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Can you make money with a home-based Drop shipping business?
Mike about Money | Drop shipping business
I have been getting this question more and more as companies like Shopify expand their audience. There is a new group of “get rich quick” gurus popping up around the drop shipping business model, so it makes sense that more of our readers are exploring their options. You are smart to be doing your homework before jumping in. You must be sure you understand the business and what will be required to be successful to give yourself the best chance.
I think it’s important, before we answer the question, “Can I make money with a drop shipping business,” to understand exactly what is meant by the term and how such a business operates.
Understanding Drop shipping
Drop shipping is a retail fulfillment method where a store doesn't keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.
The biggest difference between drop shipping and the standard retail model is that the selling merchant doesn't stock or own inventory. Instead, the merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders. This is how Amazon has become so successful.
The drop shipping model has a number of benefits and drawbacks:
Less Capital Is Required – Probably the biggest advantage to drop shipping is that it's possible to launch an ecommerce store without having to invest thousands of dollars in inventory up front. Traditionally, retailers have had to tie up huge amounts of capital purchasing inventory.
With the drop shipping model, you don't have to purchase a product unless you already made the sale and have been paid by the customer. Without major up-front inventory investments, it's possible to start a successful drop shipping business with very little money.
Easy to Get Started – Running an ecommerce business is much easier when you don't have to deal with physical products. With drop shipping, you don't have to worry about:
Managing or paying for a warehouse
Packing and shipping your orders
Tracking inventory for accounting reasons
Handling returns and inbound shipments
Continually ordering products and managing stock level
Low Overhead – Because you don't have to deal with purchasing inventory or managing a warehouse, your overhead expenses are quite low. In fact, many successful drop shipping businesses are run from a home office with a laptop for less than $100 per month. As you grow, these expenses will likely increase but will still be low compared to those of traditional brick-and-mortar businesses.
Flexible Location – A drop shipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.
Wide Selection of Products – Because you don't have to pre-purchase the items you sell, you can offer an array of products to your potential customers. If suppliers stock an item, you can list if for sale on your website at no additional cost.
Easy to Scale – With a traditional business, if you receive three times as much business you'll usually need to do three times as much work. By leveraging drop shipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work. Sales growth will always bring additional work – especially related to customer service – but business that utilize drop shipping scale particularly well relative to traditional ecommerce businesses.
All these benefits make drop shipping a very attractive model to both beginning and established merchants. Unfortunately, drop shipping isn't as easy as setting up the system and going to the bank. All this convenience and flexibility comes at a price.
Lower Margins – Low margins are the biggest disadvantage to operating in a highly competitive drop shipping niche. Because it's so easy to get started – and the overhead costs are so minimal – many merchants will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. They've invested so little in getting the business started so they can afford to operate on minuscule margins.
True, these merchants often have low-quality websites and poor (if any) customer service. But that won't stop customers from comparing their prices to yours. This increase in cutthroat competition will quickly destroy the profit margin in a niche. Fortunately, you can do a lot to mitigate this problem by selecting a niche that's well suited for drop shipping.
Inventory Issues – If you stock all your own items, it's relatively simple to keep track of which items are in and out of stock. But when you're sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory changes on a daily basis. While there are ways you can better sync your store's inventory with your suppliers', these solutions don't always work seamlessly, and suppliers don't always support the technology required.
Shipping Complexities – If you work with multiple suppliers – as most drop shippers do – the products on your website will be sourced through a number of different drop shippers. This complicates your shipping costs.
Let's say a customer places an order for three items, all of which are available only from separate suppliers. You'll incur three separate shipping charges for sending each item to the customer, but it's probably not wise to pass this charge along to the customer, as they'll think you're grossly overcharging for shipping! And even if you did want to pass these charges along, automating these calculations can be difficult.
Supplier Errors – Have you ever been blamed for something that wasn't your fault, but you had to accept responsibility for the mistake anyway?
Even the best drop shipping suppliers make mistakes fulfilling orders – mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business's reputation.
Is It Worth It?
As we initially warned, drop shipping isn't a perfect, stress-free way to build a successful business. The model has some definite advantages but comes with a number of built-in complexities and problems you'll need to be able to address.
The good news is that with some careful planning and consideration, most of these problems can be resolved and need not prevent you from building a thriving, profitable drop shipping business.
The bottom line is that the only one who will make money from drop shipping is the one who is selling you the Drop shipping Training program unless you approach this like any other business opportunity. You must have a solid business plan, an understanding of what it will take to be successful and a realistic outlook on how much revenue you can generate each week with a business of your own.
Setting up a web site and a drop shipper account with one of the many companies that provide this service will not be enough to make you successful. You must become a student of, not only product sales, but of online traffic generation. We’ll cover those topics in future posts.
With the right attitude, preparation and actions, yes, you can make money with a drop shipping business. How much you money make is up to you.
Who are the best Drop Ship companies to work with?