Idea #04) Drop Shipping.

Top 40 On-Line Business Ideas
Dropshipping is when you create an online store to sell other people’s products (i.e you don’t do any of the manufacturing or shipping). Then, you get a commission for each sale.

The benefit here is that you don’t have to risk buying up stock in a product and losing money if it doesn’t sell. The entry barrier is lower and you don’t have to invest nearly as much to get started.

If you’d like to learn how to dropship, Drop Ship Lifestyle is one of the best resources to help you get started.

How Does Drop Shipping Work?

The drop shipping model is relatively simple. It consists of the following steps:

  1. A customer places an order with an online business.
  2. The business receives the order and forwards it to the drop shipping partner.
  3. The drop shipper packs and sends the products in the order directly to the customer on behalf of the business.
  4. The customer receives the products ordered.

Pros and Cons of Drop Shipping

Aside from the central benefit of eliminating costs associated with storing, packing and shipping products, here are some of the key benefits of drop shipping:

Lower capital requirement: Due to the nature of the business model, utilizing drop shipping helps cut typical business spending. It’s a cheap way to start a business because it keeps startup costs low. It also does away with inventory management practices, typically one of the most prohibitive costs for new businesses.

Wider product selection: Because it gives you access to new products, niche items and best-sellers, Volusion says that drop shipping “can effectively increase the variety of products your online business sells.” E-commerce incubator A Better Lemonade Stand also points out that it’s easy to diversify inventory by merely adding new items to your store.

Reduced risk: Without drop shipping, businesses take on a great deal of risk when purchasing inventory due to the potential for excess inventory or under-ordering, Volusion notes. Drop shipping frees you from purchasing items you may not be able to sell.

Flexibility: Dropping shipping allows you complete location independence. This means that you can operate anywhere that has an internet connection instead of worrying about storage space.

Scalability: You can easily scale your business up and down because you don’t have to manually fulfill each order. Selling 10 or 10,000 units requires roughly the same amount of work.

There are also complexities and potential drawbacks associated with drop shipping. Here are some of the disadvantages to the model:

High competition: More people tend to choose drop shipping because of the benefits listed above. This increases competition, meaning that businesses should have a selling point that differentiates them from the competition.

Low margins: Slim margins mean that businesses have to be able to move a lot of product in order to make enough profit. In addition, it can be difficult to execute paid marketing campaigns to attract new customers.

Limited brand control: Because it utilizes third-party shippers, drop shipping limits businesses’ ability to control branding and customer experience.

Despite these disadvantages, drop shipping is the right choice for many entrepreneurs. For example, entrepreneurs who are looking to test new products before investing a large amount of time and money into them will benefit from the flexibility of the drop shipping model. Entrepreneurs who are just starting out in e-commerce may find drop shipping to be a great business model because it is relatively low-touch and gives them a chance to gain valuable experience, A Better Lemonade Stand notes. However, it is important to note that, as is the case with all business decisions, you should think critically and understand your specific requirements before choosing drop shipping to build a successful online business.

The challenges of drop shipping

Drop shipping can be beneficial for business owners, but there are drawbacks that might not bode well with your overall business strategy. Here are a few examples of why some businesses decide against drop shipping for their business:

  • Reduced profit margin: As discussed above, the longer your supply chain, the lower your profits.
  • Inventory issues: When you own inventory, it’s easy to check stock levels. But when you get products from multiple suppliers — who in turn are working with other retailers — it’s more difficult to make sure that the products you need are readily available.
  • Shipping complexities: If you’re working with a number of suppliers, your shipping costs become quite complicated. Let’s say that a customer orders two items, each from different suppliers, each with different shipping costs. You’ll need to determine how to charge the customer for shipping in a way that the customer won’t feel overcharged.
  • Lack of control over customer experience: By putting reliance on a drop shipping partner to get products to your customer, you’re acting in good faith that they will deliver the orders on time and intact. If they don’t come through on their end of the deal, or deliver items late, broken, or not at all, it can result in bad reviews and a loss of consumer trust that can negatively impact your company’s customer service reputation.
  • Issues with suppliers: It’s imperative to have solid relationships based on trust and mutual respect with your suppliers. Suppliers are at the core of your business, so be selective about whom you partner with, and never take those relationships for granted by paying them late or being difficult to work with. To build strong partnerships, it’s important that you learn how to manage your suppliers effectively in order to maximize drop-shipping efficiency.

How to select a drop shipping supplier

The third party you choose as a drop ship supplier will determine your supply chain’s success, so you need to do your due diligence during the selection process.

Generally speaking, you want to set up drop shipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line, so whenever possible, it’s best to work directly with a manufacturer.

Here are some questions to ask potential suppliers:

  • How much do you charge?: Crunch the numbers before selecting a drop shipping partner. If the wholesale price isn’t enough for you to make a decent profit off of the products, look elsewhere.
  • Also, is there a handling fee?: If so, assess how it may affect your profit margin. Again, every fee and each middleman affects your bottom line, so you want to streamline the process as much as possible.
  • How are products shipped?: You want a partner who ships items via a service that provides tracking numbers (which they should send to you). That way, if your customers inquire about the status of their orders, you can provide them with accurate, up-to-the-minute information. And, with shipping comes returns. Find out the return and warranty policies. If returns aren’t accepted or products not guaranteed, steer clear.
  • What is the billing process?: Do drop shipping partners charge your credit card as soon as you submit an order? Or do they send you a monthly bill? Make sure to choose a partner whose billing process is a good fit for your cash flow.

Tips for a drop shipping business

There are a few best practices to implement to assure success for your drop shipping business.

  • Make online shopping a pleasure: From ordering to delivery, you want to make the experience as seamless as possible. That starts with a user-friendly e-commerce experience. You want to invest in building an elegant site that is easy to use (on all devices) and simple to understand.
  • Be particular about products: While drop shipping allows you to sell a wide variety of products, that doesn’t mean you should sell everything. Do market research and analyze trends to determine what you should be selling in your store. Think carefully about what is marketable, what is easy to ship, and what is hard for people to find locally.
  • Focus on quality: Even if you thoroughly vet a supplier, you should remain vigilant about the service once you’re working together. For example, if there are several incidents of damaged products, lost packages, or late deliveries, cut ties with the supplier or risk losing the confidence of your customers.
  • Build a trusted business: Your reputation is everything, so not only do you need to follow through on your promises with reliable drop shipping partners and a great website, you should also work to boost your online credibility to ensure customer trust. This will guarantee longterm success. From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your drop-shipping business.

Drop shipping FAQ

Yes, drop shipping is legal. Business owners who get into drop shipping should be mindful of the suppliers they work with — and especially pay attention to trademarks and intellectual property — but the process itself is legal.

Is drop shipping profitable?

Drop shipping can be profitable, though it depends on a number of factors. When you consider the costs of handling fees and percentages taken out by various middlemen, it might not be worth it to pursue a drop shipping operation. There’s also a lot of competition in the drop shipping niche. Because it takes so little investment to get started, drop shipping businesses often provide products at very low prices. To compete, you often have to drop prices too.

How do I create a drop shipping website?

A drop shipping website will work similarly to an online store on an eCommerce platform. The primary difference will be managing inventory with your third party supplier. Square has partnered with Spocket to help make this integration possible for your business.

Running a business isn’t an easy feat, but Square is another resource you can turn to. We have all the tools you need to start, run, and grow your business, whether you’re selling in person, online, or both. And we’ve made all our tools work together as one system, saving you time, money, and effort. So you can get back to doing the work you love and focusing on whatever’s next. See how Square works.

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