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What Is Drop Shipping? Definition, Cost, Features & Providers

Drop shipping is a way to sell physical products without having a storefront. Plus, you don’t need to worry about storing inventory because your manufacturer will only ship an item to your customer after an order is made. You can even get started as a drop shipper with little to no money upfront.

How Drop Shipping Works

To a customer, drop shipping doesn’t seem any different than any other online retail transaction. The customer might not have any idea their order is drop shipped. For example, let’s say that Barbara goes to BigScreenPros and buys a TV. The TV arrives in great condition, and she’s happy.

While Barbara does purchase her TV from BigScreenPros, the retailer is a drop shipper who doesn’t have any inventory to ship to Barbara. BigScreenPros then places a duplicate order with its supplier, SuperDuperFuture TVs. SuperDuperFuture TVs receives that order and ships the TV to Barbara.

The drop shipper never sees or handles the product, and the supplier never sees or deals with the customer. The customer has no idea that two different companies were involved in her shopping experience. What the customer does know is that BigScreenPros.com is a great place to buy TVs and that SuperDuperFuture TVs makes a great TV. The next time Barbara needs a TV, she will have both of those brands in mind.

Retailers like BigScreenPros make their money by marking up products before selling to customers. If BigScreenPros sells the TV it bought from SuperDuperFuture TVs for $400 to its customer for $750, then BigScreenPros just made $350.

Your customer doesn’t typically ever know when their order is drop shipped; instead, they think it comes directly from you

Who Drop Shipping Is Right For

Drop shipping products through a manufacturer is an attractive option for many sellers because it has low startup costs and can even help increase sales of intangible services such as info products and courses. Drop shipping is also ideal for a seller who doesn’t want to maintain inventory.

  • Beginner entrepreneurs: If you don’t have your own product or service to sell, starting a drop shipping businesscan help you make money in the meantime.
  • Brick and mortar businesses: Traditional businesses can expand their offerings by drop shipping. For example, a seller of children’s books can branch out to children’s puppets by drop shipping.
  • Bloggers with info products: When a blogger includes a physical product with the purchase of an info product, sales can increase. They’re combining a tangible product with an intangible one.

Drop shipping and ecommerce make up a steadily growing portion of total United States retail sales, so it’s no wonder that entrepreneurs of all kinds are wanting to get started. According to the most recent quarterly report by the US Census, total ecommerce sales for the second quarter of 2019 came to $146.2 billion. That’s an increase of 4.2% from the first quarter of 2019.

The US Census helps retailers know the condition of the retail economy through its quarterly reports

Drop Shipping Costs & Profitability

You can potentially get started drop shipping for little to no money out of pocket on the front end. Since you’re buying one product at a time from your supplier, you’re going to pay more than you would’ve if you bought in bulk. Plus, you’ve got to pay for your supplier to pick, package, and ship the product to your customer.

Drop shipping costs can include:

    • Shipping: You’ll pay to drop ship a product to a customer. If a customer buys four different shirts on your site from four different manufacturers, you’re paying for shipping from each manufacturer.
    • Product:You’re not going to pay wholesale prices for a product even though you’re buying from a wholesaler. This is because you’re buying a single product at a time, every time a customer makes a purchase.
  • Advertising:While you can run a drop shipping business without advertising, it’ll take a lot of marketing skills to do so. Running ads on social media or through search engines can help your store gain traction.

As with any business, your profitability will depend on many factors. The two things that most impact how much money a drop shipper makes are the margins on their product and their conversion rates. Margins are the difference between what a drop shipper pays their supplier for the product and what they charge the customer. Conversion rates are the number of people that visit your store vs the number of people that end up making a purchase.

In general, drop shippers can expect margins of 20% on their core products and conversion rates around 2%. This information allows you to build a rough model for your business’ profitability:

(Traffic x .02) x (average order x .20) = estimated profit

For example, if we sell Fit Small Business TVs for $1,000, we would expect to make $200 on each sale. If we have 1,000 people visit our site per month, then we would estimate that 20 of those people will buy our product. If we made $200 per sale and had 20 sales, we have made $4,000.

Drop shippers increase their profits by finding higher-margin products and increasing their conversion rates. It’s important to find higher-margin products by developing a focused niche and finding great suppliers when starting your drop shipping business.

Drop Shipping Providers

Working with an experienced drop shipping provider is essential. However, it’s also important that you pick great products and choose a supplier that has a quality track record. Your customer’s experience depends on it, so we’ve put together a list of providers who can help you provide an excellent experience for your customers.

1. SaleHoo

SaleHoo connects you with over 1.6 million different products and 8,000-plus suppliers. SaleHoo verifies each of its suppliers, so you can trust these vendors’ quality and shipping practices. It also offers a market research lab so you can figure out which product is best for you to promote.

2. Doba

Doba will provide a directory of suppliers and wholesalers to work with. Plus, you get the ability to add several products you want to your store without needing to work with several drop shippers. Doba will work directly with the supplier to get the product to your customer so that you don’t have to.

3. Oberlo

If you run your drop shipping store through Shopify and AliExpress, you can use Oberlo. It’ll connect you directly with many different suppliers, and you can even have up to 500 products and 50 orders with its free account. If you don’t use Shopify and AliExpress, you’ll need a different provider.

Pros & Cons of Drop Shipping

Using drop shipping to make an income is popular because it doesn’t have to cost anything upfront to get started. Plus, there’s no inventory to manage, nor do you have to purchase stock and worry about not selling any of it since you’re only buying a product once a customer orders it. This also means you’ll have lower profit margins and less quality control. Additionally, your customer doesn’t know if their order is drop shipped, so any complaints will reflect on your company and not the supplier’s company.

Pros of Drop Shipping

There are many benefits to drop shipping, and they include:

  • No inventory: Drop shipping is popular with digital nomads, who have no permanent home base. This is because you won’t need to keep any inventory.
  • Only purchase what you sell: You’ll only place an order for a single product after a customer makes a purchase. This means you won’t need to worry about whether or not you’ll sell your remaining stock.
  • Less upfront capital: Since you’re not purchasing products in bulk, you won’t need much, if any, upfront capital. You may need to pay for a website and marketing.

Cons of Drop Shipping

The drawbacks of drop shipping include:

  • Lower margins: While your products are coming from a wholesaler, you won’t get wholesaler prices. This is because you’re buying a product at a time versus placing a bulk order.
  • No quality control: Since your product ships directly to the customer, you won’t get to see if the manufacturer swaps out material. There’s no opportunity for you to inspect your products.
  • Delivery complaints are on you: You don’t have any control since you’re not in charge of the packaging or shipping of the products. However, you’re the seller, so any complaints will come to you.

Alternatives to Drop Shipping

If you’re not interested in drop shipping, there are other ways to make money selling products online. These alternatives include creating and selling your own products and services, private labeling products, and using Amazon.com or eBay to sell.

The biggest difference between drop shipping vs fulfillment companies is the responsibility of products, shipping, and handling. Selling your own products means you’ll need to store the products somewhere and either handle the packing and shipping yourself or hire a service to do it for you. Some of these alternatives require more time and costs upfront, but you might also realize better profit margins as a result.

Sell Your Own Products and Services

It’s simple to get started selling online. Your profit margins will be higher if you sell an intangible product, such as an online course or membership site. The reason for this is because you don’t have to spend money on raw materials or shipping. However, creating a physical product offers you an opportunity to create a higher perceived value than an intangible product.

If you choose to sell your own products, you are likely going to need a fulfillment service to help with picking, packing, and shipping what you sell. FulfillmentCompanies.net can help by matching you with a fulfillment company that’s best for your business. Plus, it won’t cost you anything to use the service—vendors pay a small fee any time you’re matched with them. Get started today.

Private Label Products

Private labeling a product is similar to drop shipping, although you don’t always have to drop ship a product. To private label a product, you’re selling a manufacturer’s product under your own company’s brand. You could purchase these goods in bulk and store them, or you can use a service such as ShipBob to store and ship for you.

Use Amazon or eBay to Sell

While you can drop ship while selling through Amazon or eBay, you don’t have to. Many online retailers use these platforms to sell rare or unique items. Others use these platforms to sell products without needing to create their own website or online store.

Drop Shipping FAQs

This section includes the most frequently asked questions (FAQs) about drop shipping.

Can drop shipping make you rich?

That’s going to depend on your own definition of rich. Many drop shippers make a full-time living while others barely cover their expenses. Your success will depend on your talent, time, and resources devoted to drop shipping.

Can you start drop shipping with no money?

You can start drop shipping without having the money upfront. However, your goal is to make money before you begin to incur expenses. For example, you can sign up for a free 14-day trial with Shopify to make your store and then drop ship using AliExpress. A customer places an order from your Shopify store, and then you buy it from AliExpress and have it shipped directly to your customer.

Can I drop ship without a website?

Technically, you can drop ship without a website. For example, if you’re a brick and mortar store owner, you’ll place the order for a product you don’t carry in-stock for a customer. You can also start drop shipping through eBay or Amazon.

Bottom Line

In as little as a weekend, your drop shipping store can go live. You won’t necessarily have to pay anything upfront, which makes the barrier of entry very low for most entrepreneurs. The process of drop shipping involves your customer ordering a product from you, and then you ordering the product from your supplier. That supplier will ship the product directly to your customer. You’ll only pay for the product once you place an order with your supplier.