What is Drop Shipping and How Does it Work? – Beginner’s Guide

What is drop shipping and how does it work

There are many great ways of making money online and entering a new chapter in life, the life on your own terms. Just pick one!

However, in this post, my goal is to focus more on drop shipping. I believe some of you’ve heard that term.

I also remember tons of ads about making money online; there are folks advertising affiliate marketing solutions, and there are people introducing you to drop shipping.

For a vast majority of people, drop shipping is a dark forest: “What is drop shipping and how does it work?” I was one of these guys too. Back in those days, I had no clue what drop shipping is all about.
In this article, you’ll learn what is drop shipping all about. It will help you draw your own conclusion and decide if drop shipping is something that’s for you.

What is Drop Shipping All About

In general, drop shipping is similar to e-commerce. In fact, drop shipping is a variation of an e-commerce business model.

By definition, drop shipping model focuses on selling products, created or manufactured by someone else, on your online store. So, you own an online store, but you sell someone else’s products.

The only difference between drop shipping and the actual e-commerce business is that in the former, you don’t have to create or own a product, you don’t have to rent a warehouse, or any other premises, you don’t have to deal with packaging.

I believe many of you recall mobile stores, that sell, for instance, iPhone, or Samsung Galaxy S, while not being an owner or a manufacturer of the products.

How Does It Work – The Mechanism of Drop Shipping


Now that we’ve gone through the definition of drop shipping, let’s dig deeper and see the mechanism, how drop shipping works.

In the drop shipping model, we have three figures:

  • Online store owner – has an online store, where certain products of a manufacturer X are sold
  • Customer – the one who looks for a solution to his/her problem in the form of a product
  • Manufacturer/Product owner – the entity that owns or produces the product sold by an online store owner

Pretend you own an online store. First, to sell something, you import some products to your online store. You can find certain products on Amazon, EBay, AliExpress, or other stores. Importing a product simply means adding a product to your store.

To import a product, it will cost some amount of money (per product), the wholesale, but you don’t pay it before importing; it will be subtracted from the price of this product in your store. By the way, assigning a price to a product is the next thing you do after importing it.

You have customers, who may be interested in the products that you offer. If they buy something from your store, their order information is sent to the manufacturer. Manufacturer then takes care of the order; they process it and then deliver it to customers. You get your profit after each transaction.

The profit you make is the difference between the price you charge for a certain product and the price that you’re charged for importing a product. Let’s put it in a simple formula:

Profit = (number of transactions)*(product price – wholesale)

Example:

Imagine you are an online store owner. Your store ABC sells sports products. You decide to import boxing gloves to your store; the wholesale is, for instance, $45. You decide to sell these boxing gloves for $80.

A customer (let’s call him John and he likes boxing; pretend it’s him on the photo) visits your store. He finds these boxing gloves on your store. Assuming that they are the best fit for him and can afford them, John decides to buy them from you.

Your profit is $35; you will receive $80 for the sale, but $45 wholesale price is subtracted from these $80.

If 15 more people decide to purchase these boxing gloves, then you would get additional 15*($80-$45) = $525. So, your net profit would be $560.

To give you another round of help understanding the entire drop shipping cycle, I want to share this video with you.

It will give you additional details about this cycle and hopefully get most of the questions out of the way.

Pros & Cons of Drop Shipping – Nothing is Perfect

Just like any business model, drop shipping has its own pros and cons. Let’s go over them.

Pros:

  • Low startup expenses
  • Low overhead
  • Location freedom
  • Lucrativeness

Let’s go over each of these in more details to make things more clear for you.

So, to get started with drop shipping, you don’t have to be a rich man, $30-$50 would be enough for you to go and conquer.

Also, as I said earlier, you don’t need to create any products from scratch, rent any warehouses, or deal with product packaging (all of that would constitute huge startup expenses).

Your drop shipping business will just require your laptop and access to Internet, which will grant you location freedom. Being chained to one location isn’t always fun, right?

Lastly, if you sell a product that is very popular and always in demand, your drop shipping business can become very profitable.

Cons:

  • No control over market; expect competition
  • No control over manufacturer

Just to explain these drawbacks in more details, first you can’t control manufacturer’s affairs, their supply amount, their processes, etc. If, for instance, your manufacturer runs out of supply for a certain product, then you can’t really do anything about it, but to declare this product out of stock on your store. This can lead to profit loss.

Lastly, because you have no control over market, you must do whatever it takes to be above your competitors; your competition volume will only grow. In that case, you need to beware of what your competitors are doing, so you know in what areas you may need improvement.

How to Get Started

First, you need to determine your target audience, to find your niche. Ideally, you should select a niche that you either feel passionate about, or the one that grabs your interest. This way, owning and taking care of your store won’t feel like a ‘job’.

If you’re into smartphones, tablets, or laptops, you can drop ship these products. If fashion is your passion (wow, what a nice rhyme), then you can open your clothing store.

The next step is to figure out how to register your business and get the legal and administrative stuff out of the way, because you want your drop shipping store to be legal and this will allow you deal with your potential suppliers. In this case, you should have an appointment with your local lawyer or attorney to find out how to register your business, what business type is suitable for you (sole proprietorship, partnership, LLC, or corporation), and what do you need for registration.

Next, you’ll obviously need to set up an online store. Luckily, due to the existence of e-commerce and online store platforms, you don’t have to be tech savvy to do it.

Once you’ve got you online store set up, you need to import products to your store. These products have to be relevant to your selected niche.

But before you add them to your store, do some research on them. Are these products in demand? Will customers spend their bucks, euros, rubles, pesos, or whatever money on them? Are the products of good quality? Are consumers happy with them? These are the questions you need to ask yourself as you do your research.

You can find this information on the manufacturer’s or other merchants’ sites. They may display the number of purchases of a certain product, and will definitely have customer reviews. If there is no data on the number of purchases, you can guess the popularity of a certain products by the number of customer reviews.

Also, because you want to sell good quality products, you need to check the ratings of each product you consider importing to your store. My recommendation is to add products with a star rating of no lower than 3.5 stars out of 5 (7/10 or 70%).

Before buying something, consumers usually look for the rating of their product of interest. High rating convinces them that this product is worth buying. Hence, if you follow this tip, your chances to make a sale will be higher.

Recommended:ย  How to Open an Online Store – No Inventory Needed

Last Words

In this article I gave you some basic information about drop shipping. I hope it helped you, and you’ve learned something as you read.

If you want to explore other opportunities to make money online, then check out this article. But remember that all business models, including drop shipping, require hard work. So if you you’re looking for some “get rich quick” magic, then you’re in the wrong place.

If you’re one of those people, who made a firm decision to go for making money with drop shipping, then I would strongly recommend that you create your online store on Shopify. This is the most beginner-friendly platform where you can start your online store within minutes rather than hours, and have all the tools that can help you become a successful drop shipper.

Have some questions or feedback? Please feel free to leave them in the comment section below. I’ll be glad to help you out!

 

 

 

 

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14 Replies to “What is Drop Shipping and How Does it Work? – Beginner’s Guide”

  1. I tried drop shipping .It works I made the most money online doing drop shipping through eBay.But just be careful of bad reviews that will kill your rating and sales in a hurry.I found the key was following up with buyers

    1. Hey Nigel!

      I’m glad you achieved success in drop shipping.

      You’re absolutely right about the reviews. That is part of the research that you should do before importing products to your store. And following up is also essential. This way you have a better chance of getting more loyal customers. For example, you can send your customers newsletters, if they sign up for them, of course.

      Best of luck in your endeavors! If you have any questions, I’m here to help you ๐Ÿ™‚

      German.

  2. Hi German. Honestly, I never heard of drop shipping before. I like the concept of affiliate marketing, but, this sounds like a lot of fun as well. A lot of useful information here, thanks.

    1. Hi Ivan!

      Drop shipping is definitely one of the top online business models along with affiliate marketing. I decided to cover it so readers have a bigger variety of options to choose from. If you’re choosing a specific business model, you need to research it, and hence figure out if it’s for you.

      I’m glad you enjoyed this post ๐Ÿ™‚

      If you have any questions, please feel free to return! Helping you out is my duty ๐Ÿ™‚

      German.

  3. WOW, great article! I have this idea in my mind for couple of months, I check many resources to understand the process, but your article just clear my unanswered questions. The only thing I’m concern is the fact that we do not have control over the manufacturer.
    Thanks for sharing!

    1. Hey Dany!

      Yeah, unfortunately we can’t do much about any problems or issues that our supplier may have. This is usually the case if you sell something that your customers are crazy about. If you sell this kind of a product, this issue is something you need to watch out for.

      If you have any questions, please feel free to come back! I’ll be happy to help you out ๐Ÿ™‚

      German.

  4. Drop shipping is a great way to do business. You don’t have to buy your stock. Thats what I love about it. It can be very lucrative. This article was a great read. This guide will help a lot of people…

    1. Hey Dennis!

      I’ll definitely agree that drop shipping is one of the greatest business models, and low seed capital is one of the reasons ๐Ÿ™‚

      If you have any questions, please feel free to return! I’ll be glad to help you out.

      German.

  5. Drop shipping is an excellent way to run a business online. There is nothing like having all that comes with shipping a product and have someone else take care of the particulars.

    1. Hi Maurice!

      I agree that drop shipping is one of the most convenient business models, where you have less headache compared to traditional stores.

      If you have any questions, please feel free to come back ๐Ÿ™‚

      German.

  6. I have always wondered on how this worked and I thought that it couldn’t be as easy as that, I mean buy a product for dirt cheap and jack up the price 50%? Then I thought about that is what stores do all the time. Thanks for explaining this for me.

    1. Hey Johnny!

      Basically, buying cheap and selling more expensive is a very common practice in sales. But the point is you don’t want to get too greedy if you sell something this way. Making a product too expensive will only turn your customers off.

      Regarding pricing, I would examine how my competitors are pricing their products, and decide how can I beat them on that front.

      If you have any questions, please feel free to come back ๐Ÿ™‚ I’ll be glad to help you.

      German.

  7. Thank you for the thorough and honest information. You explain a dropshipping process in simple words, just amazing. I tried to go for Shopify twice but, to be honest, I never had such information and quite quickly. do I need to buy the products not all but few? Do I need to write a blog regarding my niche?
    Thank you.

    1. Hey Abraham!

      I’m glad that you found this post helpful.

      If you want to import products to your store, the wholesale (price of importing products to your store) is subtracted after a customer purchases something. What I mean is that you don’t have to pay a wholesale just to import something to your store.

      You can definitely buy some products, so you can get some experience with them and have personal opinion about them. This way, you can recommend something, if you liked the product that you bought. However, you don’t have to buy a product to import it to your store.

      Personally, I would recommend that you write a blog regarding your niche or store. This will help you generate traffic or grow it, if you already have it. By writing a blog, you can increase the brand awareness of your store.

      Please feel free to come back with more questions, if you need ๐Ÿ™‚

      German.

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