Google Trends show that “drop shipping” and its related search terms are on a steeply rising curve. Is it a ticket to paradise? Or are punters gullible for handing over cash to access “drop shipping directories” with “exclusive” deals? Is there any real money to be made? Are services like Oberlo the future and which eCommerce platform has the best options for anyone wanting to use drop shipping as a business model?
The UK eCommerce industry is worth an estimated $150 billion and is the third largest eCommerce market in the world (Source. Statista) But drop shipping as a business model is a small part of that economy. Individuals who sell online, make up about 15% of the total.
In this guide, I'll take you through all the steps required to build a successful, thriving, drop shipping business.
What Is Drop Shipping?
Drop shipping is a way to sell products on your website that you don't pay for until they have been purchased, doing away with costly inventory and giving you massive flexibility over which products you sell. The drop shipper then fulfils the order on your behalf, so you don't have any packaging or transport costs.
On the face of it, drop shipping seems like a genuine low-risk business opportunity.
The internet marketing business model with the lowest barrier to entry is Affiliate Marketing
In reality, it puts you, the store owner, in the position of being a middleman with little or no control over product quality, stock levels, delivery dates and the inevitable returns. On the positive side with some hard work, you'll hopefully be able to escape the “me too” crowd and build a brand before the market becomes saturated with third rate drop shipping wannabees.
Keep in mind that because your supplier will be sending single items to multiple customers on your behalf, you'll never achieve the economies of scale that someone purchasing an actual physical stock at true wholesale rates can attain. So if you are heading into a hotly contested marketplace, you will most likely not be able to compete on price using drop shipping.
Competing on price alone though is a terrible business model. To build a profitable and lasting business, you need to find untapped niche markets. Once you are established (and profitable), you can begin purchasing the physical stock at lower prices to increase your margin. Seasonal trends are perfect for the drop shipping model because you won't be left with a lot of stock when the trend is over.
What Are The Benefits Of Drop Shipping?
Less Money Required To Get Started
I've discussed the costs of setting up an eCommerce store in this post. The summary is that if you were to employ a digital agency to set up the store for you and do the initial SEO and marketing on your behalf, you are looking at a £10,000 investment. You can subtract from that figure by doing some of the work yourself, and it's feasible to shoestring it for as little as £500 if you have the technical skills.
The drawback of doing it all yourself is that unless you are in the trade then your store probably won't look good, or it will look the same as all the other templated stores out there. With so many people jumping on the drop shipping bandwagon your store will be a little drop lost in the big bad wide ocean.
There is nothing wrong with building a site and learning as you go. I'm a big fan of just jumping in and trying things out. As long as you don't expect to make money from day one, this could be a significant second income for you.
Here are some simple maths to understand why drop shipping is such an attractive proposition:
I'm going to start up a shop selling t-shirts. I have ten product lines, and I want to offer four colours in four sizes. I'll start off with five of each in stock. The cost price of each t-shirt is £5.
It doesn't sound like a lot of stock to get started, and it isn't. However:
10x5x4x4x5 = £4,000!
By swapping to a drop shipping business model, you free up cash otherwise tied up in stock to spend on marketing your site and making sure it gets found. Web sites fail because of a lack of traffic and nothing else. Even the most poorly designed website can be successful if it has a lot of traffic. A brilliant side product of website traffic is feedback and the opportunity to improve.
Because you won't be carrying any real stock, you won't have to pay any storage or container fees until your business gets bigger and becomes profitable. All you need is a computer, an internet connection and a phone to get started. You could also be a coffee shop warrior, but in reality, a comfortable office to work from would be ideal. Convert that spare bedroom into somewhere nice to work.
Drop shipping is one of the very few business opportunities where you don't have to pay for stock until the customer has paid you, so it takes a lot of the risk away from your position. It has to beat learning to day trade the stock market for a living!
Being able to switch out products quickly and easily is one of the big advantages of the drop shipping model. You are free to test different products to see what works best on your website without incurring expensive stock charges. It's also possible to find out what the best sellers are and then physically purchase them at cheaper rates in the future.
What Are The Drawbacks Of Drop Shipping?
Unknown Business Model In The UK
In the USA, drop shipping is a very well-developed business model, but it's still in an early growth stage in the UK. Suppliers are thin on the ground, but it is a market set for rapid expansion over the next few years.
If being able to start up on a shoestring sounds like just the thing for you, the flip side is that there will be thousands of people doing the same thing. Being able to make your products visible in the huge crowd is going to be a massive challenge.
High Delivery Charges
You'll be at the mercy of drop shipper rates for packaging and distribution so expect rates to be slightly greater than regular UK Royal Mail prices.
High Product Costs
Buying single items at trade prices to be packaged up and sent out on your behalf is less efficient than bulk buying. This extra work means you will be paying higher prices than if you purchased multiple items in one go in true wholesale fashion.
Lack Of Quality Control
If you don't see the products before they are sent out then how can you vouch for their quality or authenticity?
Complicated Inventory Management
You'll have to be vigilant and check supplier stock levels regularly to make sure that you don't have products on display with zero inventory at the provider level.
Blank Un-Personalised Packaging
Being able to enclose coupons, offers, trial products and other paraphernalia in the product packaging is out of the question because you won't be handling the product. It's a big opportunity missed for cross-selling and building brand awareness.
Dealing with returns and sorting out refunds can be a difficult process. If you haven't seen the product before it is delivered and have no quality control, then you'll have no idea of the number of returns to expect. Suppliers may request that returns are handled by you, and so you'll have to be adept at handling customer complaints.
The drop shipping business models' major benefit is that you can start a business very cheaply, but there are so many drawbacks that even if you make it work successfully, moving to a model where you physically purchase, inspect and deliver your stock is the ultimate goal. Drop shipping is a stepping stone to a full-fledged eCommerce business or to supplement and test your existing product lines.
Relying solely on drop shipping as a business model is not sustainable in the long term because competition in the future will be so fierce. We are already at the stage in eBay and Amazon marketplaces where price wars in some product areas are so cut throat that merchants already sell for a loss.
Look for new opportunities, for example combining the drop shipping model with Facebook advertising is currently reaping benefits, there are opportunities to target impulse buyers with beauty and weight loss products, and that market sees new players on a daily basis.
For example, my wife has suddenly started making random purchases on Facebook, and I see anti ageing creams, makeup brushes and other beauty products appearing in the mail, so that's how I know it is working for some creative merchants.
Finding A Drop Shipping Niche
The way to begin building a viable drop shipping business is the same as any other affiliate marketing or website idea - find untapped niches where there is lots of demand and limited supply. With so many people rushing to take advantage of the drop shipping model this is going to be harder than it sounds.
For the first timer, there is an awful lot to learn. From building out your website to devising an advertising plan and gaining that all important feedback to improve your service, you are going to come up against old hands who have been doing this for a long time and will have a head start on you.
They will have a better understanding of the marketplace and the customer demographic. They will understand where to focus their eCommerce marketing effort much better than you.
The major consideration you need to address for your website is attracting website traffic. How will you drive hordes of eager buyers through your sales funnels? Buying advertising through Google Adwords or Facebook is one possibility, but you'll also need to be prepared for high advertising rates. Check those rates out first before you commit to your niche.
To try and level up the playing field you need to pick a niche that you understand well. If you are the type of person that buys the products you have in mind, then you'll have a good idea of what it's going to take to build a successful business in that niche.
Don't get suckered into paying fees for a website that will give you a t-shirt or sex toy drop shipping business. They are website design agencies posing as something they are not. Do not buy "off the peg", or "turnkey" drop shipping businesses".
One good idea for niche selection is picking a product you've recently purchased that didn't come up to your expectations. Using your knowledge of the marketplace, you can offer a better product and write better descriptions that help the customer make an informed buying decision.
In any business, to be successful, you must offer a better product and customer experience than the competition. You must add value to the proposition. Building an eCommerce business by competing on price alone is a race to the bottom of the marketplace and unsustainable.
Building a discount store that offers nothing but cost as a benefit will fail. The global marketplace is shrinking; it is becoming easier to buy products from countries like China and get them shipped to Amazon distribution centres. The Fulfillment By Amazon service accelerates this process. In the end, the only eCommerce businesses that will succeed are those that offer something unique and original. Your knowledge of the product area could be the advantage you need to succeed.
Some of the best niches for drop shipping are those that have specialist magazines dedicated to them. Many years ago I worked at a wholesale newsagent, and the array of independent magazine titles was staggering. If you want to find great niches, then go through the specialist magazine titles. They have a following big enough which warrants producing a magazine. Wikipedia has a complete list of all the current and defunct titles which would make an excellent starting point for research
Here's another useful resource for independent magazine titles
This storebuilder article (how to research and find an eCommerce idea) has resources for finding and following trends and trend watching
How to implement A Drop Shipping Business
Companies like Oberlo and Ecomdash who use API technology to integrate their App's with existing eCommerce software are revolutionising the industry.
I've recently added Oberlo to the directory. See my Oberlo Review
The App is an interface between the eCommerce store (Shopify for example) and popular eCommerce marketplaces like AliExpress or the Oberlo Supply market. These third party apps take away a lot of the drudgery of having to research and find products.
How Drop Shipping With Oberlo Works:
A customer places an order in your Shopify store, and you receive money to your payment gateway account (PayPal for example). Then, you have to use your credit card and purchase an item for your customer from the supplier, to be shipped directly to your client.
Your profit will be the difference between the amount of money a customer paid in your Shopify store and the cost of the product you paid for the supplier after subtracting any advertising costs.
I would advise anyone that wants to get started with drop shipping to build a Shopify store and install Oberlo. It's by far the easiest method possible, and it will save you hours if not days of research. See my Shopify review
Shopify also has built-in support for selling on Facebook, and that is a hot new market at the moment.
The other method for UK users is to use EKM or Shopwired to build your eCommerce store and then manually integrate your drop shipped products. Many companies offer XML data feeds of their products that you can use or in the case of a few products you can add them piecemeal to your store.
The drawback with this method is the time taken to do it and also compared to Shopify, UK eCommerce software simply doesn't have the cutting-edge features required to sell on social media marketplaces or integrate third party drop shipping Apps.
As a business model, drop shipping now rivals affiliate marketing for the ease at which you can start a new business.
Many affiliate marketers use embedded XML feeds to recommend products on their websites supplied by the major affiliate marketing networks, but the commissions available are so ridiculously small that you have to build very high traffic websites to make it work. For example trying to sell white goods or electrical products through affiliate marketing typically has commissions of 2- 3%.
Using a Shopify store in combination with Oberlo gives you the opportunity to make a better presentation and offer a wider range of products at a higher margin.
The caveat is that every man, dog, brother and his son, wife and children will all be trying to do the same thing because it is so easy to do. Competing on price is not the answer.
Drop shipping is a great supplement to an existing business model, for example, a successful blog which already has a qualified traffic stream. Or for going into marketplaces where shopping buttons were not previously available (Facebook/Shopify).
As a stand-alone investment of your time, you'll have to have unique knowledge of a marketplace or a new angle to make it a success. Setting up shop is one thing, getting traffic to it is quite another.
All Life Is An Experiment, The More Experiments You Make, The BetterRalph Waldo Emerson Poet
You can't build a business without trying something or experimenting. For a low-cost way to start building an eCommerce business and begin learning the ropes then Shopify in conjunction with Oberlo is the way to do it.