What is Drop-Shipping?

What is drop-shipping?

Drop shipping in simple terms is a business model that allows the user to sell products (most commonly physical products) without committing to a stock quantity. Essentially, the user acts as a middle -man, with the customer at the beginning and the supplier at the end. To illustrate it better here is an image.

To break it down further lets go through the cycle step by step.

Step 1

Customer buys a product from you, either through a website such as shopify (which I use) a sales funnel or even Amazon/ ebay. They make payment at the point of order so you have that added peace of mind, essentially you get paid before you place the order with the supplier.

Step 2

When you have the order from a customer you need to order the product from the manufacturer/ supplier. I typically use Aliexpress.com to source my products from but it can be anywhere you like.

Step 3

You’ve paid the supplier and now they fulfill the order by shipping the product directly to your customer. Cycle complete.

Very simple and very effective, however there are some negative points to consider before starting a business model like this. Lets look at the pros and cons.

Small start up costs.

Most people already have a computer and an internet connection. That being the case you only need approx. £100 to get set up and get started which is very cheap in comparison to other business models.

Flexibility to work anywhere.

If you have a laptop then all you need is an internet connection to run your business. Meaning you can be anywhere in the world! This is a huge perk to drop-shipping.

Low overheads.

As you're not holding stock you don’t need a premises so theres no bills. Your only expenses will be your internet connection and website hosting costs (approx. £30/month) and that’s it!

Wide selection of products.

As your dropshipping you can have 1000’s of products on your site because you're not holding stock. This is great because you can give the impression to customers that you're a large and legitimate business.

Easy to scale.

With no need for large stock orders you can sell 100’s of 100’s of different products. You don’t need the capital to invest in more stock before you can sell it. As long as you find a reputable and reliable supplier you can sell as much or a little of a product as you like.

Low risk.

This relates back to small start-up costs. If it fails you haven’t invested £1000’s into stock, a lease on a property or staff etc. You can cut it loose without much financial loss.

Shipping times.

Depending on where you source your products from shipping times can be anywhere from 1-3 weeks. This makes it difficult to build a brand because most people want things sooner than that.

Quality issues.

As you don’t see the product every time before your customer sees it quality control can be difficult. This is where it pays to have a reputable supplier.

Lower margins.

To have products ready on demand you pay the price. My first ever drop-shipped product cost me £5.20 delivered to the customer. When I started sourcing the product in bulk my cost reduced to £2.20 delivered which is a massive difference! This is why I always suggest drop-shipping as a short term business model.

Inventory issues.

It can be difficult to stay in sync with your suppliers inventory levels, without warning they can stop selling the product or run of stock and this causes problems!

Returns issues.

Returns will happen, asking your customer to ship it back to China will result in very annoyed customers so I recommend having a return address in the country you're selling too. I pay for a virtual office so I don’t have to give out my personal address.

Overview

For those looking to get started in ecommerce it’s a great business model, probably the best there is however I do think its only a means to an end. I may be wrong but I don’t think it’s a long term business plan. The goal has to be longevity and I think it will be tough to create a long term business using this business model. The way I see it and the way I have done it is use drop-shipping to test products, if they prove profitable then move immediately to sourcing in bulk. This will increase your profitability and customer loyalty which are both key to creating a long term brand.

Thanks for reading, any questions at all then comment below!

JK