Why You Should Consider a Drop Shipping Business

To get ahead and kick some financial ass, one of the best ways is to create a side hustle. This can take a lot of different forms, but for any business idea you are thinking of creating will fall under either a product or service. Either can be a great way to create a side income and both have their benefits.

The four most common methods of acquiring products are:

1) Hand-crafting

2) Manufacturing

3) Wholesale

4) Drop shipping

For the purposes of this article, I will focus on the drop shipping method which is one of the more low cost and automated ways of operating a side hustle.

What is Drop Shipping?

Drop shipping is where the seller does not hold goods in inventory, rather they gather orders for their product and send them directly to the manufacturer who then ships the goods directly to the customer. This is beneficial because inventory management is outsourced, saving you time and money without needing to deal with holding inventory and shipping your product. It’s low risk, low cost, easy to start-up, and can easily be automated. It is also a great way to test your idea to the market without upfront capital costs and allow you to offer a broader product offering than you would if you had to stock inventory. You still need to pay for marketing and have an online platform (there is no free lunch).

Things to Consider

  • Outsourcing challenges. You don’t control the quality of the products, the timeliness of the delivery, if it’s in stock or the appearance of the packaging. To mitigate this risk it is essential to first test out the manufacturer before offering the product so you know what your customers are getting.
  • Thin margins. As drop shipping orders are typically small volume, the manufacturer can add an additional fee. For example, if a shoe manufacturer charges $30 to produce the shoe, they might charge an extra $10 for a drop shipping order. If you add in an average return rate and cost of advertising, the margins could be thin. This is why it is critical to find products with sufficient mark-up or a product you can customize to sell at a higher price.
  • Drop shipping offers low barriers to entry, so do your research to ensure the products you sell are hard to find online, and that there is a demand. I recommend developing a plan to deliver outstanding customer service. Make sure you also have a strong return policy to stand out from the crowd.

How Do I Get Started?

You can either:

  • Work directly with a manufacturer
  • Use a drop ship aggregator

The first method is more work as you need to contact potential manufacturers directly, but this allows you to have more control and customization over your product to stand out from the competition. The second method is easier, and using a service like Oberlo, allows you to easily add products to your online store. An aggregator works with a wide range of manufacturers and easily allows you to add products to your online store without needing to maintain relationships with each manufacturer.

Working Directly with a Manufacturer

Advantages

  • More customization. There are manufacturers for any kind of product, and can often customize to your desires.
  • More control. By working with a manufacturer directly, you have more control over the packaging, quality and your brand.

Disadvantages

  • Time investment. To find a supplier could take weeks to find what you are looking for. Once found, it takes some time going back and forth to finalize your product.
  • Due diligence. You need to vet the suppliers yourself instead of them being vetted by a marketplace like Oberlo.

What Should You Look For?

  • Wholesalers that don’t charge a monthly fee. If a supplier asks for a monthly fee, chances are it is not legitimate.
  • A wholesaler that asks you to sign up for an account. To get genuine wholesale prices, you need to open an account. Wholesalers that do not require this, are often a retailer offering their products at higher prices.
  • Wholesalers that do not charge a per-order fee. Often this cannot be avoided as it is standard in the industry, but if you can find a wholesaler for your product with similar features that does not charge an additional fee (often $2 to $5 per item) then go with them. The fee is because the costs of packing and shipping are higher with individual orders vs. bulk orders.
  • Wholesalers that do not require minimum order sizes. If there is a minimum order size requirement, it can often defeat the purpose of drop shipping depending on what your product is.

Using a Drop Ship Aggregator

Advantages

  • Easy to get started. Using a drop ship aggregator like Oberlo is very simple and easy to set up. Another benefit is the suppliers have all been vetted so you know they meet a certain standard.
  • Quick to start and test ideas. This allows to keep flexible and adjust to customer demand nearly instantly, adding and removing products at your discretion.

Disadvantages

  • Shipping times. If the supplier is located overseas this can lead to longer shipping times. Set the expectation with your customers when they should receive your product.
  • Less customization. The supplier is dealing with hundreds of customers a day so likely won’t let you customize unless you have a high volume. This can be a problem if the product you are planning on selling has a lot of competition.
  • Fewer options. By going through a drop ship aggregator, your choices of products are limited to the agreements the company has with suppliers.

How Do You Find a Supplier?

There are a variety of ways to look for a supplier but first, you should determine what kind of product you want to sell. Your product should have a high search volume, but low competition, commonly known as a niche product. Once you have an idea, here are some of the tried and true methods of finding a supplier.

  • Good old fashioned Google can work wonders when looking for a supplier. Depending on where you live, you may even find a supplier that is located close to you, which would allow you to scope out their operations and see how credible they are.
  • Directories are databases of suppliers that are organized by market, or product. They can be useful to browse for ideas and often charge either a monthly fee or a yearly fee for their services. Some of the largest are Worldwide Brands, Doba, and Wholesale Central.
  • One of the oldest tricks in the book is to place an order from your competitor you think is drop shipping, and look at the return address label. You can then google them and make contact with the supplier. Note: if you do this, make sure your product can be customized to stand out; having the same exact same product from the same supplier can be a recipe for failure.
  • Tradeshows are great ways to get product ideas and make connections with suppliers. The largest tradeshow in the world is the Canton Fair held annually in Guangzhou. Nearly 20,000 vendors and 200,000 buyers attend the fair every year. If that’s too far, you can check out other trade shows that might be in your area.

Contacting a Supplier

Suppliers can be as selective when choosing a business partner as they get a lot of emails from people that end up buying nothing. Some may want to know your business is legitimate before they decide to do business with you. That often means having your business incorporated. This is fine if your business is already up and running, but if you have a startup you will want to test your idea out first before incorporating and going through all that work.

If you find a supplier that you want to work with, you can prove yourself by having a functional website and selling your story. Focus on what makes you different, and why you want to choose them over other manufacturers. Use the phone if you can, it shows you are more serious and creates a friendlier interaction.

Sample Email

You want to keep your email short and brief with key details. As mentioned above, suppliers get bombarded by emails every day. The last thing you want to send is a long email with a million questions. It will likely get ignored.

Try an email along the lines of:

“Dear _____,”

My name is _____ and I am the owner of ______.

After a lot of market research, we feel our customers will love your product. In particular, we love your _____ and would like to use you as our supplier.

At your convenience, we would appreciate a price list if you have one. I have more questions but if you are interested, I can be reached at “insert cell number” or via email here _____.

Thank you for your time and consideration. Looking forward to working together.

-Chris”

Questions You Should Ask

Once you have a list of potential suppliers, there will likely be things you have questions on. Here are a few you should ask before making a decision:

  • Do you offer drop shipping?
  • Do you offer product customization?
  • Do you offer packaging customization?
  • Can you place my brand on the package slip?
  • Do you offer private labels?
  • Are there any fees? What is the average shipping cost to customers?
  • What method is best to send orders to you? Would email work?
  • How will you invoice me?
  • What is your return policy? Can this be modified? (good if you want to offer a better return policy than your competitors)
  • Can I use your product photos to advertise on my website?
  • How long is it between when an order is placed and when it ships?
  • Do you outsource your production or manufacture it yourself?

Test Your Product

Before you launch your online business, first test out your manufacturer by ordering the product yourself. See how long it takes and check the product for defects. Ask yourself, would you by this yourself if you were in the market for it and would you be satisfied with the quality? If not, look for another manufacturer and repeat the process. Using your target market, see how much you can sell your product for.

Marketing Your Business

If you are relying on random searches on Google to sell your product you are doing something wrong. In this day and age, you have to be actively marketing your business to get in front of customers. This means advertising online, this means having product reviews, this means having a blog on the topic you are selling. Even then, it may take 4 to 6 months before you see any traffic to your site.

Drop Shipping Failures

Almost 90 percent of drop shippers fail in their first month of operation. This seems high compared to an already high fail rate for most businesses; Forbes puts the failure rate for businesses at 80% after a year. Why is this? With a low barrier to entry, most drop shippers are inexperienced business owners and think once it’s set up the business will run itself. This is the approach, and proper market research and testing of the idea should be conducted before fully committing.

Here are some of the biggest reasons for failures:

1) Selecting the wrong product

You need to test, test, and test your product. Keep in mind that with drop shipping the world is your oyster. If one product is not appealing in one country, it might be appealing in another. The only way to find out is to test the product before fully committing. This means buying the product for yourself, checking the quality, doing market surveys to determine demand, and creating a landing page to see if people will sign up to buy it.

2) Lack of patience

It takes time to build a brand name and create a positive customer experience so don’t expect stellar sales immediately.

3) Lack of resources

Like with any business you should have money set aside for marketing, website design, and product testing. Not to mention if you sell a product that has a high return rate, you better be prepared for some returns. It could take months of buying online ads before you see any returns.

4) Selling on the wrong platform

Use multiple platforms to target your audience. Facebook, Google Adwords are the two giants in the online advertising space and should be utilized.

5) Lack of product differentiation

Competition is high with drop shipping. If a customer can find your product for cheaper somewhere else, they will. The best way to combat this is to find a manufacturer that works with you to customize the product to your preference or find a market that your product is not available in. This allows you to sell to a profitable audience and keep profit margins higher.

6) Bad customer support

Your work is not done after you ship the product. If the customer has questions or needs to speak to someone, your business needs to offer customer service support. You can do this yourself, or outsource it. Whichever method you use, make sure the replies are quick and consider offering phone call support for a more personalized experience.

7) Long shipping times

Drop shipping is usually from China which can lead to 20 day shipping times. With society wanting instant gratification this is too long.

8) Bad website design

Your website needs to look professional and appealing. Fortunately, there are website builders out there that make it easy, whether you use WordPress with the WooCommerce plugin, Shopify, or Squarespace.

Legal Disclaimer: The views expressed by Mr. Dumont on Money Sensei are solely his and not intended as investment advice nor a guarantee of any financial return. Mr. Dumont is not an investment or tax professional, so the information contained on the blog is not a substitute for professional advice. The contents of this blog are accurate to the best of his knowledge at the time of posting, but rules and laws are ever-changing. Please do your research to confirm that you have the current information.

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