Is dropshipping a solution for small business?

Dropshipping is an order fulfillment method or an ecommerce business model that does not require a business to keep products in stock. Instead, the store sells the product, and passes on the sales order to a third-party supplier, who then ships the order to the customer.

it seems like easy money — you sell other people’s goods and take a cut for yourself — but when you factor in all the drawbacks, obstacles, and day-to-day management, it’s far from easy.

In addition, there is practically zero upfront cost to start a dropshipped online store because you don’t have to invest any money on inventory.

In fact, you can literally start dropshipping for under $5 with a free open source shopping cart.

All you need is a website, free credit card processing and you can start taking orders immediately.

Does this business model sound attractive to you? Here’s what you need to get started.

 

First off, you have to partner up with a dropship wholesaler or distributor that ships products directly to consumers.

As part of your partnership, you and the dropship supplier will decide on a wholesale price for the products you want to sell.

Once an agreement is in place with your supplier, here’s how dropshipping works.

  • The customer places an order for a product on your online store and you collect the money.
  • You forward the order and shipping details directly to your dropship supplier and pay the agreed upon wholesale price for the product.
  • Your dropship supplier packages and ships the order directly to the end customer as if it was shipped from your online store.
  • You get to keep the difference between your selling price and the wholesale price.

You can predict your income using these variables (they’re averages, so they’ll change depending on your industry and situation):

    20% margin.

    2% conversion rate.

You can then calculate a working estimate using this equation:

    (Traffic x 0.02) x (Avg order value x 0.2) = Profit

 

While this is fine for a quick starting estimate, there are a few problems you also have to consider:

  • Chances are, your discount on buying from manufacturers and wholesalers will be less than 20%.
  • This doesn’t account for any of the additional expenses mentioned above that you have to pay from your end. It’s not the final profit.
  • For most products, you’ll have to cut into your profits to keep your sales prices competitive. If you stubbornly hold on to your 20% margin, other companies will easily undercut you.

On top of that, you’ll notice that your profit is also largely determined by your traffic, so if you’re building an ecommerce brand from scratch, you’ll be struggling for a long time as you build a client base.

It’s much more reasonable to approach dropshipping when you already have a regular source of traffic.

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