There is a new class of business that has been taking the world by storm. These are what I like to refer to as “internet template businesses”, and in this segment there is none that better embody the ethos of the internet template business than Dropshipping.
In this article, I will be exploring the technicalities and allure of this business model, and let you know if this approach is one that makes sense for you when staring your next online business.
What Is Dropshipping and How to Do It
Dropshipping is particularly clever approach to online ecommerce where the owner of the website/store does not have to worry about the sourcing, storing, or shipping of products. Instead, an ecommerce business that is practising dropshipping will rely on one or more third party suppliers to handle these pesky tasks by acting as a middle-man; passing off the sale to their supplier to process and fulfil.
Essentially, an ecommerce store that is practising dropshipping will create an online storefront with a listing of products they do not own. Following this, there are two approaches that are commonly taken in order to facilitate the sale and transfer of goods to the customer.
Affiliate Link Websites
With this approach the store operates strictly as a listing with no transactions being initiated or processed on the website itself. Basically, when the shopper clicks the “buy” button to initiate a sale they are instead redirected to the website of the supplier to complete the transaction. The dropshipper completely passes the customer onto their supplier and earns money through an affiliate program, essentially skimming money off the top.
Using a Dedicated Dropshipping Service
This approach is a bit more intimate than the affiliate link website. It focuses on handing off inventory management and fulfilment to a supplier while still keeping customers on the website. This is achieved through integrating with one of the many dedicated dropshipping service providers who have popped up to quench the thirst of this piping hot market.
For the most part these services tend to either specialize in a particular product vertical (e.g., clothing, mugs, bags) and provide a variety of ways for you to connect your store with theirs. In fact, depending on how this technique is executed, often times the customer is not even aware that any third-party suppliers were involved in the transaction.
Why Is It So Popular?
It is not hard to imagine why a concept such as this would garner popularity in today’s world. A “passive” internet business based on a concept taught by dozens of cheap online courses. One that is completely automated and, in theory, does not require you to do anything apart from upload a website, then lean back in your chair as your bank account swells with cash.
I mean, come on. What am I doing with my life … sign me up.
Well, that is what I would say if took a purely superficial look at this business model without diving any deeper. Unfortunately, the truth is not so sexy.
Is It worth It?
The short and hard answer to this question is no … but.
You see, chances are if you are reading this article you are not positioned to take advantage of the opportunities that dropshipping can provide. That is because if you were, you would already know what dropshipping was and would not need to read a short 1000 word blog post to educate yourself on the topic.
The reason comes down to the commonly understated cons of this business model.
Dropshipping has an Extremely Low Profit Margin
When I say the profit margins here are low, it is no exaggeration to say that you would probably make better margins by buying a crate of bottled water from the supermarket and selling it to your neighbours.
Typically, online stores that have adopted the dropshipping model can expect to see a profit margin of about 10 to 20% per item sold. Even in the best-case scenario, when you include the expense of keeping your website online, plus marketing and advertising, this can easily drop to less than 5% of your gross income. To put this into context, this means that if your ecommerce website does $10,000 dollars in sales per month, which I can tell you is no easy feat, you can expect to take home no more than ~$500. Yikes.
Dropshipping is a highly competitive business
Due to the popularity of this business model there have been an explosion of dropshipping stores on the internet. If you are trying to enter the game now as a fresh faced amateur, be prepared to compete with websites from grizzled veterans. Websites that have already built up a long term “relationship” Google, and have gone through years of tweaks, adjustments and optimizations.
When is Dropshipping worth it?
With all that being said, there are actually a few situations where dropshipping is not only a decent option, but potentially the most optimal approach. This is the case for the following situations:
- You already have an ecommerce store and would like to experiment with a new product before investing in inventory. In this situation, deploying dropshipping for this item is actually the smartest approach provided you are able to find a reliable supplier for the item. One who is willing to perform fulfilment on your behalf.
- You are able to negotiate an exclusive deal with a supplier of high-cost low competition products (i.e., items that cost $1000+). Products like these will allow you to earn good revenue despite a low profit margin. This is, of course, assuming that the supplier is willing to handle inventory and fulfilment on your behalf.
- You are new to online business and would like to gain experience in the marketplace.
The dropshipping business model is like a bowl of soup. For most people, it works better as a side dish than the main course.
If you are someone who is in situations 1 or 2 but are not sure how to proceed, get in touch with me. I will help you to determine whether or not it is indeed a good idea for you to use dropshipping in your business and, if necessary, use the technological resources at my disposal to execute this integration in most seamless way possible.