At first glance, dropshipping looks like a foolproof business model. Dropshippers don’t keep inventory and they don’t pay for the products they sell until a customer has already bought them. All you have to do is set up your listing, mark up your prices and collect your profits, right?
Not quite! Dropshipping is a great way to start making money online, but it’s not always easy when it comes to balancing costs and profits. In this article, you’ll find answers to some commonly asked questions about the true costs of dropshipping and how to make your dropshipping business profitable.
How Much Capital Do I Need to Start a Dropshipping Business?
The biggest perk of dropshipping is that you don’t need to front the costs for the products you’re selling. There will be some startup costs, but you won’t need to invest thousands to start your online business. Here are some of the startup and maintenance costs of dropshipping:
- Your online store. If you use a selling platform such as eBay or Amazon, you’ll need to factor in listing and sales fees. Running your own store lets you avoid these fees, but in exchange you’ll need to pay for hosting and any extras such as website themes or add-ons.
- Supplier fees. Some suppliers might charge a fee to use their dropshipping services. Choosing the right dropshipping supplier can save you time and money in the long run.
- Marketing costs. These costs can vary depending on the scale and methods you choose for marketing your online business. Social media, blogging, and email marketing are a few ways to market your products.
- Other business expenses, such as obtaining a tax ID, business credit cards and local business licenses. Be sure to check with your local laws to make sure you have everything you need to start your dropshipping business.
Is It a Profitable Business Model?
Dropshipping is as profitable as you make it. This isn’t a get-rich-quick business model; drop shipping takes time and effort if you want to have a successful online business.
What Are the Benefits of Dropshipping?
If you’re looking for an easy way to start an online business, dropshipping has a few benefits.
The lower startup costs are the most obvious perk. Without the need to keep inventory, your costs are limited to hosting/listing and other setup fees.
You’ll be able to start and run your dropshipping business anywhere you can carry a laptop, since you won’t need to store your products.
Dropshipping also offers the freedom to explore a wider range of products than wholesale buying. Is one of your product lines or niches not working out? No problem. You don’t have inventory to sell off, you can just find what you want to sell next and make new listings.
Since your “inventory” is unlimited, so you can try out new products whenever you like. If your business doesn’t take off like you hoped, you can walk away with very few losses.
What Are the Disadvantages of Dropshipping?
Dropshipping has a few disadvantages, and unfortunately most of these factors will be out of your control.
One of the largest disadvantages of dropshipping is that you won’t get the same discounts that you would from wholesale buying. Suppliers usually aren’t willing to provide you with the wholesale price for items unless you’re buying in bulk, so you can expect dropshipping surcharges in the pricing they give you, up to a few dollars more per item than you would pay wholesale. In turn, you’ll have to raise your own prices if you want to profit from your sales.
Another disadvantage is that you will have very little control over customer service. If your supplier is late with shipping, ships out poor-quality items or suddenly disappears, your online business will take the heat. Remember, your customers are expecting their orders from you, not your supplier, and just a few negative reviews can be a death sentence for online stores.
What Kind of Profit Margins Can I Expect with Dropshipping?
If you think dropshipping offers high profit margins, think again. In truth, the margins for dropshipping are generally low, for a few reasons.
Firstly, you won’t see the discounts on products that you’d enjoy if you purchased your items wholesale from your supplier. Dropshipped items often come with markups.
Secondly, the easy business model that dropshipping provides means there’s plenty of competition out there. You’ll have to keep your prices low to get sales.
There’s no “right” way to price your dropship products. Consider factors such as the MSRP (Manufacturer’s Suggested Retail Price), additional costs such as listing fees, hosting and marketing, and the niche your item falls under. Certain product categories, such as electronics, might sell in higher volumes but with a low profit margin, while other products might have a lower sales volume but enjoy a higher profit per sale.
Thankfully, there are ways to…