Drop Shipping: What is the Best Way to Setup a Dropshipping Business (March 2017)

drop shipping
 “Drop shipping! Step right up! Find your ultimate freedom as a business owner – sit somewhere on the beach and coordinate your whole business remotely with little effort!”  – this is probably what a snake oil salesman would sound like if they were to ever preach drop shipping…

However, setting the preaching aside, there's something that you should know before you throw yourself into drop shipping and build your whole business around it.

In this complete guide,  we'll cover all the ins and outs of drop shipping as a business model  that you should know if you're considering it the path for you.

Table of Contents:

drop shipping how-to
 

My favorite drop shipping company

Just dropping the name of my favourite dropshipper for beginners, just in case you're in a rush. The primary feature you get from Oberlo is the importing from AliExpress. Since so many dropshippers use AliExpress to find and sell products, it's a wonder as to why a tool like this hasn't come around sooner. You may also want to check the full list of my favorite dropshippers.

Chapter #1: What is drop shipping? (overview)

Drop shipping sounds simple on the surface. It entails you setting up your own ecommerce shop and reaching out to suppliers who take your orders and ship those orders to your customers. It's slightly different than ecommerce fulfillment.

In short, it's designed so that you don't have to house any inventory, and you don't have to worry about any shipping costs or logistics.

Sounds great, right? Well, not so fast.

Here's how it works exactly:

 
Drop shipping

drop shipping model

In the drop shipping scenario:

  • (1) The customer pays you for the product.
  • (2) Only after you get the money from the customer, you pay the supplier to fulfill the order.
  • (3) The supplier sends the final product directly to the customer.
Classic

classic commerce

In the classic commerce model:

  • (1) You get the materials or the elements of the product from the supplier + at this stage you also need to pay the supplier.
  • (2) The customer pays you for the product.
  • (3) You send the product to the customer.
 
As you can see, the most significant difference between drop shipping and the classic way of operating is that you don't hold any product inventory. Instead, you only pay for it when the customer has already given you the money for the order.

This makes  drop shipping one of the few business models where you don't need to spend money before the customer actually pays you,  which minimizes a lot of your risks.

Chapter #2: Pros and cons of drop shipping

The retail side of ecommerce is worth more than $220 billion, and is expected to grow to $370 billion by 2017. Much of this pie goes to drop shippers.

 
Drop shipping: pros and cons
PROSCONS
Good earning potential with arguably low barrier to entry.You outsource a big chunk of your customer satisfaction. Someone else builds and sends the product. This is just a huge part of the overall customer experience. If anything goes bad with your supplier, the customer will still blame only you. In general, you lose quality control since you can't see or use the product before it goes to the customer.
Location independent (for the most part). For small, one-person businesses, most of the time you just need a laptop and an internet connection.It's more probable to come across copycats – people attempting to do exactly what you are doing.
Less capital needed for the initial investment. With drop shipping, you don't manufacture anything yourself, so you don't need to invest in inventory, materials, tools, or anything else related to getting a product created.Returns can be tough. Based on the agreement you have with your suppliers, customers might be required to return the products to you, and then you have to take care of the return/complaint process yourself. During that time, keeping the client happy can be difficult.
You buy from your suppliers only after you've already made your money.You lose control over shipping quality/speed. In a business where you do everything from A to Z, you also control (nearly) everything. This includes all things related to shipping. With a drop shipping business, basically by definition, the shipping part is outside of your control.
It's easier to scale your business. Quite simply, as a drop shipping business, ramping up your sales volume is not that much connected to higher product/operating expenses. You have your suppliers doing the heavy lifting in that department … with one exception – more on that in the corresponding cell »As you grow, more sales means more customer support. This is the one area you can't escape. Even having fulfillment handled by your suppliers, customer service is still on you. This is just simple math. While selling 100 products vs 10 products isn't more costly for you, supporting 100 customers vs 10 customers is.
Less overhead. There's:

  • no storage needed, as you don't keep any products with you,
  • no need to pack anything yourself,
  • no need to track your inventory,
  • no need to hire more staff to deal with more products or sales coming in.
Easier to pivot or change directions. If your current drop shipping business model doesn't play out that well, it's easier to change directions and start offering something else. Compare this to the traditional model … where you'd need to invest in new tools, materials, processes, and whatnots.
 
Action Tip #1:

Go through the list of pros and cons above, and think how you feel about each one. Is any of them a show-stopper or game-changer for you? The goal is to learn something about yourself and your approach towards the business model of drop shipping. Having your mind set and a good idea on how significant you think these pros and cons are will help you decide whether drop shipping is something for you – which is the topic of the next chapter.

Chapter #3: Is drop shipping for you?

Did you know that according to E-DSS.org, around 27% of retailers on the web have transitioned to drop shipping as their primary method of order fulfillment.

The first honest answer that you really need give yourself is whether drop shipping is something you should actually do, and not as much if it's something that you can do. You need to consider all the pros and cons, and also look into whether the model is in tune with your vision, goal, and actual market/niche.

To help you with that, let's start with the most common misconception in the drop shipping land … and also probably the main cause of failure of many drop shipping businesses.

What drop shipping is not

Let's set one thing straight. Contrary to what that fictional snake oil salesman told you, drop shipping is not about doing nothing while sitting on the beach. Far from that!

“Drop shipping = easy money” is a very wrong mindset.

Think of it this way:

 Drop shipping is mainly about outsourcing the most inconvenient parts of production and/or selling a product. 

what to drop ship

In a scenario like that, you let the professionals take care of what you're either not good at, or what you can't do yourself in a cost-effective manner.

Just to give you an example – and it will be a recurring example in this guide since it's easy to grasp – if you want to sell designer t-shirts, but you don't know how to sew, you have two options:

  • (a) Learn how to sew, or hire someone who can.
  • (b) Outsource the production process entirely to someone who's mastered it, and take care of the other aspects of the company.

In other words, the business is still yours – you're the brains behind everything. The only difference is that instead of handling everything in-house, you're outsourcing product development/assembly and order fulfillment.

Drop shipping seems like an awesome concept when you look at it, but in order to truly take advantage of it, you must find your own place in the market, and pick a niche that you can really serve well.

And this might not be as simple as you'd imagine.

Action Tip #2:

What do you think might be your main struggles when it comes to the challenges of drop shipping? Write down your top 5 worries. Having them on paper will help you decide if they are really serious enough to stop you from trying out the drop shipping model in your business.

Chapter #4: Picking your niche, market, and finding suppliers

Another misconception about drop shipping is that you can start in almost any niche imaginable, and that you'll be able to make it profitable no matter your previous experience.

This is simply not true.

Keep in mind that no matter what market you join, you will come across multiple competitors – competitors that are much more experienced than you, who may have been in this market for years now, and who probably have a much better understanding of the customers and their needs.

The fact that your initial costs are low – due to the drop shipping model – doesn't mean that you are going to be able to compete with them effectively.

That's why you really should pick a niche that you know and understand. This will give you some additional advantages over the competitors who might not have invested the same amount of research or personal experiences.

And don't get me wrong, you don't necessarily need the seller's experience in the niche, but the following would help a lot:

  • you're a consumer in that niche yourself – you've bought a number of products in that niche, and you understand what's good/bad about them, and how to make things better;
  • you have professional or academic expertise – you're educated in that specific area, which allows you to approach it from a more professional level;
  • you've already done research in that niche – even if just among your friends and family, but the point is that you have some first-hand understanding of the target audience;
  • you've witnessed other businesses in the niche rise and fall, you know the mistakes + how to avoid them;
  • and so on.

Having some sort of understanding of the niche will not only help you to compete and cater to your customers better, but it's also especially important when dealing with your suppliers who send products directly to your customers.

Without any knowledge about the niche, you won't have the ability to pick up on anything fishy about the quality of the products, the process, the pricing, or anything related (read: you will fail).

How to find suppliers / drop shippers

This is the case in most industries, and even more so in drop shipping: You finding quality suppliers is crucial to your success.

Let me say that again … you finding quality suppliers is crucial to your success.

How about we backtrack a bit. If you work in the traditional model – where you hold inventory – and you mess something up, then at least you have the means to fix things and make everything up to your customers. After all, you control the entire process.

Try-Shopify

But in the drop shipping model, if the orders delivered to your customers are sub-par then it's basically back to the drawing board for you. Since so much depends on your suppliers, you cannot just fix what they did wrong. The only thing you can do is find new suppliers. However, this isn't always doable on the spot, and your brand reputation might suffer in the meantime.

That's why working with the right suppliers is so crucial.

Okay, so how to find those suppliers:

1. Think local

local

Thinking local is my first recommendation, purely because it's the most manageable solution, and in most cases it makes keeping in touch with the supplier easier.

Specialized drop shopping companies found on the web are great for what they are – and we'll talk about them in just a minute – but they might not necessarily be the top choice for your specific niche or market.

Sometimes, or rather oftentimes, you might find local vendors willing to drop-ship to your customers if you just have a conversation with them and offer them a good deal.

For example, there's this home-based bakery in my local area that, over the years, has transitioned to the role of a drop shipping supplier. Basically, they started by baking awesome cakes and wholesaling them to local cafes, where they were sold by piece (standard model).

But then, those cafes noticed that the customers loved those cakes so much that they started asking how they can get them whole. So the cafes started collecting orders from the customers, and sending them over to the bakery.

In that model, the cafes get the order, get the payment from the customer, then buy the cake from the bakery, and then the bakery delivers that cake to the customer's doorstep. Classic drop shipping.

This is just one example, and it might not be applicable to your specific situation, but I hope you can see that the possibilities are really endless with local businesses.

The easiest way to begin would be to think how you can arrange a deal with a local supplier, which would eventually let them sell their products to a larger audience through your online store.

2. Try online suppliers

drop shipping companies

Another place to look at, once you exhaust all the local possibilities, are various online suppliers.

The good news here is that there are really more of those than you can shake a stick at. The leaders such as Oberlo, Doba, Worldwide Brands, or Salehoo have built their brands in the drop shipping industry, and can be a good solution for you (depending on your niche, of course).

Here are some of our favorite drop shipping companies (suppliers) that operate on the web. But don't treat that as gospel, be proactive and do your own research. It's a good start, though.

The things to look out for when choosing suppliers

No matter where you go looking for suppliers, you should also pay attention to some red flags that might indicate that a supplier isn't all that great:

  • Browse through online reviews, and sites like Trustpilot, or even Google. Look out for any negative reviews or opinions about your suppliers.
  • Be careful with ongoing fees. Suppliers who require ongoing fees just for the possibility to work with them might be a scam.
  • Do your math when dealing with minimal order sizes. This is something you might stumble upon with bigger suppliers.
Action Tip #3:

Create two lists:

  • The first one is for the local businesses that can potentially drop ship for you. You don't need many entries on this list. Even 1-3 is enough.
  • The second list is for the online drop shippers that have the kinds of products that you need. Having 3-5 entries would be cool.

Go through each list and plan how you're going to reach out to those companies.

Okay, with suppliers done, it's time to think about the products you can offer. You probably have some ideas already … this is where the next stage comes into play. Hold onto your seat:

Chapter #5: Don't think products – think how you can add value

I'm sorry to be the bearer of bad news, but just thinking that you can be a simple middle man won't work.

If you don't add value, you won't succeed.

“Wait, wait! Isn't this whole drop shipping thing supposed to be about getting someone else to fulfill the order after I collect the payment?! There's no room to add any more value in that, right?!” – you ask.

Well, as a matter of fact, there is a lot of room.

Here are 4 possible approaches:

Method #1: “The Teenager Method”

Among many things that teenagers want – for all I know – is to either be different from their peers, or at least be perceived as different (in the positive way, though).

Translate this into drop shipping … you should position the specific products that you are selling to be in some way different from everyone else's.

The ultimate goal is to be able to stand out and be unique, even if, at some point, a competitor starts using the same drop shipper.

If you don't add value in some way, this will be impossible.

Let's take Teespring as an example.

(Some will argue that Teespring is an affiliate business – where you're just promoting other people's products – but the line between affiliate and drop shipping can be really thin, so let's just go with it for the purpose of this guide.)

Teespring is a place where people go if they want to buy cool t-shirts. But the interesting thing is that the marketplace is community-driven. Everyone can come, design their own t-shirts, and put them on sale. If anyone buys, it's Teespring that takes care of fulfilling the order.

If you want to sell with them, what you bring to the stage are your unique designs. Those unique designs are your added value. It's what makes you unique, and it's what makes one seller different from another, even if they both use Teespring.

The key here is to position your product to be different and/or customizable in some way. Many drop shipping suppliers allow those kinds of things.

Also, you need to think profit margins. In general, the more customization you introduce into the product – the more of your input – the higher your margins can be. Even sticking with the basic t-shirts example. Drop shipping white t-shirts doesn't give you much room for margins, but t-shirts with original designs can go for 3x-10x the asking price of a blank tee.

Method #2: “The Angle Grinder Method”

Make your offers angle-driven, rather than bare-product-driven.

Let me use another example to illustrate what I mean.

And it's going to be a really boring example: selling car insurance.

Now, any type of insurance is technically a virtual product, as in the customer doesn't get a product they can hold. They just get a promise. Nevertheless, it's still a product in its own right.

So, if you're selling car insurance in a bare-product-driven manner, you're probably going to market your offers like everyone else … “cheap, safe, reliable, no payout shenanigans, etc.” Basically, you're focusing on the product.

Another way is to take that generic product and try to look for an angle you can use while marketing it.

For instance, you could investigate all the insurance plans, analyze them deeply, and come up with a list of the ones that are the best for tuned-up performance cars and car modification enthusiasts. The plans offered through your business would cater to that specific customer only – the customer who likes to drive fast and modify their car.

By providing them with tailor-made plans, you're taking an angle in a niche. At the end of the day, you're selling something similar to your competition, but you've invested your time to find out what really suits your target customer.

You can do something similar in most niches.

Method #3: “The Cleanex Method”

The third method is to simply clean up the confusion and make the product clearer overall.

Many suppliers sell products that don't have a well-defined purpose or target market. Other products have unclear user manuals, or even unclear sales materials, so that the customers don't know what they should do with them, or even why they should buy.

You can make all that clear.

Some possibilities:

  • Market the product via your own custom-written descriptions and promotional materials.
  • Create a “Getting Started Guide” for the product.
  • Create a “Best Setup” package where you tell the customer what the best way to set up the product is (while dealing with technological tools, machinery, or even vehicles, for example).
  • Offer additional support and customer service packages.

Method #4: “The Supplemental Offer”

This applies to those of you already running an ecommerce store and looking for ways to expand your inventory.

You can treat drop shipping as a good way to supplement your current offer.

A good start would be to research the kinds of products that your customers buy the most often, and try to look for drop shippers that can provide supplemental products (products that go along with what you have).

That way you could add new products to your portfolio, and at the same time don't have to produce them yourself.

Example: Selling custom exercise clothing? How about adding home exercise equipment.

Action Tip #4:

Which of the methods above seem like the most likely to work for you?

Order them from most likely, to least likely.

Take the #1 entry and brainstorm over specific ideas on how to bring it to life. Where will you start? How will you add value specifically? What will you customize? Etc.

Final thoughts on products

At the end of the day, the product is obviously the most important element and the differentiating factor. Without good products, you won't get very far.

But the message I want to leave you with is not to expect that you will hit a jackpot at first try. Any business – including drop shipping – involves a lot of trial and error.

So once you have an idea for a specific product, just go and execute. Put it on offer. See how the market responds. Then improve. Then repeat.

Chapter #6: Getting a website set up for drop shipping

Okay, so everything above was still what I'd call preparation on your way to launching a drop shipping business. What comes now is the technical, website-related stuff.

First things first,  need a website to make all that work.  That website is going to serve you in a handful of ways:

  • It's where your customers see the products and can order them.
  • It's where you collect payments from the customers.
  • It's where you manage the orders.
  • It's where you can configure the pipeline to then send those orders to your suppliers.
  • It's where your suppliers can communicate back with you, and let you know that the order has been fulfilled.

In a sentence, the website drives your whole drop shipping business.

Now, before I scare you off, building a high-quality website for this very purpose isn't difficult anymore, and especially in 2016.

You don't need to hire a designer or another “website pro.” You can do most of the work yourself.

For instance, Shopify has a great guide about drop shipping, and they've made it quite clear that they have built a system that caters to those who drop ship products. What this means is that you can safely just sign up with Shopify – a hosted website service – and they will help you build and launch your drop shipping website from A to Z, and with minimal technical hassle.

To find out more about Shopify in general, I send you over to our Shopify review (updated for 2016).

shopify shops

Action Tip #5:

This one is simple. Shopify offers a free trial. Just take them up on that offer and test out the platform for yourself. If you don't like it, no problem. There are some alternatives out there as well.

Conclusion

Now you know exactly what drop shipping is, and how you can become successful with your own drop shipping website. Just to recap:

  • (1) It all starts with finding a niche that is relatively untapped and validate it.
  • (2) Then, you must locate suppliers who'll be reliable and helpful in your drop shipping journey.
  • (3) Figure out how you can add value through the products you will be offering.
  • (4) Launch a website to connect all the dots together.

graph: the path to get started

Just getting into the drop shipping business? Feel free to share your thoughts and concerns in the comments below.

 

Catalin Zorzini

I'm a web design blogger and started this project after spending a few weeks struggling to find out which is the best ecommerce platform for myself. Check out my current top 10 ecommerce site builders.

2 Responses

  1. Hi there,
    Very good article. Thank you! Fully understood the basic steps.
    What about the legal aspect of such a business? What does it imply and require? What taxes have to be paid etc.
    Could you extend the article to show also those aspect of the drop shipping business…or ecommerce in general?
    Thank you.

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