What Is Dropshipping

What Is Dropshipping And How Does It Work?

Dropshipping in a nutshell is a fulfillment method where the store doesn’t own any physical inventory. It acts as a middleman between the customer and the supplier. Dropshipping is one of the easiest and cheapest ways to start a business.

Almost every established brand on the planet does the exact same thing except they stick a label onto their products and have stricter quality control.

How Does It Work?

Simply put, the process of dropshipping goes like this:

  1. Find a winning product from a wholesale supplier.
  2. Set up an online store with Shopify (or Shopify alternatives).
  3. Set up ads on Instagram, Facebook, Pinterest using your desired marketing method.
  4. A customer clicks on one of your ads, is directed to your site, and places an order.
  5. You then place an order with your AliExpress supplier using the customer contact details on your site.
  6. Everything proceeds as normal and your customer receives the product from the supplier.

Let’s say the product on AliExpress costs $3, you sell it on your site for $12. The customer click costs you $2, Shopify fees approximately $1.

12 – 3 – 2 – 1 = $6. Profit!

Ok, but doesn’t it sound too good to be true?

Definitely.

There is a reason why dropshipping has such a bad name and why many people don’t see results.

As with everything in life, there is a learning curve that comes with this business.

Many people (me included) start scouting for online cash opportunities out of desperation. Since dropshipping is such a (seemingly) easy business plan, most don’t hesitate to jump on the bandwagon.

Many expect overnight results or give up easily after failing once or twice.

Some fall in love with a product, get in the so-called “analysis paralysis” and take ages to launch, always afraid of failure. And then when they do, the store flops, they’re convinced there’s nothing else they can do and say that dropshipping is dead.

Then gurus use this frustration to push their agenda and try to sell courses or get people off dropshipping for good.

Dropshipping is a business.

And that requires work, consistency, dedication, and education.

Most of the time its profits fluctuate between 15-20%. So, when you see some video boasting about “$100k with dropshipping in xyz” they’re talking about revenue, not profit. The profit can be as low as $15-20k.

But, I’m not here to demotivate you!

I’m just being transparent with you and letting you know what to expect from this business.

The low margins are one of the disadvantages of dropshipping.

However, the scalability of this business model is phenomenal.

The future of dropshipping is always a brand. The end goal is to be an established provider of your product with a label on, great customer service, and a physical warehouse.

Dropshipping is just a stepping stone to the greater good.

The Pros of Dropshipping

1. It’s cheap

It is the most cost-efficient way to start an eCommerce business. When I was trialing out Amazon FBA back in 2018, I spent nearly 2.5k USD for mere inventory purchases. That cost sucks when you aren’t even sure the product’s going to work. It can set you back by months in case of failure. Which is what happened to me.

With the same amount of money, you could test out 4-5 different niches/products using the dropshipping fulfillment method. How so? Because the set-up costs of dropshipping are just domain name, hosting (provided by Shopify) and everything else goes into marketing. This business model removes the core of all eCommerce expenses – product cost.

2. Easy to start

You can start it without leaving the comfort of your home. Heck, even the comfort of your room. As long as you have a plan in mind, the process is quite simple. Find a (possible) winning product, set up a Shopify store, purchase domain name, import product, market it. All with simple click clacking of the keyboard.

It’s really kind of scary how it is possible to earn thousands if you know how to market the right product to the right kind of audience. That’s why I consider Marketing and Entrepreneurship to be the most valuable skills of these days. If you want to survive, that is.

3. Low risk

It’s completely dependent on you and your budget. The bulk of your expenses will go toward marketing costs. Therefore, if you don’t see success, there’s no excess inventory you have to shred & get rid of. You can lose whatever amount of money you’re comfortable losing and avoid having to sell your house to pay the bills.

4. Location independent

Ah, the digital nomad lifestyle. And I don’t mean to sound sarcastic! While true dropshipping doesn’t look as glamorous as popular pictures depicting palms and mojitos (weak WiFi), I greatly value location independence.

As I’ve mentioned, no more than an internet connection and a working laptop is needed to run this business. Heck, you can even do it with a phone instead. Whatever person you are, life is unpredictable, and you will most likely need/want to relocate at some point in your life. The world is becoming more remote, but many companies still insist on office work in big and bustling cities. Dropshipping allows you to live in low-cost locations earning medium to high income. Which, aka equals a good quality life!

5. Easy to scale

Since you’re going to be outsourcing suppliers, you don’t need to handle the production of the product. If you’re seeing that your store is doing well, get a private sourcing agent and increase the production as much as you like.

Lastly, vamp up the marketing. Effective ads are the other half of the equation with dropshipping. If you’re having great conversions from an ad with a 1k USD budget, then increase the ad spend 2x, 3x, or more and see when you hit the roof or the product starts dying off.

6. Easy to test

Great for new store owners or already established businesses. The process of labeling and product design takes a long time and effort. Before committing to such an endeavor, many brands benefit from simply testing if their audience would like a specific product. From a dropshipping perspective – we test which audience would like a specific product or if there is an audience for it.

7. Choose any product

You’re not limited to AliExpress. Any wholesale supplier can do. And you can pretty much find any product on the planet sold wholesale. Because that’s what brands do. Private labeling. When I realized this 2 years ago it felt like I have been lied to my whole life!

The key is not to fall in love with any product. I made this mistake with my first product when I tried private labeling. And it’s really hard to. Especially when you know you did a good job, invested time, effort, and money. But business is business!

Once I heard in a podcast that most of your profits come from one or a few products. These are your “money cow”, they bring you the cashflow. Once you establish these products, you can then move on to your passion and create something you truly care about that’s maybe more niche. It’s perfect when your passion is your “money cow”, but we don’t live in a perfect world!

8. Pick any supplier

You’re going to be dropshipping something that’s popular. Therefore, many suppliers will be creating similar if not identical products. You are free to choose any one you fancy, and not afraid to switch if things go south.

9. Lightweight

The whole nature of this business is to be light. It can surely feel a bit scammy at times, since you don’t have the physical product to touch. And it’s hard to visualize something you can’t touch or see. Many dropshippers establish a relationship with their suppliers once they’re successful. I believe, it’s for this same reason of wanting to feel the business.

However, this lightweight property allows youngsters and full grown adults alike to partake. It’s easy enough that there simply cannot be any excuses. This business model works with almost any lifestyle and commitments.

The Cons of Dropshipping

1. Comparatively low profit margins

Scammy site charging way below product price on AliExpress

Dropshipping has fierce competition. In life, the easier something is – the more people are going to try and go after it. Since dropshipping seems like a “get rich quick” scheme due to its incredibly easy setup, the competition it receives is cheap.

You could (sometimes) get away with bad website design back when dropshipping was starting to get traction. But currently, in 2020 it’s almost impossible.

However, a bunch of these cheap sites (as illustrated in the picture above) try to drive the product price to break even or below that. That is horrible for proper dropshippers who seek and want to add value, invest time, and effort into their stores. People that invest in better customer support and remain transparent with their customers.

Customers don’t see all that’s underneath though and compare these cheap website prices to yours. Then end up ordering from the cheaper sites, get scammed, contact support for a refund, and receive nothing. Lo and behold, every independent eCommerce site is a scam, let’s head back to Amazon!

That’s why it’s important to go after high perceived value products that have a strong emotional impact and are in evergreen niches.

2. Lack of control over the supply chain

This is a given. When you’re starting with a low budget, there is no way to do a proper quality inspection. Ordering a product from AliExpress in order to test it can take a month or so, which prolongs the whole process.

Moreover, since you’re not the only one using a specific supplier, you cannot control the items in stock. It’s possible to set up quantity controls with Oberlo, but that may still deter you if your product is successful. That’s a common problem when scaling dropshipping shops. The suppliers aren’t capable of keeping up with the demand.

3. Long shipping times & other issues

If you dropship from AliExpress, the delivery times are rather ridiculous. Sure, you wouldn’t mind waiting a bit if your purchase was an impulse buy. However, many successful dropshipping products are problem-solvers, and you’d like to receive such a product ASAP.

There are alternatives to AliExpress. Like I’ve mentioned, once you start seeing consistent sales, you can look for sourcing agents or source locally. But that’s hard to do at the start. Spocket is the current emerging alternative, however, it has a limited product selection.

Lastly, if you have a niche or general dropshipping store, it is likely you’ll source products from multiple different suppliers. Then item delivery will become somewhat of a mess. I. e. delivery charge on every item or items arriving in multiple packets.

4. Lack of customization

Dropshipping is not private labeling. The end goal is surely it, but for the start dropshipping could be renamed to “drop marketing”. You should avoid selling trademarked, copyrighted, or anyhow labeled items. These can get you into big trouble.

Customers love brands and they attach values onto them. What value do you attach to Apple? Or Nike? Or Tesla? These brands incur a feeling of luxury. Unbranded items are just… meh. Creating a branded dropshipping store is a way of adding value to a plain product. However, you are still selling an item without a label. Therefore, you’re prone to get refund requests due to customers not being happy with unbranded items.

5. Bad reputation

As I’ve mentioned already, there are many scammy dropshippers like in the talking pumpkin example above. They set up stores without much thought and let loose on the ad spend. I’m not sure why they do it, because the revenue won’t make up for the ad costs. Unless they do find incredibly cheap suppliers.

In any case, many people got scammed already by sites like those, and they’re warier of new ones. That’s why it’s important to be professional with branding right off the bat in order to establish trust with the customer.

6. Market saturation & high competition

Dropshipping trend

Saturation is a debatable subject on its own that worthy of a separate blog post, but the business model has incrementally gained traction over the past 5 years.

High competition is certainly not bad, and it is healthy to boost marketing efforts and improve the overall quality of digital ads. However, for reasons mentioned in point 1 of this list, it can be an obstacle in your path to dropshipping success.

To shed some light on this gloomy list, due to this year’s events e-commerce has grown 5 years into the future. And therefore, dropshipping is thriving.

In 2020 alone the global profits from dropshipping have exceeded $4 billion.

This proves that dropshipping is still possible just like any other e-commerce business model.

And having in mind that e-commerce just jumped 5 years into the future, right now is the perfect time to start.

Dropshipping Shop Examples

Let’s look at a few examples of completely different dropshipping stores.

Different ideas but both working very well.

InspireUplift

InspireUplift landing page

This site is a general dropshipping store selling anything they can find trending.

It recently changed platform and doesn’t use Shopify anymore. Maybe the fees got too high for their traffic size.

This store is sort of an enigma to me. It has a clean design, something like a branded AliExpress store, and the product pictures go well together.

However, most dropshippers are steering clear of general stores nowadays, because they look spammy and distrustful.

But this one’s an exception.

InspireUplift creation date

Maybe it’s because it was created in 2015. Back when it was branded as “Hype Dojo”.

General stores did well back in the day, and InspireUplift held its reputation until today.

InspireUplift stats

This store gets a remarkable 2 million visitors each month.

And has a seller platform, which is completely unique to a general store. It allows sellers to register on their site and promote products, for which InspireUplift gets a commission (I presume).

Seller program

I personally have used this shop as product inspiration.

They have a “Today’s Top Sellers” tab, which shows all the trending products for the day.

It’s a useful brainstorming tool for product ideas. They have tons of exceptional dropshipping or print-on-demand products.

I also visit their Facebook site and look at which ads they have running to determine winner products.

Warmly

Warmly landing page

Warmly is an exceptionally branded home décor store.

They’re selling high ticket items, so granted they’re getting high profit percentages.

But just the feel of the site is very clean, light and luxurious.

Wood, cement, and industrial theme across the site. Very basic color scheme, consistent and well put product pictures.

This site must’ve done really well during the pandemic, when sales for home décor items skyrocketed.

People started spending 100% of their time at home and unfinished interior details started to irk people.

Later in the post, we’ll run some numbers for a branded dropshipping store with 130k monthly visitors.

This shop has 230k recurring monthly visitors and a whole store of high ticket items. Therefore, it can expect as much as 300k USD monthly profit.

Warmly stats

Brands That Started as Dropshipping Sites

Have a look at Hey Silky Skin or Mooshe Socks.

HeySilkySkin

Hey Silky Skin landing page

HeySilkySkin is popular one product store selling a DIY laser hair removal tool.

It utilizes influencer marketing and has had a bunch of high follower accounts market their product.

You can get the exact same product on AliExpress for approximately 34 USD. HeySilkySkin is selling one for 112 USD. That’s almost a 70% markup!

Laser hair removal tool AliExpress

I reckon they also have a private supplier by now and can cut the product cost even lower.

Now, let’s do some quick math.

The store gets approximately 130k visitors a month, let’s imagine the conversion rate is 3% (average).

So, 3900 people a month make a purchase. Let’s imagine the average order value is 120 USD (they have an upsell on the site). That’s 468 000 USD revenue per month.

We can assume they have around a 35% profit margin since the product is branded and high ticket. Which brings us to 163 800 USD of pure profit per month.

Sure, these numbers can be way off, but I’m just talking industry average here.

It’s awesome what you can do with one well-branded product.

Mooshe Socks

Mooshe product page

Mooshe sells branded socks with wacky designs.

What’s interesting is that they’re using the 0 USD sale tactic that many dropshipping sites used a while ago.

Out of curiosity I did a checkout on their site to see the shipping costs.

Mooshe checkout page

Many people would go for the 12.99 USD option, because it’s safer.

Since making socks is very cheap and dropshippers usually include the shipping price within the product price, this store is still making profit with these 0 USD items through the shipping costs.

Conclusion

Mooshe socks and HeySilkySkin are both very simple, but clean looking sites with great branding, that speaks to their audience.

Both started as dropshipping stores serving products that either solve a problem or look unique and cause impulse purchases. Don’t stress, I will tell you how to choose a great product later in further posts.

It really doesn’t take a scientist to be good at dropshipping.

But it does take time, patience, and perseverance.

Oh, and trying multiple times and opening multiple stores until it clicks.

So, Is Dropshipping Worth It In 2020?

To be honest, I really dislike seeing questions like these. Back in 2018, I kept seeing ads and comments in forums about how dropshipping was dead or whatnot. I was experimenting with Amazon FBA at the time, so I didn’t think much of it, but I sure made a mental note that dropshipping was dead and I should not ever try it out.

Come 2020, and the same song is being sung!

Thanks to some wicked fate, despite everything I was drawn into this world of dropshipping and brand creation. And I can tell you for sure that yes, it is totally worth it. It is very rewarding, not only from a monetary perspective. It teaches you problem-solving, brand creation, marketing fundamentals, sourcing, how literally every eCommerce business happens, unveils, and grows.

Like any other business on the planet, dropshipping has its starting flaws. But the whole point is to up the quality and solve the issues.

I always like to imagine myself 50 years from now.

I’ll be an ol’ granny reflecting on life.

I know it sounds cheesy, but it helps me put things into perspective.

And then as that 70 year old granny I imagine myself having 2 different trains of thought.

“I gave up on my desires to build something online, but got a safe and steady job and lived my normal 9-5 life.”

Or

“I kept trying and trying, never gave up on my dreams. I never saw much success, I sometimes worked a 2nd job to fund my desires. And I don’t intend to stop now either.”

These are the 2 worst cases that I could think of.

So, is it worth it? To attempt dropshipping? To chase your dreams? To achieve financial independence, live wherever you want, work whenever you want?

I’m not sure about you, but even in the worst-case scenario where everything I try fails (as it did for KFC’s Colonel Sanders), I’d still choose my dreams anytime.

That’s why it’s worth it.

How Do I Learn More?

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