What Is Dropshipping – The Truth About Dropshipping In 2019
Dropshipping is a supply-chain business model in which dropshippers act as middle-men by selling products without owning the stock/inventory. Upon receiving money from customers, merchants redirect the money to wholesalers who then ship directly to your customers. This way merchants can make huge retail margins, as much as 1000% of the wholesale price depending on the niche. For example, if a phone case costs $1 on a wholesale price, and it retails for $11 in the dropshipping store – the dropshipper can make a 1000% price markup on each sale. The dropshipper only instructs a wholesaler to ship to their customer, they never package or ship products themselves. As of 2019, more than 30% of all online orders are fulfilled via dropshipping.
The Benefits Of Dropshipping
- Location-independent: Merchants can process orders regardless of location, as they never have to touch the product themselves.
- Low investment/start-up cost: Merchants don’t need large start-up capital, because they only spend money after the customers pay for orders (retail price + shipping cost). They only start-up cost is the cost of the dropshipping store and the advertising budget.
- High-growth potential: Price markups starting at 100%, with some up to 1000%.
- Easy access to products: Thousands of niche markets and millions of items available for sale.
The Dropshipping Chain
- The Customer: The person who orders a product from a dropshipping store.
- The Wholesaler: The person who ships a product to a customer.
- The Dropshipper: The middle-man who connects the customer to the wholesaler (you).
The wholesaler is the key component – he handles everything for a droppshipper: the packaging, the shipping, even the returns and inbound shipments. Your sole responsibility as a dropshipper is to drive customers to a dropshipping store and convert them.
There are two prices in each dropshipping transaction: the original wholesale price and the retail price. The wholesale price is the price the merchant pays for the original product (usually sourced from a factory in China via Aliexpress); and the retail price is the price the end-customer pays for, usually in a developed economy such as the USA, European Union, Canada, etc. Millions of items can be sold using Chinese-based directories like Aliexpress where dropshippers can find niche products at original prices.
How Dropshipping Works – 4 Steps Funnel
The funnel works on the following 4-step principle: Customer Buys From Dropshipping Store > Dropshipper Redirects The Funds To The Wholesaler > Wholesalers Ships To Customer > Repeat.
This funnel can be leveraged, repeated and scaled in thousands of niche markets using products that are available at much cheaper prices in manufacturing countries, and re-selling them online to Western markets that pay as much as 10x of the original value of the product. The merchant is never in touch with the inventory and the wholesaler handles the stock: packaging, shipping, customer service, etc. It allows merchants to make huge profit margins regardless of location and without holding inventory, by only spending money on marketing. The dropshipper only pays for marketing such as Instagram/Facebook ads and acts as a middleman connecting the product to the customer.
Downsides To Dropshipping
The downside to dropshipping is that it requires a marketing budget– Ads on Facebook and Instagram are getting increasingly more expensive (especially in high-income counties such as the US, UK, Germany, where clicks cost more) and rich dropshippers with unlimited budgets can outbid novice dropshippers for popular dropshipping markets, effectively increasing ad costs. Dropshippers have to have a marketing budget or a smart marketing strategy in order to create an edge. What’s more, dropshippers have to identify niches and find profit margins that can align with their marketing budget, in order to secure ROI.
Making Sales On A Dropshipping Store
The main answer across the board is the sale: Build trust. If a customer trusts your dropshipping store, they will be more inclined to purchase regardless of your marketing strategy. Most dropshippers think the marketing strategy is the most important, but overlook the quality and trustworthiness aspect of their website. The way to test is to ask yourself – would you buy from your own Dropshipping store if you were a customer?
Take a look at your store and put yourself in the shoes of the customer. Is something bothering you, such as lack of information about Payment Methods? Do you want to know the shipping time/cost? Are you concerned about credit card security? If you feel something’s wrong, make the change and prospects will be more inclined to buy from you.
Scaling A Dropshipping Store
To scale a Dropshipping store, a dropshipper needs to gradually increase the marketing budget. If the marketing budget is set to $100 per day and the dropshipper makes $200 in sales, the droppshipper only needs to start spending $200 per day on advertising to double their revenue.
Most stores are “scaled” until the profit revenue/demand for that niche is capped. If the store receives organic traffic such as through SEO/content marketing, the dropshipper could scale the store by simply increasing the product range as this will increase the number of orders coming through. Scaling is done proportionally and can take months at a time, as a result of many transaction fees and waiting times between the transactions from your customers to the wholesales and the volatility of the ad costs. If a dropshipper on Instagram/Facebook starts experimenting with target audiences and formats, this might burn their budget until they discover a high-converting strategy.