What is dropshipping?
Dropshipping is where you sell products on your website but don’t keep the stock yourself.Instead, once an order is placed on your website, you contact the wholesaler or merchant and pass the order onto them. They arrange the packing and delivery direct to your customer–so you don’t have to.
You make money from dropshipping by adding a profit margin to your product. The merchant will give you their total price and then you add whatever you like to that as your profit earnings.
It’s worth remembering that your profit margin needs to be realistic, as eCommerce is very competitive. However, you need to cover costs, such as website hosting, and still make a profit for yourself.
Setting product prices can be a trial-and-error process. You’ll quickly learn what your customers are willing to pay for the products on offer. Most people with a dropshipping business set around 20-30% for profit margins.
Consider the items you’re selling, too. A lower priced item might be more popular and provide a regular income, but a higher priced item will mean greater profit margins.
Dropshipping is worth it since you don’t have to pay for or store inventory. You only order the items your customer has already paid for. And you don’t need to manage the packing and delivery.
Dropshipping is 100% legal as long as you obtain all of the necessary sellers permits like a traditional ecommerce store.
After all, a dropshipping business is just like any other online store except a third party supplier handles the shipping and you handle the orders.
In fact, many large companies like Target, Wayfair and Create & Barrel drop ship other brands as an additional channel for generating sales.
However, certain forms of dropshipping are illegal on marketplaces like Amazon and Ebay. For example, you are not permitted to dropship goods from Amazon to Ebay and vice versa.
In addition, dropshipping from AliExpress and other online markets are expressly prohibited on both Amazon and Ebay.
According to the terms of service for both marketplaces, purchasing products from another online retailer and having that retailer ship directly to customers is illegal if the shipment does not identify you as the seller of record.
However, if you only plan on running a dropship store (without Amazon or Ebay), rest assured that dropshipping is 100% legal as long as you obtain a business license and sellers permit.
How does the dropshipping business model work?
Before we get into specific ways to make money online with dropshipping, we need to understand a bit about how the dropshipping business model works. To do this, you need to think about 3 different players:
The merchant (that’s you)
The customer
The supplier
In standard e-commerce, the merchant buys stock from the supplier and stores it somewhere. Then the merchant shisp it to the customer when a purchase is made.
But in dropshipping, the merchant doesn’t own or keep any stock. Instead, they sell online the stock of the supplier. This means the supplier handles all the shipping
So it works like this:
- The customer places an order at retail price on your online store.
- You receive the order and place an order with the supplier at wholesale price. You keep the difference in cost.
- The supplier ships the product to the customer.
Can I really make money with dropshipping?
As the merchant, you are the person in the middle, connecting customers with suppliers. In order to make money in this role, you need to ask yourself what value you can add to this process for both the customer and the supplier.
Here are a couple of ways you can add value for the customer:
Help shoppers discover great new products: By building a store with a clear brand and identity, you can help customers who share that identity to find new products they like. For example, if your focus is on ecological products, you can help environmentally-conscious shoppers discover products from a range of great eco-friendly suppliers.
Offer excellent user experience (UX) and customer service: Create a great site that is easy to explore and a pleasure to use. And offer the service levels and aftercare online shoppers today expect.
Adding value in these ways is how you will make money as a dropshipper.
Helping customers discover new products will increase the average order value for each customer. In other words, shoppers will purchase more items per visit, which will boost your profitability.
Offering great UX and customer service increases loyalty. This means more return customers for you, helping your sales, and generating more income per customer.
Generating traffic and raising awareness helps your dropshipping business to grow. You’ll boost your sales and become a sustainable online business by ensuring a steady flow of customers.
Here’s how to start a dropshipping business in 4 easy steps
#1: Start Your Dropshipping Store Website
#2: Research Profitable Product Ideas
#3: Find Dropship Suppliers
#4: Drive Traffic To Your Dropshipping Store
Social media is the best and cheapest way to build traffic to a dropshipping store.
And the right social media platform for your business will depend on the products you sell.
- Instagram – Any product with a high visual component tends to work well on Instagram. For example, if you are in the fashion or wedding industry, Instagram is a must
- Pinterest – Home and interior design products work extremely well on Pinterest. Similar to Instagram, products with a high visual component are perfect for Pinterest.
- Facebook – Products that target an older demographic tend to work well on Facebook.
- TikTok – Tiktok allows your brand to have tremendous reach even for brand new accounts. What’s great about TikTok is that you don’t need a lot of subscribers to drive customers to your store and the traffic is free!
- Twitter – Business to business brands tend to do well on Twitter. Most brands have a Twitter presence for customer service and loyalty.
No matter which marketing platform you choose, make sure you focus all of your efforts on one traffic source before moving onto the next. And as you generate sales and leads for your store, make sure you collect both emails and SMS phone numbers.
Email marketing and SMS Marketing allow you to bring customers back to your online store repeatedly until they are ready to buy.
By attracting new customers through social media and retaining your existing customers through email and SMS, you can easily grow a sustainable ecommerce busines
What Are The Average Dropshipping Margins?
The average dropshipping margins are between 10% and 30%. This means that if someone spends $100 on your online store, you will make between $10-$30 in profit.
However, this number can vary greatly depending on the type of products you sell online.
For example, I have friends who achieve 50%-60% margins dropshipping perfume, jewelry and large oversized items like stoves and outdoor grills.
I also know a colleague who dropships personalized funeral urns and caskets that command high margins because his niche is not price sensitive.
Overall, your margins will depend on how crowded your market is and the level of competition. But for a typical dropshipped store, you should assume a 10-30% margin on average.
It’s also important to note that this number does not include expenses such as credit card processing, advertising and other fixed expenses. By the time you account for overhead and marketing, most dropshipping stores have net margins in the single digit range
How Much Money Can You Make Dropshipping?
Every business is different but you can make between $1000-$10000 per month dropshipping in your first year if you leverage at least one marketing platform to its full potential.
For example, if you can rank in the search engines for your target keywords, you can hit 6 figures per year on search engine optimization alone.
Similarly, if you leverage influencer marketing, Facebook ads or Google ads effectively, you can make over $100k in revenue as well.
In general, it takes 1 good traffic source to hit 6 figures but 3 or more to make over a million dollars.
However, these numbers are expressed in revenue and not profit. Once you take into account the 10-30% margins, you can make between $1000-$3000 per month running a dropshipped store after one year.
Is Dropshipping Worth It?
Dropshipping is worth it if you want to create an online store for as little money as possible or if you want to test certain products for sale without a large monetary commitment.
However, if you have at least $2000-$3000 to invest in your business, dropshipping may not be the best business model to pursue.
After all, the time that you save in not having to deal with inventory and fulfillment will be spent dealing with customers unless you have a reliable core of dropship distributors.
One thing that I forgot to mention is that many drop shippers don’t use automated supply chain technology with a real time API. What this means is that you may not be alerted in real time whether a particular product is available for sale or not.
Therefore if an item is out of stock, you will have to interface with the customer to let them know when they can have their items. Unless your shopping cart is closely tied with your dropshipper’s database, it will be difficult to maintain an accurate inventory count.
With dropshipping, you are trading off not having to deal with fulfillment logistics with having to deal with more customer headaches. And depending on your personality, this may or may not be a wise tradeoff.
While the tone of this article has been anti-dropshipping in general, don’t get me wrong. Many people have run a successful business with dropshipping as it works very well with small niche stores but my personal opinion is to avoid it if you can.