The dropshipping business model can appeal to entrepreneurs looking to start a new business due to low start-up costs, reduced risks, and greater flexibility.
Many dropshipping businesses can be run from your home opens in new window and managed alongside a full-time job, which may make it an option for those who want to start a business without quitting their day job.
What is dropshipping?
Dropshipping is a business model where products are sold to customers by one business – the seller – and delivered directly from a different company – the supplier – all without the selling business needing to store or handle the goods.
The seller takes the customer’s orders and passes them on to the supplier, who will take care of manufacturing, packaging opens in new window, and shipping the product.
It can be a lower-risk start-up business venture, as shipping responsibility is in the hands of your suppliers opens in new window, and you don’t need to pay for stock that you may not potentially sell.
Dropshipping businesses often create their online storefront, operating a website opens in new window that sells the product or service before passing the customer order details onto the supplier to fulfil the purchase.
The advantages of dropshipping
Flexibility
Dropshipping can be a flexible business model.
Many dropshipping businesses are successfully run from home; all you need is an internet connection to communicate with customers and suppliers.
It is not uncommon for people to run dropshipping businesses alongside other commitments or on a part-time basis.
Growth potential
It can be relatively simple to scale your dropshipping business compared to a traditional e-Commerce store opens in new window.
With no production or storage requirements, your growth is not necessarily hindered by increased operating expenses or constrained by the amount of inventory you hold.
Lower overheads
Running a dropshipping business comes with potentially fewer overheads as you may not need to:
- hire staff opens in new window to keep up with growth
- pack or ship any of the products yourself
- pay for storage or production facilities.
Lower start-up costs
Starting a dropshipping business may require less investment, such as finding premises or warehousing, buying inventory, handling waste opens in new window, and arranging security such as CCTV and alarms to prevent physical theft.
Costs may be limited to building a website, marketing products opens in new window, processing payments, and handling customers opens in new window.
The disadvantages of dropshipping
Low-profit margins
Profit from dropshipping depends on the type of products you are selling and the margin that the supplier is willing to give you for each sale.
Suppliers often determine the amount they will pay the seller per product, such as 10% of the retail value.
This can be much lower than the actual profit margin opens in new window on a product.
Be aware that your costs will have to come out of a supplier’s fee, including salaries opens in new window, marketing, and other overheads opens in new window, reducing your profit margin even further.
Competitive
Dropshipping is a popular business model due to its ease of entry and low start-up costs.
Competitors opens in new window will often be selling the same products from the same suppliers, with pressure to continually lower prices to compete.
Lack of control over the customer experience
While the supplier is responsible for delivering the correct products on time, you may need to liaise with customers opens in new window on delivery issues.
As you don’t manage your own inventory, resolving customers’ problems can be more difficult as you will take the issue up with your supplier.
This can be a slow process and may negatively affect the customer’s experience opens in new window.
Reliance on supplier stock
Unexpected trends in certain products or supply chain constraints may result in your supplier running out of stock, meaning you cannot fulfil your customers’ orders.
While the ability to meet customer orders is not entirely in your control, you’ll still be responsible for managing and responding to customer complaints or issues.
How to get started with dropshipping
To get started with your dropshipping business, follow these key steps:
1. Pick your niche
It can be a good idea to focus your efforts on a niche area opens in new window to target a defined audience with less competition.
2. Product research
It can pay to try to identify popular and trending products.
For example, look at ‘best selling’ categories on e-Commerce marketplaces such as eBay opens in new window and then pinpoint any niche products in which your business could specialise.
When researching products, getting to know your competition can be a good idea.
Look at companies selling similar products, explore their products, and see at what cost they sell them.
3. Find a supplier
Finding reliable suppliers opens in new window is important to allow you to fulfil orders.
Your business might suffer from negative customer reviews if you use unreliable suppliers with low-quality products and poor delivery services.
To help find a reliable supplier opens in new window, reading through their reviews is a good start.
Order samples of their products to test the delivery process and product quality.
Contact potential suppliers to discuss how their drop shipping service works, service level agreements, what happens when things go wrong, and get an idea of the sales volume they can handle.
Discuss dropshipping fees, such as how much you’ll earn, and if there are any other costs.
Consider flexible fees, where you are paid more as sales increase.
Always seek professional legal advice opens in new window before entering a commercial agreement with a supplier.
4. Create a sales platform
Consider creating a dropshipping website so customers can see the products you sell.
Many online tools can help you make a website yourself, or you could hire a professional to create your website opens in new window.
As well as creating a website you could use e-Commerce marketplaces such as eBay, Etsy, and Amazon opens in new window for your dropshipping business.
Such marketplaces already have large audiences but can be highly competitive.
5. Attract customers
To build your customer base, you could create social media pages opens in new window for your business to increase visibility and attract new customers opens in new window.
If you have your own website, you might consider investing time and money into search engine optimisation (SEO) to rank highly on search engine results pages for the products you are selling, and it will also increase traffic to your website.
Thinking of starting a business? Check out our free online courses in partnership with the Open University on being an entrepreneur.
Our free Learn with Start Up Loans courses opens in new window include:
- Entrepreneurship – from ideas to reality
- First steps in innovation and entrepreneurship opens in new window
- Entrepreneurial behaviour opens in new window
Plus free courses on finance and accounting, project management, and leadership.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
