchase order to your supplier with (2) the shipping information from the supplier and (3) the invoice your vendor sends you for payment. Those three artifacts represent the full lifecycle of sourcing and shipping a product.
Do: Think about the manual steps to reconcile the three-way match for your dropship orders. Consider what communication and order visibility you need to know exactly what your supplier ships, delivers, and invoices. As your business grows, you should consider software to help automate and manage this process for you.
Don’t: Just rely on email and phone calls to track your orders with suppliers. If you don’t reconcile the three-way match properly, you can pay too much or too early for your inventory. Your customer experience may suffer too if you have no idea what customers are receiving and when.
Be Strategic about Dropshipping
Online sellers tend to view dropshipping as a quick and guaranteed way to make money. In reality, a profitable dropshipping business takes serious effort, especially with its low margins.
Do: View dropshipping as a strategic business model. It’s a great way to complement the bigger vision of your online brand. You can use it to go-to-market quickly, test out new products, or reach a new market. As you build an online brand with high-quality products and a rich customer experience, dropshipping can be one part of your strategy.
Don’t: Rely on dropshipping as your whole, long-term business. This fulfillment process has its perks, but overall it’s hard to sustain a thriving business off low margins in a highly-competitive online space.
How to Fund your Dropshipping Business
One of the reasons to turn to dropshipping is the low overhead costs. While that’s true, it doesn’t mean you won’t need access to capital to grow your online business over time.
A successful dropshipping business still relies on creating an online experience that draws customers in to buy your products. You’ll have to put effort and money into launching a website or marketplace account, paid advertising, and other marketing initiatives. Dropshipping also involves buying inventory on an ongoing basis. Some wholesalers have minimum initial order sizes to ensure you’re serious about working with them.
If you’re working on a tight budget then, how do you finance the growth of your business?
Applying for a business credit card is usually the first step. You can use it to pay for general business expenses and dropshipping inventory purchases. As you regularly pay for inventory, you can rack up reward points.
A business credit card though might only get you so far. You can quickly outgrow your credit limit, especially with how often you need to buy inventory. This can lead to maxed out cards. When you’re running low on inventory, you don’t have that kind of time to wait and fix it.
Payability Instant Access
Luckily, there are alternative financing solutions designed for eCommerce businesses to get access to cash when they need it.
Payability offers accelerated daily payouts and capital advance solutions exclusively for eCommerce businesses. Our Instant Access product pays online sellers for their marketplace sales the next-day, everyday so you can easily fund your dropshipping business with your own sales. It’s not a loan, it’s just your money in real-time.
Here’s how it works: Each morning your marketplace earnings are made available to you in your Payability account. You can then transfer all or part of it to your bank account the same day (via same day ACH) or spend it on the Seller Card (accepted wherever Visa is accepted) and earn up to 2% cash back. It’s totally up to you. The Seller Card is a completely optional way to receive your money. If you’re happy with the card you are already using and the rewards you’re already getting, you can just transfer all of your funds to your bank account and pay off your card much more often which reduces your risk. Instant Access is available to businesses selling on Amazon, Walmart, Newegg, Tophatter, and various other marketplaces where businesses are paid on terms.
Payability approves sellers based on account health and sales performance. So there’s no credit checks, complicated paperwork, hidden fees, or origination fees. Just a short online application and fast 24-hour approvals. Instant Access can also protect your business from unexpected setbacks like an Amazon Unavailable Balance that occurs when Amazon takes longer than the usual 14 days to release all or a portion of your payout. While Instant Access is not for brand new businesses or businesses new to eCommerce, the minimum requirements are only 90 days of marketplace sales history and an average of $2,000/month in sales.
Next-day marketplace payouts not only give you the ability to reinvest in your business faster, they also give you the peace of mind that you have money available to buy inventory, make payroll, or pay your credit card bill when you need to.
Since dropshippers have to pay their venders way more often than those using other eCommerce business models, Instant Access is a great option. Learn more about how Payability Instant Access helps marketplace sellers grow their eCommerce businesses and reduce their risk here.