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What is Dropshipping? How does Dropshipping work?

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What is dropshipping?

After close to 20 years as an entrepreneur, a common question I get is “What is dropshipping?”

 

The answer is simple… Let’s cover the ins-and-outs of this business model!

What Is Dropshipping?

A lot of people are curious about starting online businesses. After everything we’ve encountered this year, I understand. But for most, they aren’t sure what to do or how to get started. Dropshipping is a simple way to start your own business. In fact, when I started my web design business in 2001, I also started messing around on ebay.

My oldest brother introduced me to the concept of e-commerce through ebay. It was my first time buying or selling anything online. When I found out that I could sell products without owning them, I was in love!

During that time, I was still teaching, so my salary was about $28K per year, so I was not earning much. I continued to research and experiment with products. In time, I was able to come across some electronics that were trending at the time. After about 6 months of testing various products, I was able to earn $19,640… in ONE WEEK!

Imagine being able to earn as much money in one week as you do all year! That’s when I knew entrepreneurship was for me!

So... Let's Define Dropshipping

Dropshipping is a retail method in which you sell products, but in most cases, you don’t keep any in stock. Instead, you find a supplier that stocks its own inventory. As you get sales through your online store, you send the order and shipment details to the supplier, and they ship the order to the customer.

 

Now… I know you wonder how you could actually make money because there are many ways to drop ship. And the truth is, some ways work and others don’t.

 

To start, let’s go over this diagram:

So as simple as possible, this is dropshipping in 4 steps.

 

 

  1. You list the supplier’s product on your store for customers to buy.
  2. The customer purchases something from your store.
  3. You order that same exact item that the customer paid for from your supplier.
  4. Your drop shipping supplier ships this item directly to your customer. So your customer receives the item that they’ve ordered from you.

 

 

It all starts with building your online store and listing products on your website. I recommend building this store on Shopify, but there are other options as well. Either way, you can customize it to fit your target customer and your taste.

"But What Products Am I Selling?"

Well, these are different suppliers’ and brands’ products. Generally speaking, you can sell whatever you want (provided people want to buy it!). That’s where you come in as a dropship retailer. You will be selling for these brands who don’t sell to the public. They look for people like us to sell their products. They save money on advertising, which increases their profits, and you get paid, too.

 

Customers come to the store, and after they buy, you contact your suppliers. The supplier ships the items to the customer. You own no inventory. All you’re doing is making an agreement with the drop ship supplier to sell their products on your website. You get their price lists and put their products for sale on your site. When someone buys, you place that order with the supplier.

 

You only order the product after the customer has paid you. The difference between your retail price and what you pay your supplier is the net profit. From my experience, when you drop ship the right way,  you’re looking at about 25 to 30 percent average net profit.

 

That means if you sell a $1,000 item, you make $250. That’s the average I’ve seen in my experience. Sometimes it’s higher, sometimes it’s lower, but that’s a good goal to shoot for. It’s a realistic expectation.

What Are Some Advantages & Disadvantages of Dropshipping?

It’s important to me to have transparency when it comes to your options. That way you have the complete picture and can decide if you want to build a dropshipping business.

 

Advantages of Starting A Dropshipping Business

1. You Can Do It From Anywhere

The first benefit and probably the one that’s most important to me with drop shipping is being location independent. With a drop shipping business, you really can live and work from wherever you want. 

 

Drop shipping allows a level of location independence that not many of these other business models do. That’s why my platform teaches dropshipping as way to multiply your money. You are not tied down to a particular location.

 

2. No Inventory Costs

Another benefit is that there are no inventory costs. So when you’re starting out with drop shipping, you aren’t laying out any of your money for inventory.

The truth is that when you’re a traditional retailer, inventory is your biggest expense. You need to physically have the products to sell but with drop shipping, you don’t.

 

 

All you need is approval form your suppliers to use their products. You only pay for items after you sell them and there are costs associated with stocking.

Now in the previous section, I wrote about how I started in eCommerce by importing. So when I first started, I actually had these inventory and warehouse costs. I was spending tons of money every month to store my products.

 

But if you use the drop shipping business model, you’re not paying for these expenses, someone else is. All of your suppliers have their own warehouses and they’re paying to store these items. So it’s another cost that isn’t on your shoulders, something you don’t have to worry about when starting out.

 

3. No Handling Returns

Another benefit to drop shipping is not having to deal with returns. To be clear, if your customer wants to return an item, you’ll still have to forward the return slip from your supplier to your customer. But these items are not coming to you. If you own a drop shipping business, you won’t have returned products showing up at your house.

 

They’re going to be shipped back to your supplier, and then based on the policy of that supplier, you’ll get a refund or they’ll ship the customer a replacement item.

 

My educational platform goes over how to find suppliers with low return rates. So ideally, you won’t even have to deal with emails about returns.

 

4. Gather Data While Getting Paid

This next benefit of drop shipping is gathering information while you’re getting paid. Let’s say that you want to build a brand in the chandelier niche, you want to sell your own lighting fixtures or chandeliers. Also, let’s assume that you want to be an importer and build your own product line. We’ll also say that you even have the money to invest in it right now.

 

Well, before you throw money at an import business, have products manufactured, and start trying to sell them… I’d still recommend that you start a drop shipping business in that niche first.

 

As you’re dropshipping, you’ll be learning what sells. You’ll be able to find out what your customer wants and building resources that you can use for your own product line. All while making money. Basically, you’re testing out the market while making a profit.

 

You’ll learn what types of products sell best, what price point you make the most with, and which features customers of your niche want most. After you’re successful in that niche, you can use all that data to launch your own brand with an importing business.

 

5. It’s Easily Scalable

Another huge benefit of a drop shipping business is how easy it is to scale. 
For instance, if you are making $100,000 a year in sales from just one drop shipping store, it’s very easy to build more stores and get similar results. The best part – you can do this over and over again.

 

I always recommend starting with one drop shipping store, so that you really learn the process, go through it and master it. But after you do it one time, it’s very easy to do it over and over again.

 

6. You’re Building A Sellable Asset

Another benefit of building a drop shipping business is that you’re building a real asset. Now when I first started this business, I didn’t realize it, but a lot of people don’t want to do the work of starting a store, but would be willing to invest in an already-profitable store. There are a lot of buyers out there that are looking to start a home business, and would be willing to buy one that is already working.

 

Because basically, these buyers could just plug themselves into your business and be making money the next day. All without having to take over your inventory or take over a warehouse.

The Disadvantages of Drop Shipping

Now let’s talk about some of the downsides of owning a drop shipping business when compared to owning your own brand.

 

1. Smaller Profit Margins

This is not negative, but it’s a reality. You’re selling someone else’s products, so anticipate profits being less than if you created your own products.
If you go to China and have your products manufactured yourself, you can negotiate better deals for the product price. That’s because you’re doing a lot more work and taking on a lot more of the responsibility. Your profit margins will be higher.

 

So with drop shipping, there are usually smaller profit margins than with having your own brands. Personally, I aim for at least 25-30% profit margins.

 

 

2. No Inventory Control

Another thing that’s not so great about drop shipping, and in my opinion it’s probably the biggest downside, is that you have no control over inventory.
Let’s say you have one supplier whose product sells well on your website, you’re making great money with them. Well, what happens if that supplier runs out of stock? What if your drop shipping supplier sells out of those items?

 

 

Your customers are still going to want to order from you, but you won’t be able to fulfill these orders. You’re going to lose potential money in that situation. All because you have no control over the inventory, or because maybe your suppliers aren’t so great about managing inventory and keeping every item in stock.

 

 

This is something that great suppliers know how to deal with. Regardless, it’s probably something you’ll run into at least a few times if you decide to build your own drop shipping business. You’ll run into suppliers who don’t have great inventory management and who do run out of stock and that will lead to lost sales.

 

 

Those are just a few of the benefits and downsides when it comes to dropshipping. But even with the drawbacks, it is still a good business to start from your own home.

 

 

It’s what I’ve recommended to family and friends who weren’t interested in trading & investing, and it’s one of the areas that I teach people how to do when it comes to learning how to multiply your money. It works.

 

Dr. Carlton Calhoun

Dr. Carlton Calhoun

In addition to being a trader & investor in the financial markets, I am the founder of HireCarltonCalhoun.com - one of the leading African American Web Design companies in the world. Apart from running my businesses, I enjoy reading, learning, developing skills and helping other people develop theirs. My greatest accomplishment is being a father to my children and a loving companion to Ana Benzan.

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