IS DROPSHIPPING A PROFITABLE BUSINESS?
Dropshipping’s low entry barrier and zero need for physical inventory make it attractive for intending eCommerce entrepreneurs even teenagers on a shoestring budget.
In dropshipping, suppliers send orders directly to customers generated by middlemen called dropshippers. In other words, customers give you money then pay you to shop for them.
It is commonly believed that these advantages make dropshipping a profitable business model by default. But is this true or merely a myth? Are there any profit guarantees?
Statistic Brain reports that 46% of Wholesale and 53% of Retail startups in the US pack up within 5 years.
According to Patrick Henry former owner of Entropic, in his article Why Some Startups Succeed, “…there is a consistent set of factors that lead to startup success and failure.”
Hence adopting a cookie cutter approach to dropshipping will only cut you out of business and put you in the reds in record time.
In this article we investigate the pros, cons and profitability of dropshipping as a business venture.
But before that, here are:
5 KEY THINGS TO KNOW ABOUT DROPSHIPPING
- Startup Cost can be as low as $0.
- Market Share is not fully known.
- Widespread Adoption globally practiced.
- Future Outlook expected to grow.
- Also known as Supplier Direct Fulfillment or Vendor Direct Fulfillment.
SOME PROS AND CONS OF DROPSHIPPING
1. Low entry barrier
1. High level competition
2. Convenience, laptop lifestyle
2. Core areas of retail are out of your direct control
3. No need for stock
3. Stock shock when supplier fails
4. Money not tied up in stock
4. No back up stock in case of back
5. Not stuck with bad stock
5. Miss out on sudden price hike on old
6. Not taking physical inventory
6. Miss sight, smell, feel of your biz
7. No shrinkage
7. No experience detecting retail fraud
8. Surplus suppliers to choose from
8. Sorting through the pile for the best
9. Surplus products to front
9. Not enough unique SEO product
10. Shoppers spend more time on
10. Shoppers are overwhelmed with
11. No salaries, payroll and
11. Job opportunities missed
12. Faster multi-location global
12. Shoppers become more expectant
13. High competition drives
13. Non-competitive stores trail behind
14. Walk out if it doesn’t work out
14. Easy entry, easy exit
15. You can focus just on marketing
15. You outsource other core areas of
16. Cost effective
16. Business is out of your direct
17. Room to boom
17. Your supplier’s doom, your doom
18. Ability to pick and mix
18. Higher than wholesale price
19. Freedom to set price
19. Competing against bigger retailers
20. Direct to customer shipping
20. Multi-carriers may muddle things
21. Outsourced fulfillment
21. You handle customer complaints,
22. Outsourced reverse logistics
22. Recovering money before refund
23. Payments processed for you
23. Issues with resolution of credit card
Profit is one of the prime reasons for doing business besides passion and compassion. So how can you ensure your dropshipping business is profitable?
SOME BASIC OPERATIONAL COSTS
YOU MIGHT INCUR AS YOU GROW
(14 days free trial, no setup fees)
(10% off annual; 20% off biannual payment)
Apps like Oberlo
(tax calculation, reporting)
Tidio Live Chat
(free trust seals and review generation tools)
(+$2.25/mo annual filing)
Hosting, domain name
Tracking Software (Traktor)
Accounting Software e.g. Xero
(Growing Business: $0 to 2,000 emails)
Google Ads Banner displays
Payment processing fees
SOME PROFITABILITY ISSUES
Several factors will impact your dropshipping margin like:
1. PO-SMS Discrepancies
Discrepancies between purchase order and supply manifest system can affect item, quantity, order date, shipping address, ship date, delivery date, customer name, contact information, shipping service, label and packaging etc. Any of these can lead to wrong item delivery or other order fulfilment fails that can hurt reputation and revenue.
2. Dropship Price
Suppliers operate a two-tiered pricing system-wholesale pricing and dropship pricing, the latter higher than the former based on volume of order.
Big ticket retailers buy at wholesale price giving them a price advantage over dropshippers who have to add a markup to make profit making it more expensive for shoppers.
3. Discount Deals
Discounts drive retail sales. Black Friday and Christmas sales are good examples. However, with dropship pricing it becomes difficult for dropshippers to offer competitive discounts.
4. Market Saturation
Due to low startup cost dropshipping is attractive. Competing with thousands of other sellers forces prices down in order to stay competitive.
5. Free Shipping
Free shipping as a big incentive for shoppers to spend more. However, with dropship pricing it might be difficult to offer free shipping.
6. Cross-border Taxes, Duties
International orders will attract tax and custom duties which will further add to the already high dropship price, affecting your ability to turn a profit, more so if there’s a return.
WHY SUPPLIERS INSIST ON DROPSHIP PRICE
Suppliers are responsible for:
- warehousing, WMS
- keeping inventory
- picking, packing and dispatch
- handling returns
- maintaining equipment and machinery
- staff payroll
Their margins are already eaten into; they depend on large volume sales to make profit.
HOW TO BETTER PRICE YOUR DROPSHIPMENT
Based on the foregoing here’s how to profitably price your products.
Take the following into consideration when deciding prices:
- MSRP (Manufacturer’s Suggested Retail Price)
- Listing Fees
- Percentage of final sales (up to 10% per sale on eBay, higher on Amazon)
- Payment processing fees
- Subscription for Apps, Plugins
- Competition’s price
- Customer price perception
- Price trends over time
HOW TO STAY PROFITABLE AND BOOST
YOUR DROPSHIPPING MARGINS
- Start with a little
- Automate your dropshipping processes with apps like Oberlo
- Look to less saturated non-US markets
- Explore LVCR (Low-Value Consignment Relief) for goods worth €10-€22 entering the EU from a non-EU territory
- Create content marketing strategy
- Aim for Retail Order Consolidation to reduce shipping costs
- Team up with other dropshippers to order wholesale
- Devise quality control measures to beat returns down
- Include size guides if selling fashion to reduce returns
- Niche with high volume, low cost products
- Use eBay InDemand tool for PowerSellers or AliExpress Best Selling Category
- Find high demand products and their related niches or complimentary products
- Check products with large volume orders and good reviews
- Find a hot product and sell to a warm or cold market
- Sign up to a couple platforms, eBay, Shopify, Amazon etc
- Strive to avoid backorders as much as possible
- Keep backup stock in the event of back order (but you’ll pay shipping both ways; from supplier to you and from you to customer: not very smart)
- Have secondary or backup suppliers
- Let customers know where items are shipping from in case of delays
- Optimize website design for higher engagement and conversion
- Implement chat and other customer engagement tools
- Run top notch customer service or support, it is a key brand differentiator
- Build lists and send periodic newsletters
Whether or not you succeed with dropshipping depends on a number of factors as outlined. Do your due diligence and take action.
Floship is a global leader in eCommerce fulfillment. Get in touch and get a quote.
Floship Guest Post – About the Author
Amos Onwukwe is an AWAI trained B2B/B2C Freelance Copywriter.
When not writing, he’s making music with the crew. You can follow him on Twitter @amos_onwukwe.