What is dropshipping and how to launch a low-cost business

The dropshipping business model can appeal to entrepreneurs looking to start a new business due to low start-up costs, reduced risks, and greater flexibility.

Many dropshipping businesses can be run from your home and managed alongside a full-time job, which may make it an option for those who want to start a business without quitting their day job.

What is dropshipping?

Dropshipping is a business model where products are sold to customers by one business – the seller – and delivered directly from a different company – the supplier – all without the selling business needing to store or handle the goods.

The seller takes the customer’s orders and passes them on to the supplier, who will take care of manufacturing, packaging, and shipping the product.

It can be a lower-risk start-up business venture, as shipping responsibility is in the hands of your suppliers, and you don’t need to pay for stock that you may not potentially sell.

Dropshipping businesses often create their online storefront, operating a website that sells the product or service before passing the customer order details onto the supplier to fulfil the purchase.

The advantages of dropshipping

Flexibility

Dropshipping can be a flexible business model.

Many dropshipping businesses are successfully run from home; all you need is an internet connection to communicate with customers and suppliers.

It is not uncommon for people to run dropshipping businesses alongside other commitments or on a part-time basis.

Growth potential

It can be relatively simple to scale your dropshipping business compared to a traditional e-Commerce store.

With no production or storage requirements, your growth is not necessarily hindered by increased operating expenses or constrained by the amount of inventory you hold.

Lower overheads

Running a dropshipping business comes with potentially fewer overheads as you may not need to:

• hire staff to keep up with growth
• pack or ship any of the products yourself
• pay for storage or production facilities.

Lower start-up costs

Starting a dropshipping business may require less investment, such as finding premises or warehousing, buying inventory, handling waste, and arranging security such as CCTV and alarms to prevent physical theft.

Costs may be limited to building a website, marketing products, processing payments, and handling customers.

The disadvantages of dropshipping

Low-profit margins

Profit from dropshipping depends on the type of products you are selling and the margin that the supplier is willing to give you for each sale.

Suppliers often determine the amount they will pay the seller per product, such as 10% of the retail value.

This can be much lower than the actual profit margin on a product.

Be aware that your costs will have to come out of a supplier’s fee, including salaries, marketing, and other overheads, reducing your profit margin even further.

Competitive

Dropshipping is a popular business model due to its ease of entry and low start-up costs.

Competitors will often be selling the same products from the same suppliers, with pressure to continually lower prices to compete.

Lack of control over the customer experience

While the supplier is responsible for delivering the correct products on time, you may need to liaise with customers on delivery issues.

As you don’t manage your own inventory, resolving customers’ problems can be more difficult as you will take the issue up with your supplier.

This can be a slow process and may negatively affect the customer’s experience.

Reliance on supplier stock

Unexpected trends in certain products or supply chain constraints may result in your supplier running out of stock, meaning you cannot fulfil your customers’ orders.

While the ability to meet customer orders is not entirely in your control, you’ll still be responsible for managing and responding to customer complaints or issues.

How to get started with dropshipping

To get started with your dropshipping business, follow these key steps:

1. Pick your niche

It can be a good idea to focus your efforts on a niche area to target a defined audience with less competition.

2. Product research

It can pay to try to identify popular and trending products.

For example, look at ‘best selling’ categories on e-Commerce marketplaces such as eBay and then pinpoint any niche products in which your business could specialise.

When researching products, getting to know your competition can be a good idea.

Look at companies selling similar products, explore their products, and see at what cost they sell them.

3. Find a supplier

Finding reliable suppliers is important to allow you to fulfil orders.

Your business might suffer from negative customer reviews if you use unreliable suppliers with low-quality products and poor delivery services.

To help find a reliable supplier, reading through their reviews is a good start.

Order samples of their products to test the delivery process and product quality.

Contact potential suppliers to discuss how their drop shipping service works, service level agreements, what happens when things go wrong, and get an idea of the sales volume they can handle.

Discuss dropshipping fees, such as how much you’ll earn, and if there are any other costs.

Consider flexible fees, where you are paid more as sales increase.

Always seek professional legal advice before entering a commercial agreement with a supplier.

4. Create a sales platform

Consider creating a dropshipping website so customers can see the products you sell.

Many online tools can help you make a website yourself, or you could hire a professional to create your website.

As well as creating a website you could use e-Commerce marketplaces such as eBay, Etsy, and Amazon for your dropshipping business.

Such marketplaces already have large audiences but can be highly competitive.

5. Attract customers

To build your customer base, you could create social media pages for your business to increase visibility and attract new customers.

If you have your own website, you might consider investing time and money into search engine optimisation (SEO) to rank highly on search engine results pages for the products you are selling, and it will also increase traffic to your website.