Table of Contents
Table of Contents 3
What Is Dropshipping? 6
Pros Of Dropshipping 7
Cons Of Dropshipping 7
How Dropshipping Works 9
Avoiding Scams 11
Investigating Companies 13
Finding A Dropshipper 17
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What Is Dropshipping?
Imagine setting up your own online store with dozens, hundreds, even thousands of products without having to spend a single dime upfront on inventory.
Instead, you find products on another website (let’s use Amazon in this example since most people are familiar with it), add products to your site, and price them higher than they are being sold on the original size (Amazon).
Let’s say you are selling a frying pan that sells for $14 on Amazon. You price it at $20 on your website. When a customer orders it, they pay you $20. Then you go to Amazon and order it for $14, having Amazon ship it directly to the customer, and you keep the $6 difference.
Pretty slick, right?
Only dropshipping doesn’t require you to pay full retail price like ordering from Amazon. Instead, you can often get prices that aren’t all that much higher than true wholesale prices.
Of course, you have to be careful. Some so-called dropshipping companies are actually selling at or very near retail, so it’s nearly impossible to make a profit. Sometimes they charge a monthly or yearly fee to access their inventory, which cuts into your potential profits even further.
You also have to make sure the company isn’t going to be slow with shipping, which could seriously harm your reputation.
Dropshipping has a lot of pros and cons, so let’s take a look at those before we continue.
Pros Of Dropshipping
• Lower Upfront Investment – Because you don’t have to pay for inventory upfront, your initial business startup costs are much lower.
• No Warehouse Space Needed – The dropshipper is the one who deals with inventory, so there’s no need to rent a warehouse or take up space in your home to keep your inventory.
• No Shipping Hassles – The dropshipping company also handles packaging and shipping products, so that takes a lot of work off your hands, freeing you up for other tasks, like marketing, and sourcing other products.
• More Products – If you don’t have to worry about whether a product will sell or not because you aren’t paying for it upfront, you can take more liberties with the products you add to your store. If a product doesn’t sell, the only thing you’ve lost is the small amount of time it took to add it to the store, and you can remove it just as easily.
Cons Of Dropshipping
• Low Profit Margins – Because most dropshippers are not true wholesalers, you’ll find your profit margins are lower than they would be if you bought inventory directly from wholesalers. In fact, there’s often a middleman between the wholesaler and dropshipper, which cuts into profits even more.
• Delivery Issues – Because you will have no direct control over shipping, there may be times when customers don’t get their orders on time, or receive the wrong product or damaged merchandise. Because they bought the item from you, they will expect you to be responsible, and they aren’t likely to accept the fact that you used a dropshipper as an excuse. In fact, they’d likely just see that as a reason not to order from you again.
• Inventory Issues – You may also find that your dropshipper’s inventory control system doesn’t sync with your own, which means there may be times when a customer orders a product from your site that is not currently in stock with the dropshipper. In this case, you’d have to either source the product elsewhere very quickly, or issue a refund and an apology to the customer.
• Higher Shipping Costs – Because you won’t be able to make deals with shipping companies for volume discounts, and because customers may order products from multiple dropshippers in a single order from your store, you may run into shipping issues. Shipping costs could eat into your profits pretty badly if you aren’t careful.
It’s a tradeoff, really. You sacrifice larger profit margins and control over inventory and shipping for a lower upfront investment and less work overall. It’s up to you to decide if dropshipping is right for you and your business.
How Dropshipping Works
Before you can truly understand how dropshipping works, it’s important to understand the basic supply chain. Products you see in stores often go through three, four, five, or even more companies in the supply chain before they arrive in stores.
Manufacturers are the first step in the supply chain. (Unless of course you count the companies that supply the raw materials, but that’s a different arm of the supply chain.)
Manufacturers create the products, but most of them don’t sell directly to the general public. Instead, they typically sell through a wholesaler, or sometimes another middleman brokers the sale of the product from the manufacturer to the wholesalers.
Occasionally, manufacturers may sell directly to retailers, but they usually don’t deal with selling direct to companies.
Wholesalers are middlemen. They buy from the manufacturer and resell at a higher price to retailers. They usually don’t make an enormous profit per item, but they make their money by selling in bulk.
Wholesalers may offer dropshipping, but usually they just sell to retailers.
Retailers buy their products from wholesalers, or directly from manufacturers. They sell directly to the public, often at fairly large markups. They may offer dropshipping, but because they are selling at full retail, they usually don’t.
Dropshippers usually fall somewhere between the wholesale and retail areas of the supply chain. They purchase from wholesalers, or sometimes manufacturers, but sell at near retail prices.
Dropshippers cannot sell at wholesale prices unless they manage to buy their products directly from manufacturers, which is relatively rare. They usually exist on fairly slim profit margins, because they have to sell below retail in order for those who do business with them to also make a profit, and yet they have to buy at the same wholesale prices as most retailers.
Before we get started talking about finding quality dropshipping sources, it’s important to note that there are companies out there that are borderline scams, and others that are nothing but scams.
These companies prey on people who don’t know any better, claiming to offer wholesale prices and actually selling at retail, or even higher, or not even shipping anything to customers at all.
There’s no way to be certain to avoid scams, but there are a few things you can do to lessen your chances.
First, as a general rule, say no to monthly fees. Those companies that offer monthly fees usually make most of their money on those fees, because they realize that customers will have a hard time finding products to sell that they can make a profit on. Thus the average customer won’t even order anything at all, and the company still makes money via that fee.
Keep in mind there are a few legitimate companies that do require participation fees, but those will usually be easy to spot because they’ll have more positive reviews online than other companies, as well as more recommendations.
Next, be sure to check the company’s prices to be sure they aren’t selling at or very near retail. If they are, you’re not going to be able to make any money with them.
Finally, be sure the company doesn’t just sell directly to the general public. If they don’t require you to apply for an account, often requiring a business license or tax ID number, they usually aren’t legit.
There are so many scams and near-scams out there that it can be quite tricky to find a legitimate dropshipper that isn’t going to scam you.
Even if you find a legitimate dropshipper, you still have to make sure they have prices that will allow you to make a decent profit, and will provide fast shipping and quality service to you and your customers.
It’s vital to check a company out thoroughly before doing business with them. The first step, of course, is to check for online reviews and check their Better Business Bureau report (if they have one).Other Details
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