Hello and welcome to this new series of articles on drop shipping. Now, I know I’ve already done a couple of articles, but the one you want to read if you haven’t yet is Part 1 which you can find here.
First of all, it’s essential to understand that drop shipping is a fascinating way to create a very nice business. If you are looking to do something entrepreneurial, you really should try drop shipping. However, before you start heading off to China, looking for cheap crap to sell for a fortune, read this series of articles all about the wonderful world of drop shipping.
How Does Drop Shipping Work?
To answer the question, “How does drop shipping work?” in words of almost one syllable, drop shipping happens when you promote a product supplied by a wholesaler (drop shipper) to a customer. The customer then orders the product and pays you.
You then order the product from the drop shipper, and they send it off to the customer. You never see or touch the products. Ah, if only it were that simple. Let’s go into a bit more detail about what drop shipping is.
What Are the Benefits of Drop Shipping?
You probably won’t be surprised to hear that there are many benefits to drop shipping, which is why it’s such a brilliant. Here are just a few that come to mind quite quickly.
Extremely Easy to Start
There are just three steps to starting a drop shipping business. Find a drop shipper to supply your customers, set up your online store, find your customers. It doesn’t get much easier than that.
Low Cost to Start
You only need to pay for two things when you are setting up an online store and only one of them you need to do immediately. You’ll need to find the money for a domain name and website hosting. You’ll also need to sort out a tax number.
If you live in the UK or any other forward-thinking, entrepreneurial country, this should take about five minutes and cost very little. If you live in Spain as I do, move to a forward-thinking, entrepreneurial country first, and then start your business.
The only other cost you’ll probably want to pay for is help to run your business. That can be as low as $30 a month but will go into more detail about later.
Huge Selection of Products
Pick up a pin and stab it anywhere in a dictionary you like and if it hits something that exists, you’ll probably be able to find a drop shipper who’ll supply you with it. Okay, that may be a little bit of an exaggeration, but you get the point.
No matter what you want to sell, you’ll probably find it. By the way, I would strongly suggest that when you first start trading, you choose something you’re personally interested in. When you get more experienced, then you can start selling whatever you want.
A Minimum of Risk
One of the best things about drop shipping is that you’re not holding any stock. Compare that to the bad old days where you had to pay for stuff if you wanted to sell them physically, and the drop shipping model is much more superior.
You can’t get stuck with stock that you can’t sell because you never buy any inventory. The supplier always holds the stock, so if you don’t sell anything, you lose nothing.
Your Location Is Unimportant
With a conventional store, you have to be somewhere. Not only that, but you have to be somewhere that works. The risks of setting up a bricks-and-mortar shop seem unimaginable when compared to the drop shipping model.
When you have an online store using drop shipping as your method of operation, it doesn’t matter where you are. You could be at home, driving around the world, or getting fat sitting in a bar on a beach in Bali.
It also doesn’t matter where your customers are, which is even better. Imagine 20 years ago someone saying to you that you could own a shop anywhere. That it wouldn’t matter where you were or where your customers were, and you wouldn’t have to pay for the stock. You would be thinking that the person talking to you was utterly bonkers.
Scaling Up Is Easy
Remember I just said that you should start with something you’re interested in, then you can start selling anything? Well, that is scaling up, and it is straightforward to do this when you are using the drop shipping model.
In the bad old days, the more you sold, the more you had to work. With the drop shipping model, the more orders you have, the more work your supplier does. Sure, you need to to put in more orders, but that is the work of a matter of minutes and can be done from anywhere.
This means that even though you are making more money, you still have the time to grow your business or businesses.
What Are the Drawbacks of Drop Shipping
Right at the beginning of this article, I promised I would tell you some of the disadvantages of drop shipping so, here they are.
There are half-a-dozen disadvantages to drop shipping. They’re not insurmountable since many other people do drop shipping. However, it is important to know what they are before you begin.
The Margins Are Not As Good
Although this isn’t always true, suppliers often charge more for drop shipping. Because you can’t charge more yourself, which means your margins will be lower.
Much More Competition
In the bad old days, there were some advantages. If you were the local butcher, baker or candlestick maker, you would probably be the only butcher, baker, or candlestick maker. However, you have a great deal of competition online as many people are doing drop shipping.
This in itself is not a terrible thing because more people become online shoppers each year than start a drop shipping business. Plus, you can always choose a particular niche to avoid a lot of the competition.
Managing Inventory Becomes Complex
Once you start selling, you’ll soon find out that it is challenging to keep track of who has what. Plus, as you have no direct knowledge of your supplier’s inventory, you have no idea if the product you are selling one week will be available the following week.
Of course, there are solutions for this, but they can be pricey, and probably not something you want to invest in when you’re first starting out.
Complications with Shipping
The problem with having a wide range of products is that one customer may order multiple items from different suppliers. If this happens, the cost of the shipping may be three times higher. You probably won’t be able to pass these costs onto your customer, so you will have to take a hit on the costs of the shipping, lowering your margins.
Errors Supplying Products
Even with all the computing power in the world, mistakes will happen. No matter what happens, you’ll be responsible for it. Your customer couldn’t care less if it’s your fault or not. They bought from you, and they expect you to fix the problems. This is one of the main reasons why you need to spend a long time choosing your supplier.
Less Control Over Your Brand
Some suppliers will brand your product with your logo and packing, but many do not. Moreover, even if you have a supplier who will put your branding on the product, you won’t be able to add freebies, written notes, or any of the little touches that would make you stand out from the crowd.
What is the Difference Between a Manufacturer, a Drop Shipper and a Drop Ship Aggregator?
One question that often comes up is the differences between the various businesses involved. Here, I will attempt to explain in ones that even I can understand.
You definitely need to understand the difference between a manufacturer, a drop shipper and a drop ship aggregator. Often the people who use these terms are not sure what the difference is and mix up the terms.
The manufacturer makes the product. If they have a drop shipping program that is great for you but not all do by any means. As there are no middlemen involved, you will always get the best prices. If you are very successful, you may even be able to haggle those prices down a bit.
The Drop Shipper
A drop shipper is a middleman who buys lots of inventory from different manufacturers. His job is to sell those products on to you, the online shop owner. Drop shippers will offer low prices if they can, but they have their costs, so their prices will not be as low as manufacturers’ prices.
The Drop Ship Aggregator
Finally, we have the little-known drop ship aggregator. The best way to describe a drop ship aggregator is a wholesaler who buys from many different manufacturers. Using a drop ship aggregator means that you lower the risks of having a problem with diverse suppliers. Of course, the disadvantage is that your margins will be lower.
How Much Money Can You Make Drop Shipping?
To put it bluntly, you can make a lot of money drop shipping. This doesn’t mean you will, of course, but there is money to be made. You will undoubtedly make more money as you get more experienced, and your customer base grows.
Also, the money you earn depends on your margins. Some products have a much smaller margin than others. Generally, you should be able to have margins of 20%-40%. Yours could be much higher though, but it does depend on many factors. Moreover, if you can buy from manufacturers, you’ll get margins as well.
I could not start banging on about hugely successful sellers who use the drop shipping model, but I am going to refrain from that. If you google it, I am sure you’ll come up with some crazy examples that are almost certainly true.
I am the sort of person who likes to keep his feet firmly planted on the ground. When I start a new site, I aim to earn $10 bucks a day. Once I get to $10, I then intend to scale up to $20 a day. Then, I aim for $40 and so on.
I always double my targets because that’s how my expenses work. My rent is double my bills. My holidays are double my bills and rent. It’s a stupid way to think, I know, especially as my individual sites have nothing to do with individual bills, but I still like setting my targets the way I did when I first started out.
What Can You Do to Get Help?
You’ll no doubt notice that I haven’t been trying to push any product on you because that is not the point of this article. However, If you would like to find out how you can get help, you could do a lot worse than check out my review of SaleHoo here. If ever there was a product that is genuinely helping online store owners to become rich, SaleHoo is it.
Wrapping It All Up
And there we have it. Hopefully, you now have the answer to, “How does drop shipping work?” and you see what a strong business model it is. The next article in the series is going to talk more about the drop shipping model, who it is for and not for, where you can do drop shipping, and how you can be successful. When I have finished it, you’ll find the link here.
If you enjoyed the above, please feel free to leave a comment saying how wonderful I am. If you didn’t enjoy it, you don’t have to say anything. Speak again soon.