The Dropshipping Business Model Explained
Dropshipping is an exciting business model, with very few startup costs.
A dropshipping business is when an owner finds a list of suppliers to supply products for their website to market and sell. However, instead of the business owner holding the inventory, as with an e-commerce or Amazon FBA business, a third party handles all of the shipping and logistics for them. This third party is typically a wholesaler, who “dropships” the product to the customer on the business’ behalf.
At its most basic, every time someone buys a product, the wholesaler — who typically manufactures the product — ships that product, and you get a portion of that sale for marketing the product.
If you’d prefer a more general walkthrough of the e-commerce business model as a whole, you can check out our video we did on the subject here:
Some Examples of Dropshipping Sites
My White Walls
This dropshipping company has vendors in the art world, who ship printed pieces of art to the consumer. Most of their marketing looks like it depends on SEO (Search Engine Optimization). Every time someone buys something on the site, the owner of My White Walls gets paid, and so does the vendor who stores and ships the product.
While most people will probably not get to Amazon’s level, it’s an important example of what is possible. Amazon is a hybrid. It manages dropshipping transactions, but it also warehouses and ships its own product line. If you ever buy anything off Amazon, and get the message that they are using a third party vendor, Amazon is dropshipping. We’ll get into this later in this article, and talk about how you can do this same thing with your business as part of a growth strategy.
The Pros of the Dropshipping Model
One of the huge benefits of dropshipping, over e-commerce or Amazon FBA, is that you do not need any inventory. Nor do you have to pay for the storage costs that come with keeping an inventory.
Effectively, you are an affiliate of the vendor in this regard. Because of this, you can get set up and going very quickly, often within less than a week.
You can also explore new product lines very easily. Unlike with an Amazon FBA or e-commerce business, where you need to wait until you can test the product and then get some in your inventory, with dropshipping you just find a vendor and place the item on your website. This makes it easy to test new offerings with your audience.
Obviously, since you are not keeping any inventory, no time is being spent on packaging or distributing goods. This leaves a lot of extra time for promotions and marketing experiments, to bring more customers to your website.
These types of marketing experiments have an inherent benefit to your SEO. Just by creating new product packages, you are effectively creating more content for your website, that will ultimately help you rank on Google for relevant keywords.
The dropshipping model is very similar to an affiliate marketing or Amazon affiliate marketing business model, except you have to find the right vendors and suppliers independently. There’s no huge upfront monetary investment required.
Despite these positives, there are still a lot of negatives associated with the business model.
The Cons of the Dropshipping Model
The biggest con with dropshipping models is that the profit margin can often be razor thin.
Since you are not sourcing the product yourself, or deciding on how it is being shipped or stored, you have very little wiggle room. Deciding when to mark up the product, or even doing things like bundle deals (where you might give discounts on multiple purchases of the product, to incentivize other purchases) are often at the discretion of the vendor. This is one of the biggest disadvantages, and can be a real limitation.
Even worse, if you grow your business explosively fast, your vendor might not be able to keep up, as they may be getting the product from several different manufacturers who face a variety of supply challenges themselves. This can cause a nightmare in terms of customer service, and could even damage your reputation if your orders go unfulfilled or get messed up due to a high sales volume.
Further, because of the limited profit margins, it can be more difficult to advertise. If you are using paid advertising, your tracking needs to be on point, lest your advertising costs eat up the entirety of your profit. Or worse, put you in the red.
Finally, by the very nature of dropshipping, it is going to be hard to differentiate yourself from your competitors. It is likely, unless you’re in a weird niche, that you’re going to be competing against dozens, possibly even hundreds, of other people selling the exact same products as you. This means you will need to be creative if you want to stand out from the crowd, and keep bringing customers to your website.
What Dropshipping Business Buyers Need to Know
If you are looking to buy a dropshipping business, there are a few things you should know before buying the business.
The first thing is to find out what system the seller uses to find new products. What we find with many dropshipping businesses is that the seller might not know much about the niche, but because of their product selection process, they are still able to succeed.
Often vendors (the people that are actually supplying you with the product for your website) will have a bestseller or trending items lists. If the seller is using a list like this, you can benefit from that system when you become the owner of that dropshipper site.
The next thing to consider is whether or not the seller’s business has an exclusivity deal with the dropshipper. In most cases, it will not be exclusive and there are competitors selling the exact same product. If you are able to seriously outcompete in sales, you might be able to broker an exclusivity deal with that vendor/supplier down the road.
Speaking of down the road, see if there is a product that you could eventually source yourself, which will help you decrease the profit lost to wholesalers and warehousers. Sourcing it yourself could also cure you of many logistic issues, as you’ll always know how much inventory you have so you can top up as needed.
Finally, what makes the dropshipping store unique? What makes them stand out from the competition? Are they doing a form of marketing that is outpacing the competitors? Do they have richer content that is building brand awareness?
You will want to know these aspects, so you can hopefully expand upon them and grow your investment.
What Dropshipping Business Sellers Need to Know
Sellers can do a few things to better the chances of selling their dropshipping business fast.
The first thing you want is a solid proof of earnings and a track record using the same supplier over and over again. If you can, have a rolodex of backup suppliers you can use. Logistics can sometimes be a nightmare, so if you have multiple contacts who can fulfill orders in a crisis, or a big sales streak, it will be a solid piece of info to hand off to the new buyer.
In addition, talk about the logistics issues you have had in the past. You should know how much your vendor can handle in terms of sales before becoming overwhelmed. That way the new buyer will know the sales goal they should be hitting every month.
If a buyer knows they can do more than that capped limit, it might be worthwhile to help the buyer negotiate an exclusivity deal with that vendor, or even larger profit margins on the product, if possible.
In addition to the above, offer good training and support. If you are doing paid advertising, you should be making sure all of your systems and processes for paid ads are outlined so it will be a plug and play situation when the buyer takes over. You want to systemize everything you possibly can to make this whole ordeal very simple for any potential buyer looking at your dropshipping business.
What Buyer Persona Best Fits the Dropshipping Business Model?
These websites are usually pretty easy to manage, since there is really only the marketing side that needs to be actively monitored. Since many of these websites use paid traffic to promote their products, this could be a good way for a portfolio manager to get away from SEO, in addition to diversifying away from only having Adsense & Amazon websites.
Dropshipping businesses could be the next building block in this buyer persona’s empire. If they have several content websites related to the product’s niche, then adding a dropshipping element to her content sites (along with the marketing already going to this dropshipping business), is a good move to help a Strategic Sally completely dominate her niche.
One of the great things about dropshipping businesses is that there are several routes you can take to go about improving them. For someone looking to flip a site for a bigger return, one of the easiest ways is to simply source the product yourself.
If you are looking at a dropshipping business to flip, make sure you can source the product. Once you do, you can turn the business into a full blown e-commerce store AND an Amazon FBA business at the same time. By doing this and nothing else, you could drastically increase the monthly net profit and increase your potential site resale profit in just a few short months.
Growth Strategies for Dropshipping Businesses
There are several different ways you can grow a dropshipping business.
The first is through search engine optimization and growing traffic via organic search. Since most dropshippers rely on paid traffic, these are probably avenues worth exploring and expanding. Organic traffic is often the most valuable form of traffic, and, once you have the rankings, it is almost purely net profit for every sale you make via organic channels.
In addition to SEO, you should be building a solid brand around your store. If you haven’t done so yet, add an email list and make your marketing material and product deals count, so the email list keeps people coming back over and over again.
One way to build value and convert email subscribers into customers is by offering a “Consumer’s Buying Guide” based around your product niche. This guide should link back to your site.
In addition to an email list and SEO, try and build a good following on social media outlets such as Snapchat, Instagram, Pinterest, Facebook, and Twitter. These can build huge swathes of incoming traffic, and, like SEO, often at zero cost once they get going.
We have already mentioned that you should look into sourcing the product yourself to increase the profit margins. While this is not always possible, it could dramatically increase monthly earnings fairly quickly.
In addition to sourcing proven products (products you know are selling well with your audience), you could place these sourced products on Amazon and roll your business into an Amazon FBA business as well.
You will have multiple channels to sell through, and be able to reap the benefits of Amazon organic traffic, which will route back to your listing. One nice thing about building an Amazon FBA business this way is that you never really worry about Amazon shutting down their program, because you have already proven another channel via your store, before you started the Amazon FBA.
Resources to Learn More
Probably the number one resource out there on the dropshipping business is DropShipLifestyle.
Anton has been a long-time friend of us at Empire Flippers, and it is a testament to his course that we have had so many of his students go on to sell the dropship businesses they made on our marketplace for tens of thousands of dollars.
Either way, we got you covered.
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