Drop shipping as a business opportunity
Drop shipping is a form of e-commerce selling where the seller doesn’t actually have to hold any stock. You simply make money by offering goods for sale through an online store or a marketplace like eBay/Amazon. Dropshippers are exactly like normal sellers but they don’t hold any stock themselves. They pay for the stock only when there has been a sale; the goods are then individually posted straight to the buyer from a 3rd party wholesale company.
Drop ship items are posted out in plain packaging; so the customer doesn’t know you’ve sent it direct to them via a wholesale business. Only some wholesalers specialize in drop shipping; so you have to do your research and find genuine and reliable opportunities to source your goods. This is one of the biggest challenges for drop shippers in the UK today.
It is a great way to start an online business with little to no start up capital. You can offer a huge range of goods for sale without investing a lot of resources. Typically the profit margins for dropship products are low; but this is to be expected as your suppliers are the ones investing heavily in stock. It is a business where you make your money through selling in volume. As with any type of online business there are pros and cons; it is your job to weigh these up to decide if drop shipping is the business for you.
What it takes to be successful and profitable
1. Advertising and describing products appropriately
Writing up enticing and rich product descriptions is the most important skill required for having a profitable UK drop ship business. You should emphasise the benefits the product brings to the customer as well as listing the features. To maximise sales and profits, you need to spell out the value the product will bring to the customer. The product’s benefits may seem obvious to you, but make sure they’re also obvious to your customers. This is the key to creating a desirable offering and achieving the highest sales conversions possible.
2. Organisational business skills
It’s very important that you have excellent organisational skills if you’re to make money drop shipping. This involves mastering a balance of stock, finance and risk management simultaneously.
2.1 Stock/ Customer Management – In most cases customers don’t know they’re ordering products from a drop shipper. They are under the impression that the seller they buy it from will be directly sending the goods to them. Therefore your job as a dropship reseller is to minimise the lag between the customer ordering from you and the goods arriving to them. Some individuals who make their living off of dropshipping have an efficient automated process that handles the ordering management for them. When a customer places an order with them, a software script automatically sends the order and a separate payment to the wholesaler. In these cases the income people make from drop shipping is about as near to passive as you can get. The only work is involved in creating product descriptions and dealing with customer complaints and returns (if and when they happen). However unless you can create such a software script or hire someone to do so, regularly checking your sites/accounts for orders is the best substitute.
You should also be regularly checking the stock levels that your wholesale suppliers are holding. The reason for this is that you don’t want to be making transactions for orders you cannot actually fulfil. Most reputable drop shipping companies will display their exact levels of stock to their reseller members. This way the resellers can judge how many to safely set as ‘in stock’ (remembering that other sellers will also be offering these products for sale elsewhere). Getting this wrong is one of the biggest pitfalls dropshippers fall into; as it can take weeks or longer for wholesalers to have new stock available.
Depending on the supplier, stock levels will rise and fall differently; it will take some time monitoring the trends before being confident in what a safe stock level to represent is. In some cases dropshippers accidentally take orders when their wholesalers are under-stocked. In these cases they either have to buy the product at full retail price and send it on, or issue a full refund to the buyer(s). When you’re running a business on an online marketplace like eBay it’s almost always better to take a hit on individual items and save receiving negative feedback. If you’re account falls below the minimum required feedback standards, the exposure your listings receive will drop. When this happens sales can be reduced by up to 90% of what you would receive as a top rated seller.
2.2 Financial Management – Even though most drop shipping opportunities do not require you to invest in wholesale lots of stock it is not an entirely free business model. You need to have a buffer level of capital to deal with refunds, returns and e-commerce fees. Refund rates will vary depending on the type products you decide to sell and how accurately you describe items. Seen as how the end purchaser sees you as the one and only seller you are responsible for refunding the buyer and not the wholesaler.
Ideally you should have enough capital to cover refunds on the total value of the item’s you are currently selling. However in most cases this is not practical; so having a % of your turnover set aside for refunds is the next best thing.
You may be asking why you need to have money to cover your transaction. When the buyer pays you, you then have the money to cover the wholesaler’s cost and more right? Correct. But this business model has a weakness in that it runs on inelastic cash flow. Basically, it’s all fine as long as the cycle can keep on going, but if there’s a problem it can put you in an insolvent position. Being insolvent means that you can’t pay the people you owe money to AND you do not have the resources needed to keep trading in the mean time. This is best explained with an example:
In the normal flow of things the business cycle funds itself and there are no cash flow issues.
As long as these 4 elements keep working both together sequentially the business should keep operating healthily.
There are several disastrous situations in which you could be left liable for a large volume of refunds in the short term.
Faulty batch of products sent out by the wholesaler. Sometimes products from manufacturers are faulty (and occasionally this happens in batches). If this happens to a batch that your wholesaler has in stock then your buyers will naturally want refunds or exchanges. Seen as how they see you as the sole product provider, it is you they will turn to resolve product issues. To save getting negative feedback and revealing that you’re a drop shipper you will have to arrange the refund yourself and then reclaim the money back off of your supplier (the wholesaler). This highlights the importance of having a wholesale supplier that is responsive and takes customer issues seriously. There
Wholesaler goes out of business after you’ve paid for goods. As with any business wholesalers are not immune to the hardships and challenges of staying afloat. Essentially when you place orders with drop ship wholesale companies you are putting your trust in them that they will get the products to your buyer safely. You need to be aware that there is a risk (even if it is slight) that drop ship businesses could go bust between you paying them and the goods getting delivered to your customers. This would mean you have forwarded on a large percentage of your customers money to another company but they are still to receive their goods. In these circumstances you would be liable to source their goods elsewhere or provide a refund.
Natural variance brings occasional spikes of high/low refund rates. In any business variance takes its toll. You will go through periods of high and low volumes of sales; similarly you will go through periods of high and low volumes of returns. You need to have adequate capital set aside to cover these natural peaks and drops. Make sure you are not reinvesting your profits too aggressively or alternatively have a rule that you have to wait 2-4 weeks before you can reuse your turnover.
2.3 Risk Management –Risk management closely ties in with some of the above points about cash flow planning and dealing with refunds. You need to be aware of how exposed you are to risk and what your liabilities are when running a dropshipping business.
Having only 1 supplier is risky, as it means that your whole business relies on their existence and dependability. For each product you sell try and have multiple businesses that you can reliably source it from. It may be a good idea to switch between drop ship suppliers alternatively to make sure you have a wide range of dealers you can use in case one of them goes under. Having a diverse sourcing footprint is one of the best ways to reduce the risk your business is exposed to.
How much can you earn via drop shipping?
The rate of pay depends on the size of your profit margin and volume of sales. Drop shipping usually requires a larger volume of sales to make a full time income when compared with traditional online retailing. Obviously increasing the amount of goods you offer for sale will help your chances of increasing your overall sales volume. However keep in mind that the more products you represent the higher a financial risk you are taking in having to cover refunds in the short term.
Depending on the supplier you use and the products you decide to sell the gross margin can be anything from 1-50%. On higher value items the margin is usually lower; whereas with low cost items it is more common to see larger profit margins. Shopping around, finding the best price and negotiating between suppliers will help increase your overall profits.
Drop shipping is a career path where you can grow a sizable business quickly without having to invest much in overheads. Without the need for physical stock, storage and a distribution network it is very simple to scale and turn into a wealth generating business.
It also allows individuals to take a phased approach to setting up a full online retail business. Drop shipping can allow people to invest in wholesale lots of stock gradually. Many businesses run on a hybrid model combining buying lots in bulk and drop shipping from wholesalers.
Drop shipping opportunities in the UK
There are many wholesale companies that run a drop shipping service; although not all of them advertise it. You can enquire directly with wholesalers to see if this is something they are willing to do. You also get dedicated drop shipping companies that only deal in this type of product distribution. However it is often seen that these dedicated drop shippers move into wholesaling either partially or wholly after becoming established.
Establishing strong relationships with your trading partners can get you discounted prices for loyalty, and gain you priority support if there are ever any issues. Therefore look at drop shipping as a long term business and build genuine relationships to strengthen and secure your income.
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