Dropshipping Guide: Pros, Cons, and How to Make It Work

If you’re new to ecommerce, dropshipping might seem like an easy ride to the top. And, for many people, it’s a great method for building an online retail service. However, if you plan to build your business around it, there are a few things you should take into consideration before you jump off the deep end. Dropshipping, simply put, is when you, as a retailer, do not actually stock the things you sell but, instead, have the items shipped directly from the supplier or manufacturer to the customer. There are obvious advantages to this. However, dropshipping is not entirely hassle-free. Weigh these pros and cons to decide whether this model is for you, and make it work with this ultimate dropshipping guide.

Pros

Escape the burden of inventory

Let’s face it: handling your own inventory is a major hassle. Not only do you need space—and a lot of it, if your business is successful—but you also have to track the inventory and maintain its quality (i.e., if your product is fragile or perishable, you have to have systems in place to protect it). By ridding yourself of these responsibilities, you’ll have more time to dedicate to growing your business and you will often need very little, if any, staff.

Decreased overhead

In addition to being a hassle to manage, inventory can get expensive. Most retailers stock up on inventory in large quantities to get the best price and maximize their profit. These large sums of up-front cash can start to weigh on a business’s bank account. Generally, the biggest hurdle for traditional retailers is that they need to invest a huge amount of money in inventory before they’ve even opened their doors. With dropshipping, only have to shell out money once the customer has already bought and paid for something, which makes purchasing basically risk free and your company can find more productive ways to use the cash that would have been set aside for expensive stock purchases.

Increased product variety

Without the limitations of space and overhead cost, a retailer is free to offer its customers something everyone loves: more choices. Dropshipping allows retailers to have a vast, ever-changing inventory that makes sales more likely.

Low risk

When holding on to inventory, there is a lot of pressure for a retailer to move all of it. Unsold products are money lost for the seller. The pressure of this risk can cause delays in changing inventory and updating the online store. With dropshipping, the risk factor is eliminated—you only pay for what you sell. Retailers are free to change their inventory at will and keep their store aligned with customers’ demands.

Other advantages include a flexible location. Because you don’t need a warehouse, as long as you have a reliable internet connection, your ecommerce business can be run from just about anywhere. Moreover, you can offer whatever products you can find suppliers for because you don’t have to worry about storage space.

Cons

Less control

When you hand over the shipping process to a third party, you have to let go of some control. For some of us, that can be an excellent exercise in character development, but it also comes with a hefty dose of risk. If the dropshipper makes an error and leaves your customer displeased, that reflects on your business. This is why it’s absolutely vital that you work with a safe, verified dropshipper.

Reliance on stock

While one of the benefits of dropshipping is that you are free to react to customer demands, it also means you are subject to sudden stock shortages. If an item becomes popular overnight, you might miss out on selling it because your supplier has no more stock.

Also, if you work with more than one supplier, and most people in the business do, things can get complicated when a customer orders several items, all of which come from different suppliers. This can often result in several separate shipping costs, which you can’t pass on to the customer because, as they are unaware of the process, they will think you’re wildly overcharging them for shipping.

Less competitive pricing

Dropshipping means no more bulk inventory—which means no more bulk pricing. While your start up and operation costs might be low, often your profit margins will be as well. Because dropshipping is so easy to get set up, online retail is a pretty competitive market. Many people start their business for next to nothing and sell their products for about the same. You will most likely pay more for each individual item when dropshipping, so that means your prices won’t be as competitive. Even though you might have a nice website and better customer service, buyers will often still go for the lowest price.

How to start

If, after weighing the pros and cons, you think dropshipping might be a good step for your business, here is the dropshipping guide on how to start.

Select a supplier

Your supplier will be a very close and important partner in your business. Finding a dropshipper you trust is of the utmost importance. The time you commit to researching and interviewing different dropshippers now will be time saved later on when you don’t have to worry about lost or late orders.

Local dropshippers can be found in the Yellow Pages. Online directories, like SaleHoo, are also an excellent resource for finding reputable dropshippers. Here are some dropshipping provider features to inquire about and compare:

• Shipment time
• Method of shipment (what shipping company they use)
• How they track packages
• How they manage returns
• Years in business and references

These factors will be different for every dropshipper and some factors might be more important to you than others.

Choose your products

Now that you’ve selected a supplier, browse their inventory. To raise your margins, be sure to pick a product niche that will either bring in repeat customers or customers who are willing to spend a lot of money, such as hobbyists. Likewise, it’s better to choose a product that has many components or accessories. For instance, children’s dolls often come in collectible sets and have many outfits and accessories that will keep parents coming back. Moreover, if your product is relatively cheap – like dolls’ accessories – people will be less likely to put in the effort of comparing prices than they would be for a more expensive purchase. Create a shortlist for your products.

Crosscheck your list with eBay’s completed listings next. When you examine the completed listings under a keyword associated with your item, you can see how many of those listings have sold successfully and how many haven’t. If your chosen product is unsuccessful more than 40% of the time, you’re probably going to have a hard time selling it.

If you don’t want to do this manually, you can use a service like the SaleHoo Market Research Lab. Not only will the Lab do your market research for you, but you also get extra-useful information such as the average prices for shipping and selling your chosen item.

Get a tax ID

A tax ID is unnecessary for some businesses, but eBay sellers based in Canada or the US (with some exceptions) will need one if they decide to dropship their products. The process for obtaining this ID is different in each county, so you’ll need to do some research about whether you need an ID and how to get it.

Choose a place to sell

eBay is one of the most popular platforms for online sellers, but it’s not the only one. As eBay becomes more saturated (meaning there are more people selling than buying on the site), other platforms like Bonanza.com and Amazon have started to get more attention. Some e-commerce platforms are free to use, so you might consider listing your product on more than one.

To set your company apart from others, make sure to have an attractive website and to add value to your product with things like detailed product descriptions or, if your niche is a complex one, comprehensive buyer’s guides or helpful how-to videos. Going the extra mile will help you to ensure customer satisfaction and, more importantly for your profit margins, customer loyalty.

List and sell

There is an eBay policy that says you must include the location of your supplier when you post a listing. This ensures that your customers know where their item is coming from and can prepare for shipping times accordingly. When a customer orders an item, you collect a payment, which you use to purchase the item from your supplier. Your supplier will ship the item directly to your customer, saving you from any inventory headaches whatsoever.

All in all, this is a great business model for online retailers. With a little patience and preparation, you can avoid common dropshipping pitfalls. By picking the correct product niche, choosing quality suppliers, and providing solid customer service, you can ensure the success of your online business. With each sale you make, you learn more about what products work best and can change your listings accordingly—a major perk of the dropshipping arrangement.

Recommended reading: When running a drop shipping business like any other enterprise, you need to do taxes. A dropshipping tax is determined by sales tax, nexus (you have a presence in a state, e.g., an office), and sometimes – resale certificate. To find out all the important tax terms and dates, we recommend taking a look at this beginner’s guide to drop shipping tax.