what is drop shipping

Introduction

It’s easier today to start a business than ever before. Whether starting a small business or incorporating a business, you can do so quickly and affordably. And, you can fully start, operate and grow your business online. One such type of online business is dropshipping.

If you have been researching online business models, you no doubt have come across this type of business. You have also probably read (or heard) about how easy it is to start, how little capital you need, and how much money you can make.

While most of this is true, getting into any business requires a thorough initial understanding of the business opportunity.

In this in-depth complete guide, you will learn everything there is to know about starting a drop shipping business, so you have all the information you need to start selling and succeed as a dropshipping entrepreneur.

What is Dropshipping?

Dropshipping Definition

Dropshipping is a type of retail commerce where a seller markets and sells products that they neither stock nor deliver. When a buyer places an order, the seller sends the order details, including the customer’s shipping address, to a supplier who ships the item directly to the customer. Essentially, you are promoting someone else’s products, and getting a cut of the sales you generate.

The Dropshipping Business Model

how dropshipping works

Step 1: When a customer visits your online store, they find a list of items for sale. The store looks like any other e-commerce store, and the only difference is that you do not own or hold any of the items you have listed for sale. The customer then places an order, at retail price, in the same way that they would on any other e-commerce store.

Step 2: After receiving the order and payment, you will then pass on the order details and cost (less your margin) to the supplier (a manufacturer, wholesaler, or even another retailer).

Step 3: The supplier fulfills the order, and the sale is complete.

Once the order is complete, you get to keep the difference between the retail price and the price you paid the supplier (your margin).

Dropshipping Characteristics

Inventory

In a dropshipping business, you do not own the inventory, which means you do not have to deal with stock-taking, inventory control, or restocking issues. You can also work with several third party suppliers who sell the same item so you can have more stock available for your customers.

Capital Requirements

Since you do not need to pay for the inventory upfront in dropshipping, you do not need any significant capital to start. As the fulfillment party, the supplier assumes all the costs of buying stock and ensuring there is enough stock to service all incoming orders. This characteristic makes dropshipping a low-capital startup business.

Fulfillment/Delivery

With dropshipping, you are not responsible for fulfillment or delivery. Once you pass on the order to the product suppliers, they handle all delivery aspects, including sending customer notifications and ensuring the correct items are delivered directly to the customer. This arrangement removes the stress of fulfillment from you, allowing you to focus on your customer acquisition plan.

Returns

In the same way that the supplier fulfills the orders, they also typically handle returns. They will often provide the customer with a return shipping address along with instructions on how to send returns. As the seller, you will also typically display this information on your website.

Refunds

As the seller of record, you are liable to issue refunds to customers and then request a refund from the supplier. Since the supplier may delay refunds until they receive a returned item, you might also have to delay refunds or issue refunds out of your pocket and then balance your books when the supplier pays up.

Customer Care

Although the supplier fulfills the order, you are responsible for all customer care queries. It is important to remember that your customers have no direct relationship with the supplier. They bought from you, meaning that ultimately, you are responsible for ensuring they have a positive experience.

Marketing and Sales

All sales and marketing activities for your dropshipping business are your responsibility, with the supplier typically playing no role besides providing product information. Marketing is the most important aspect of dropshipping success because whether or not you sell will depend on your efforts.

Dropshipping Advantages

Dropshipping is one of the easiest businesses to start, and for a good reason. It takes the hard work out of e-commerce, allowing you to focus on the best and even fun part: selling.

Here are more advantages the make dropshipping such an attractive business venture:

Low Risk

Inventory management represents one of the highest risks in commerce. Megacorporations like Walmart and Amazon spend billions of dollars on inventory and inventory management. Dropshipping allows you to skip all this, significantly lowering the risk associated with running an e-commerce business. Whether you need more or less inventory, that’s your supplier’s problem to solve.

Faster Startup

When starting a dropshipping business, all you need is a sales channel (more on this later) and an agreement with a dropshipping supplier. These days, sales channel setup costs are incredibly low, so the only actual cost you are looking at is marketing. With a channel in place and a marketing plan ready, your dropshipping business is ready to go.

Low Overheads

As a drop shipper, you do not have to invest in warehousing, inventory management, or costly restocking. Since the supplier stores all the items, you can run your business with incredibly low overheads, potentially increasing the profit you make. And, because you are operating as an online store, there is no need for a separate business location.

Wide Variety of Product Options

Unlike traditional retail, you are not limited just to the products you have in stock. You can add items as your supplier makes them available. You can also work with other suppliers and add their products to your store. If a product is not selling well, you can easily remove that product from your online store, without worrying about clearing out inventory or taking a loss.

Flexible

Over the holidays, sales tend to go up, and people sometimes buy items specially made for the holidays (think Valentine’s personalized mugs or Christmas decorations). Dropshipping gives you the flexibility to switch to holiday or trend-specific items quickly and then back to regular products with nothing more than a few edits to your product listings.

Scalable

Dropshipping is exceptionally scalable because, as your sales go up, your supplier will do all the heavy lifting associated with fulfilling your orders. Because of this, you can focus all your efforts on growing your business without worrying whether you will fulfill all the orders. What’s more, if your current supplier cannot handle the orders, you can add another or switch to a larger supplier.

Dropshipping Disadvantages

Wouldn’t it be great if the story about dropshipping ended there, with all the advantages? Well, like all business models, there are several downsides to dropshipping.

Let’s look at a few:

Low Profit Margins

For every sale you make, the product suppliers will take the lion’s share. That’s because they are doing 80% of the work, including sourcing the product, packaging it, and delivering it. Most times, you won’t get any more than a 20% wholesale discount on the products you sell. That means you must fund all your operations like marketing, customer care, website maintenance, advertising, and more from that 20% with whatever remains as your profit.

Highly Competitive

A low barrier to entry means any aspiring entrepreneur can get into dropshipping. With so many people selling the same products, it can be challenging to stand out. Add to it you might not have an exclusive contract with your supplier. In such a scenario, other sellers are selling exactly what you have at the same or lower price point, not to mention bigger or more experienced businesses that might have the resources to offer much lower prices.

Supply Chain Uncertainty

Drop shippers are essentially at the mercy of suppliers and the supply chain. When you forward an order, you can only hope the supplier will fulfill the order quickly and accurately. Any delays or issues will result in customer complaints directed at you, and the best you can do is communicate with the supplier and hope they expedite the matter.

Legal Liability

Let’s say you want to sell a branded product. After searching for a supplier, you settle on one who can supply the items at a reasonable price. After selling the product, your customers complain you are selling counterfeit products. In such a scenario, the legal liability rests with you. As such, ensuring all the products you sell do not break any laws can be difficult, especially if the supplier is not forthright.

Brand Building is Difficult

Let’s face it, drop shippers promote someone else’s business and help them build their brand. Of course, most retail companies operate this way, but unlike them, dropshipping can be a bit like ghostwriting, where you do all the work, but someone else gets the credit. Remember, there’s also nothing stopping your supplier from bypassing you and selling directly to your customers; they do have all your customers’ details, after all.

The Right Way to Dropship

Reading the disadvantages might sound like your dropshipping business is doomed to fail, yet there are thousands of successful dropshipping companies around the world making good profits.

The main reason dropshipping isn’t going anywhere as a business is that it serves an essential purpose in the supply chain.

Most suppliers do not want to invest heavily in marketing, so they would rather work with multiple dropshipping businesses to fill this need.

That said, here are a few pointers on how to approach dropshipping the right way:

  1. Don’t compete on price alone: Price competition is a losing battle. If you try to offer the lowest price, not only will you hurt your business, but you will also lose all your customers the moment they find a cheaper deal. Instead of focusing only on price, try to compete on multiple fronts like bundling, product expertise, extended returns, and stellar customer care.
  2. Focus on niche products: Selling trending products from Google Trends might seem like a good idea to you, but it also does to a million other online sellers. When a product is popular, supply goes up, overtaking demand and driving the price down. On the other hand, niche products command higher prices, have steadier market demand, and often do not have as much competition.
  3. Sell with the seasons:  Seasonal selling, like during holidays or summer, can be a major cash cow because demand tends to go up at these times. Unlike traditional retailers who must scramble to buy more inventory for each season, you can ramp up marketing and cash in on the seasonal sales rush as a drop shipper.
  4. Bundle your products: One of the advantages of drop shipping is the flexibility you have in mixing and matching products. Maximize this advantage by offering unique product bundles that traditional retailers do not provide. For example, if you sell electronics, bundle them with cables and other accessories to increase your profit margin.
  5. Focus on what you know: Although people might be able to buy your products from someone else, if you demonstrate greater expertise through your marketing, customer support, and FAQs, you can stand out from the competition.
  6. Try multichannel selling: Some products sell well on eBay or your website, while others sell better on Amazon or Facebook. Promote your products across different channels to see which one works best and exposes your business to more potential customers who may visit these other channels.
  7. Master customer care: Customer care is perhaps the only defensible competitive advantage you have in dropshipping. If your customers have a fantastic experience when they buy from you, they will leave you a great review and keep coming back. Looking at seller reviews on Amazon and eBay, you will see the ones with the highest number of excellent ratings are the ones who attract customers and sell the most.
  8. Experiment with shipping rates: Amazon Prime is a big hit for one simple reason: people love free shipping. Although you might not have the same resources that Amazon does, experiment with your product’s prices and see how you can build shipping costs into the final price. That way, you can promote free shipping, and even though your prices may be higher (try bundling to make it harder for your customers to compare your prices to the competition), you might be surprised at how many people will go for the offer.
  9. Optimize your product listings: Nothing puts a buyer off more than a confusing or poorly written product description. Since customers rely heavily on product listings to make their purchase decision, ensure yours are as compelling as possible and include a thorough product description and product photos.

Is Dropshipping Right for You?

Before looking at how to get started with dropshipping, it is essential first to decide whether dropshipping is for you in the first place.

Here are some pointers.

Do start a dropshipping business if:

  • You want to test a few products and see how the market responds before investing in buying stock.
  • Capital is an issue, and you want a business that you can start and grow relatively cheaply.
  • It is your first time starting an online business, and you want to learn the ropes before investing more money in the venture.
  • If you want to start a Walmart-style e-commerce business selling hundreds or even thousands of products that would need millions of dollars to purchase stock upfront.

Do not start a dropshipping business if:

  • You want to build a strong brand and be known for your unique products and business practices. Since dropshipping relies on how your suppliers do business, your brand-building efforts might go to waste if your suppliers are constantly putting out a poor customer experience or if they stop stocking the products you have built your brand upon.
  • You want to build a high-margin business because, typically, dropshipping has razor-thin margins.
  • You do not have strong marketing skills, or you lack a way of effectively marketing your dropshipping business. A dropshipping business sinks or floats based on your ability to market effectively.
  • You expect instant riches because, like most businesses, dropshipping will take time and effort to become a sustainable business.

Starting Your Dropshipping Business

Starting a dropshipping business is easy, but you need to follow the correct steps to check all the right boxes. If you miss a step like perhaps picking the right supplier, you might face difficulties ahead that undermine your business’s capacity to grow.

Here are ten steps to follow to start your dropshipping business the right way:

Step 1: Understand what it will take

As you start the process, you need to understand that building a successful dropshipping business takes time. You might also think that because you have capital, you can gain success faster. In most cases, investing a large sum into a business you know little about is a bad idea.

We recommend that you bootstrap the business and invest sweat equity in understanding how every level of the business works. If you are currently in a full-time job, you might consider committing a few hours each week to building up your business.

If you are going all in, you will have time to invest every working hour you have in the business. In either case, give the company at least one year to see any significant returns.

Step 2: Pick your niche

“The riches are in the niches.” That is an internet maxim that has stood the test of time. If you want to find products with a good profit margin, low competition, and decent demand, you’ll need to pick a niche.

Do this by researching products in your areas of interest. For example, if you love dogs, research niches related to dogs (HINT: Dog food does not count because it is too saturated and highly competitive.)

Try asking yourself (or other dog lovers you know) what you would be interested in buying and wouldn’t mind paying extra for.

By picking a niche you are interested in, you are more likely to know it better and not grow bored or discouraged when things get tough.

Step 3: Research the competition

Once you pick your niche, you need to find out what sort of competition you’ll be up against.

Competitor analysis is crucial because it gives you a good idea of which products your competition is selling and how they sell them, including pricing, bundling, packaging, marketing, and customer acquisition and care.

If the niche you’ve picked has some competition (not too much), that’s a good thing. It means you have a chance of grabbing some market share.

Some nifty ways to do competitor research include a good old-fashioned Google search, browsing marketplaces like eBay and Amazon, searching social media, and subscribing to competitors’ marketing email lists.

Organize all the information you collect in a spreadsheet, so you have a clear picture of what others are doing to succeed.

Step 4: Pick the perfect products to sell

Although you’ve zeroed in on a niche, you still need to find the actual products you will sell within that niche. For example, if you like the shaggy dog grooming niche, you need to pick the products within this niche to market.

To do this, look out for the following features:

  • Retail price: Look for products that aren’t so low priced that the margins are too thin nor priced too high that it will be difficult to market.
  • Size and weight: Since packaging and shipping costs are a significant factor in pricing, find items that can ship relatively cheaply.
  • Cross-selling products: Find products that can be bundled with other related products within the same or slightly higher or lower price range.
  • Repeat sales: Lock in repeat sales by finding products that are either renewable or disposable.
  • Product forecasts: Find products that do not change so often, either seasonally or through frequent updates. For example, fashion items often change, making it challenging to keep your website images and product descriptions relevant and up to date.

Step 5: Find the right dropshipping supplier

Finding the right dropshipping supplier is the most critical step in the entire setup process. Your whole business will depend on their ability to fulfill orders punctually and correctly.

Use the following evaluation criteria to find the correct match:

  • Pick a supplier with dropshipping experience that resolves any challenges associated with fulfilling orders effectively, while communicating through a helpful service delivery team.
  • Pick a supplier who sells high-quality, genuine products, as this will lower your return rate and increase buyer satisfaction.
  • Pick a supplier who leverages technology to make their operations more efficient and scalable and who can grow with your business.
  • Pick a supplier offering fast and punctual deliveries because slow or missed deliveries will severely cripple your business and make it impossible to attract customers and retain them.

Step 6: Select your sales channels

Sales channels are where you will list and promote your products. Here are the top three channels:

  • Marketplaces: E.g., eBay, Amazon
  • Social Media: E.g., Facebook, Instagram
  • Your E-commerce Website: E.g., WordPress, Shopify store

Which sales channel should you use?

Consider the following factors to decide which channel will work best for you:

  1. Type of products: Simple, low-priced products (like a hair clip) that can be purchased with little information sell better on marketplaces and social media. More expensive products (like exercise equipment) that buyers need more information about do better on a dedicated website.
  2. Target market: A younger target market can be reached easily on Instagram and Facebook, while an older demographic might spend more time shopping on established platforms like Amazon.
  3. Fees: Higher margin products can absorb the fees charged on marketplaces, while low margin products might be better off sold on a website or social media.

Step 7: Decide your business structure and register a business

If you are committed to turning your business idea into a business, consider dropshipping business registration.

Here, you have two options:

  • Business Registration: Business registration is a fast and straightforward way of legitimizing your business. Although it is quick and affordable to register your business, you should be aware of some of the disadvantages of business registration. (Read more about business registration HERE)
  • Incorporation: Incorporating your business creates a new legal entity that can enter into contracts, borrow money, open bank accounts, and more. Business incorporation may be a better option because it gives your business additional protections such as limited liability, business name protection, and much more. (Read more about incorporation HERE)

Ontario Business Center offers fast and affordable business registration and incorporation services. Register your business or incorporate on the same day, and start your entrepreneurial journey!

(PS: We have no hidden fees; what you see when you check out is the final amount you will pay.)

Step 8: Create a marketing plan

Your dropshipping marketing plan is the central cog in your entire operation, so it pays to invest some extra time at this stage.

Focus on the following aspects to create an effective dropshipping marketing plan:

  1. High-quality product images and descriptions
  2. Effective search engine optimization (SEO)
  3. Lead generation and email marketing
  4. Strategic social media marketing
  5. Brand building efforts like podcasts and a YouTube channel
  6. Highly optimized advertising

Your final marketing plan will depend on the type of products you are selling and your target market (see “Which sales channels should you use” above).

Step 9: Create a customer care plan

A customer care plan outlines how you will handle customer queries and complaints, which customer care channels you will use (email, live chat, social media), and what standards you will enforce to ensure a consistent experience.

Since you are probably starting alone, you might say something like, “I will set aside one hour every day at 10 AM to handle customer queries.” It is essential to have a plan because something as simple as a late response can trigger a refund request or a negative review.

Step 10: Set up sales monitoring and analytics

Finally, when everything is set up, and your store is about to go live, set up a way to track sales and monitor your store analytics. If you are selling on a marketplace, they already provide these features. If you are selling on your website, you might need to set up Google Analytics for e-commerce.

This step is vital because you want to know what is working and what isn’t in your store. For instance, if you know your best sellers, you can either promote them more or bundle them with complementary products to drive even more sales.

Grow Your Dropshipping Business

Once your dropshipping business is up and running, you might consider scaling it so you can market more effectively and make more sales.

Here are some ways you can scale your dropshipping business without investing a ton of cash:

  • Leverage Freelancers: Freelance virtual assistants (VAs), customer care agents, writers, designers, software developers, and marketers are a great way to scale up your business without the overheads associated with hiring full-time employees.
  • Add More Sales Channels: If you started on a marketplace like eBay, consider branching out to Amazon, Facebook, and Instagram.
  • Build Your Own Online Store: Having your own store can allow you to scale in ways marketplaces cannot. For example, your own online store means competing products will not be shown alongside yours.
  • Harness the Power of Email Marketing: As your email list grows, start email marketing to market directly to past customers or email subscribers. This strategy can significantly lower your marketing costs.
  • Negotiate Better Terms: As your supplier relationships mature, negotiate better terms, including lower pricing, joint marketing efforts, or exclusive partnerships on specific products.
  • Introduce Branded Products: White labeling is a powerful way to build a brand. If your suppliers allow this, gradually introduce your own branded products, so your customers come to recognize your business as an independent brand.

Last Words

A dropshipping business can be an excellent business venture, especially for first-time entrepreneurs, but only when approached in the right way.

Like all other business models, it takes time and hard work to get your dropshipping store off the ground. The best way to succeed as a drop shipper is to harness the advantages of dropshipping while reducing the risks it comes with.

Ultimately, those who succeed in dropshipping are people who commit to the business, keep learning about it, and never give up, even when it takes time for results to appear.

When you are ready to register your business or incorporate, Ontario Business Central is here to help your dropshipping business get up and running. If you have any questions, feel free to reach out to one of our helpful agents.

[email protected]
Toll-Free: 1-877-306-9458
Local: 1-416-599-9009
Fax: 1-866-294-4363
Office Hours: 9:00am – 5:00pm
Monday – Friday E.S.T.

Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions, that you speak to a qualified professional.