What is Dropshipping?
It’s long been thought that in order to start a company selling physical products to consumers, is that you need a place of business or storage facility to store your products. With the business model known as dropshipping becoming more widely known, anyone has the opportunity to start selling online without having a warehouse or office space to store their goods.
The truth is, this business model has actually been around for a long time; it’s just become easier to implement with the soaring popularity of eCommerce websites and the ability to create them using platforms such as Shopify and WordPress.
Dropshipping enables you to have a business without the need to store physical stock. It’s a great way to save money on this aspect of the business in addition to not needing a warehouse or office space. This all sounds great, but what is dropshipping?
So What is Dropshipping?
“Dropshipping is a supply chain method where the retailer does not hold any stock for the products they sell and instead, forwards their customers order details to a manufacturer, supplier, or another retailer to fulfill the order.”
Is Dropshipping Legal?
This is a very common question that people looking to adopt this business model ask.
We aren’t going to touch on it too much, because the premise of dropshipping is very cut and dry.
Dropshipping is a form of order fulfillment.
This, in its general sense, is perfectly legal. You are allowed to use different companies to handle your shipping and delivery. You are also allowed to purchase stock from somewhere and sell it too. If you’re dropshipping from AliExpress, then you are reselling an existing product.
If you think of reselling; it’s extremely common.
Here are just two examples:
Bought stock from suppliers and manufacturers and are selling it to you at a higher cost.
Bought TVs, Fridges, etc. from a supplier or manufacturer and are selling it to you at a higher cost.
Reselling is virtually everywhere you go. Shops have to purchase their physical stock from somewhere, and they will then sell that stock to their customers with a markup. Restaurants, clothing stores, supermarkets, gas stations, and many other types of businesses get stock from manufacturers or suppliers and then sell it to their customers at a higher cost. Completely normal, so no need to question the legality of this on premise.
It’s when you take away the premise of reselling and get into the specifics and circumstances that you can question the legality. There are some things you may not be allowed to resell, such as copyrighted items, licensed items, music, event tickets, recalled products, and medication for example.
But, generally speaking, most things can be resold legally, either with permission or just because it can be.
If you’re dropshipping from Printful, then you are selling your own designs that another company produces and ships out for delivery. How many companies in the world do you think have their products made by another company?
Yeah, a lot.
In this case, rather than the company making the products and sending the stock back to the company selling the products, the company that makes the products offers a dropshipping service, holds the stock, and then sends it to the customers of the company selling the products.
It’s just changing the way that stock gets held and delivered, basically by having another company act on behalf or as a middleman.
Printful have blank canvas t-shirts and you can upload your own designs and they will screenprint it and ship it to your customer without you ever needing to touch the stock.
Nothing wrong with this premise either.
If you own the copyright to the designs that get printed on the shirts or you have permission to use the designs then generally speaking you can have no issues selling them, barring obvious issues such as trademark infringement for example. There are even online thrift stores that do dropshipping as well, and because dropshipping is a business model, you aren’t boxed into a certain niche.
So really, in its most general sense and excluding committing offences such as trademark or copyright infringement and having appropriate permissions if necessary, dropshipping is perfectly legal.
Pros and Cons of Dropshipping
Obviously dropshipping, like all other business practices, has advantages and disadvantages that should not be underestimated. Among the most significant benefits we have:
Low Entry Costs
Depending on how you do it, getting started in dropshipping doesn’t have to be expensive and the basic process would look like this:
1 – Register a business entity in your country
2 – Purchase a domain name and website hosting
3 – Build a website, most likely using Shopify or WordPress
At its bare bones, this may be all that you need to get started in dropshipping.
Also, Shopify is an all-in-one platform and they will also be your web host, so you do not need to purchase this separately if you choose to go with them.
In most situations, the costs would increase depending on the level of functionality you want your website to have, and if your website gets bigger in future you may need to upgrade your web hosting to handle the traffic.
Shopify and WordPress are the most common platforms to set up an eCommerce website with, so check out that guide linked in point 4 above to see a detailed comparison and the difference in costs if you’re interested.
You don’t need to store your goods in your home or at a warehouse. This can save you a lot of money, especially over time.
If you had a warehouse, you would need to employ staff to track and organize inventory, in addition to arranging deliveries. Warehouses are not cheap to run if you have staff who need to pick, pack, categorize, sort, and manage the facility and its operations. Not to mention rent, electricity, and other overheads associated with the property.
Also, when you have inventory and it doesn’t sell, you’re stuck with it until it does or you write it off.
With dropshipping, you can change your inventory at a whim based on many factors such as sales, variety, niche, and brand direction. If something isn’t selling; you just stop selling it. No need to offload all of those units collecting dust in your warehouse to try and recoup your money.
You don’t need to worry about stock management, packaging, shipping, and staff which gives you more time to spend on marketing and customer care. These are all big aspects of a traditional type of business which can be very time consuming and costly.
There is of course work involved in this type of business, but a lot of it can be automated and many dropshipping business owners can run their store with only a few hours a day/week and a laptop and an internet connection.
Almost everyone who gets started out with dropshipping has a job and they build a website in their free time and grow it outside of their normal work hours.
Some products not selling? Take them off your store. Find some new ones, put them up for sale.
Found a new supplier and like their products?
Start selling them the next day.
Dropshipping can be flexible and interchangeable in ways that bricks and mortar businesses may find harder to do. You can make changes quickly, which is great if something isn’t working for you.
This type of flexibility can enable you to correct mistakes or to capitalize on good opportunities much faster than a physical stock business can do.
Often dropshipping providers have many affiliated stores, so your inventory control may also be limited by other business activities. You could also run into a bit of trouble if the supplier decides to discontinue stocking a particular product as well, regardless of how well you were selling it.
A lot of people who do AliExpress dropshipping can encounter this problem. The seller will produce say 100,000 of a product and when there’s hundreds or thousands of people reselling that product it will eventually run out. If that seller decides to not get any more made or in stock then one of your best sellers could effectively be eliminated.
If you have a good supplier or manufacturer then inventory control can run smoothly, but you are ultimately in their hands and if they decide to stop doing or change something then you have no choice in the matter.
Third Party Reliance
You are relying on another party to maintain stock and get your products sent out for delivery. Because of this, there can be less control on your side over certain aspects of your business.
This could also get more complicated if you are dropshipping from multiple suppliers. Different suppliers would likely have different shipping methods to each other, which would cause variances in your delivery times.
Having said that, there’s almost always reliance on other parties in most businesses. If you receive or send deliveries with courier companies, then you’re relying on them to deliver the package and you can’t control them losing it.
When it comes to dropshipping, there is generally more reliance on other parties though because a lot of the elements of the business are outsourced or fulfilled by them.
Less Competitive Pricing
With dropshipping, you can purchase individual items without the need for a minimum order quantity. This is great, but you miss out on the chance to get bulk pricing. The money you could save on not having inventory could offset this, but if you have a competitor who does carry stock, buy in bulk, and can offer better pricing than you, then you may find this to be a negative factor.
A lot of this will depend on your niche and the products you sell. There are some products that you can markup well and there are other products that you can’t because your competition is offering the same ones at a low cost.
Usually, dropshipping companies will use generic and bland packaging so there isn’t any indication it’s come from them. This is good for you, but you also may not have any option to customize the packaging and add your branding to it.
This makes the delivery of the product a lot less personal for the customer. Imagine if they ordered something very nice from you and paid a couple of hundred dollars for it, only for it to arrive in a $2 box that looks cheap and dirty. It takes a lot away from the customer’s perception and satisfaction when receiving your products.
This is all part of your branding and customer experience. Some dropshipping companies do enable you to customize the packaging, include special notes, gift wrapping, and other options. If yours does, then definitely consider it so you can set yourself apart from the competition who may be selling the exact same products as you.
Is Dropshipping Profitable?
Dropshipping can be a very profitable business model due to the potential reduced overheads and automation involved. You will be running a business if you’re dropshipping, and businesses have risks and costs involved. Being online and running it from your laptop doesn’t change this.
In reality, though, there will be a lot of contributing factors to your overall profitability such as niche selection, product selection, competition, pricing, traffic, and suppliers.
All of these factors will influence your business and what you can get out of it, in addition to you and your actions, because you’re more accountable than anyone when it comes to owning and running a business.
A lot of dropshipping businesses will have a markup of at least 10% on their products, while others will go higher and some may even follow the 100% markup rule.
Markups should be justifiable. There’s nothing wrong with making a profit, you are a business after all.
But, finding some $3 product on AliExpress and selling it to your customers for $70 could be considered unethical at the very least.
Your products should be of quality and provide value to your customers in order to justify your price tag.
Having said this, there is a lot of money to be made with dropshipping. You don’t even have to look far to find some dropshipping success stories with people selling their profitable websites while still making money.
Is Dropshipping Worth It?
In short, dropshipping is worth it.
But, as we said before, there will be many factors which will influence your overall success.
It’s a proven business model that has been around for some time. It’s also practiced in part by two eCommerce giants you may have heard of: Amazon and eBay.
Both those eCommerce websites can sell products on their platforms without holding the stock, forwarding the buyer’s details to the supplier, having the supplier fulfill the order, and then making a profit in the process. Doesn’t sound much different to how you would be dropshipping, does it?
Your dropshipping business doesn’t have to be a one-person operation either. You could grow and expand to a point where you need to hire staff to manage customer service, marketing, sales, and communication with your suppliers.
Yes, you will need to pay these people, but you’re still saving overheads by not having a warehouse with a lot of inventory in it and spending more money on local courier companies.
There will be challenges along the way, just like a regular business would encounter. But the benefits of being able to work from home or even from a laptop with an internet connection could negate these challenges for you.
The level of automation that is possible can save you a lot of time as well, which can enable you to work on new dropshipping stores to expand your portfolio or even invest into other business models to create an additional income stream.
Ultimately, it will come down to what you make of it.
You’re the one who chooses a niche, products to sell, prices to charge, and methods for marketing your business. Don’t be afraid to put in the work and try to make something of it.