Dropshipping is a great business model if you want to be location-independent, don’t want the hassle of managing inventory, and want to be able to run your entire business from an iPad or a laptop.
A lot of online businesses are practicing dropship nowadays – some may rely on it completely, and some may use it for a part of their catalog – so it definitely works as a business model.
That said, it does have its fair share of challenges. Below are some of the most glaring and frequently asked-about ones – talking specifically from a dropshipper-of-products-from-Vietnam-to-the-USA’s point of view.
Question #4: How would I know if a dropship supplier is ‘the one’?
You’ve hit the right spot! This is perhaps the biggest challenge in dropshipping – establishing a reliable network of suppliers that represent the brand at the same high standards as the brand itself.
Having an unreliable partner on your hand will taint your reputation and in marketplaces like Amazon Marketplace you will more likely be penalized.
A prime example is the abrupt shut down of the promising coffee specialized company Alice in 2013, despite a reported $18 million in VC funding just a few months prior. They did the consumer dropshipping for many consumer package goods brands, leaving them all in a lurch with no way to fulfill their orders to end consumers.
The list of not-so-lucky victims goes on, obviously and unfortunately. It is rather frustrating as a dropship entrepreneur to have so many elements of your business out of your control, but it is just what it is.
SOLUTION: Choose Wisely!
If you’re looking to vet potential dropshippers, you have a couple of options. Numerous resources offer lists of dropship suppliers and reviews. Check out this list, for instance.
Factors you would want to consider when looking for a supplier are:
- Order minimums
- Expert industry knowledge (i.e. shipping telecom hardware is much different than shipping foodstuffs)
- Support staff
- Efficiency (how quickly can they help you fulfill your order, etc.)
- Responsiveness to email orders
- Availability of tracking & data feeds
Beyond obtaining this information, follow the same business practices that you would with other suppliers. Start small with any dropshipper to ensure that it can handle your needs before expanding your business relationship. Also, have systems in place that will alert you immediately if the dropshipper is not performing up to your expectations.
Once you found yourself one reliable supplier, don’t stop searching! Many things can happen even with the most reliable suppliers: They can run out of stock, go on long holidays, raise prices, decide to stop working with you, close down the business, stop selling the line of products you buy and switch to something you cannot compete on, etc..
Try to have at least two suppliers for every type of product you sell. That way when one supplier is out you will still have the other supplier to keep you going.
Question #5: Choice of e-Commerce platform?
Needless to say, choosing wisely is a must here, since the e-Com platform you choose will be where you eventually do business most of the time.
Dropship entrepreneurs that don’t spend enough hours on researching will often end up with really bad choices for e commerce platforms.
SOLUTION: Go With the Flow.
Many experts suggest launching with cloud based SAAS (software as a service) solutions like Magento Go, Shopify, BigCommerce. The big names are more likely to have big ecosystems, to make it easier to add on features, such as Inventory Source and eComm Hub, just to name a few.
If you have a great add on tool, you are much more likely to build APIs (Application Programming Interfaces) to the main shopping cart platforms as well.
Question #6: What should I do with profit margins being so low?
We have already covered the causes of this in the above article.
Basically, unlike a regular wholesaler that would sell you their merchandise in bulk, a dropship supplier sells you a single unit every time you place an order.
Because they generally sell a single unit, they have to go through a lot more trouble with each order, and to justify that, their prices are higher than a regular wholesaler’s would be.
They may also charge a separate fee called a “dropship fee” for labor, packaging, and logistics.
For those online store owners, this burns a hole in their pockets – the average margin that they are left with is usually between 15-20%. After you subtract all expenses like shipping and fees, things start looking really bleak.
Luckily, there are a few ways to get around this problem, each with their own advantages.
The most obvious solution is to increase your profit margin by increasing your prices!
If you made $20/order on a particular product, which you felt was a little less, you can just increase your price by $10 and start making $27 (after fees) per order.
This advice might seem counter-intuitive, since commonly lowest price wins, but that’s just not the case here.
Take reputable computer hardware stores for instance. Even when they (supposedly) have terrible margins, some of their best selling products like graphic cards or CPUs cost at least $5-10 more than at any of their competitors – yet they still manage to move product.
Obviously, you don’t want to increase prices TOO much, but a little bit here and there might actually increase the customer’s perceived value of the product. Lowest prices are not always the best thing.
A guy on eBay is selling a new Macbook Pro for $600 – would you buy it? Or would such a low price trigger an alert, that perhaps this Macbook was snatched off the back of a truck? Think about that for a second and make up your mind.
2.Compensate with Volume
Solution number two to the problem of low margins is to compensate for the low margins by selling a higher volume of goods.
If you have a margin of, say, 15% on a $100 item (meaning you make $15 per sale), it may not be worth your while to operate an entire store and just get 30-40 orders a month.
However, if you can turn 30-40 orders a month into 300-400 orders, then you are talking business, and the low margins offset themselves with the higher volume.
It’s a lot and lot of math, but as with things these days, business is nothing but math!
3.Talk to Your Supplier
Finally, you can negotiate a better deal with your supplier to get a deeper discount on their goods.
Usually you can extract anywhere between 5-10% more margin – this makes a world of difference on your bottom line, especially if you sell pricey items.
The only issue here is that in order for a supplier to take your request seriously, you should have given them a decent amount of business already.
Whatever you do, it is naive to think that if you buy 1 bottle of dish soap on drop ship (returnable) you will pay the same unit price as if you buy a pallet of that dish soap for your own inventory (non returnable). The volume of your purchases affect your cost.
Since you will be competing in the marketplace with e-tailers who stock inventory and buy on deal, you need to focus on products with good dropship margins and promote those items where you have good dropship margins to work with.
TO BE CONTINUED…
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