The Drop-Shipping Business Model For eCommerce Stores in 2020: Features & Benefits Compared to Traditional Models
Ahhh…The drop-shipping business model… so sweet, so seductive and oooh so sexy!
Seriously though, who hasn’t heard about a drop-shipping business model and hasn’t immediately replied with: “Okay. I need to find a way to launch my own.”
Well, maybe I can’t speak for everyone, but I can surely speak for myself! And for those of you who don’t agree with me, let’s first make sure you have a complete understanding of how a drop-shipping business works.
Drop-Shipping: What Is It? How Does It Work?
Drop-shipping is a method of selling products online from your virtual storefront without actually having any of the products in-house.
Instead, you can now sell items online and pay a third-party as orders for their product come in. After purchasing it from a manufacturer (or third-party), you can then send them directly to the customer.
As a result, you never have to actually deal with the product or the hassle of having to ship orders yourself.
For me, that eliminates my only real contention with having an eCommerce store. I used to package and send out orders every day and now, 10 years later, I absolutely despise even the thought of having to package up a bunch of orders and ship them daily.
To reiterate, the defining factor of what separates a standard retail model from drop-shipping is that you won’t have to stock your own inventory.
Instead, you can purchase the inventory from the manufacturer or wholesaler to fulfill orders as they come in.
Features and Benefits of Drop-Shipping
The first allure people usually have after first hearing about the drop-shipping business model is that there’s virtually no capital required to start, in contrast to any other method of becoming self-employed.
Typically, retailers will have to allocate large sums of money for purchasing inventory.
As I mentioned previously, you’re not dealing with the physical product in the drop-shipping business model. No packaging or shipping, no managing a warhorse, no managing stock levels or returns.
A couple of other great features are that you can be location independent and still showcase a huge array of products; and this is all so easy to scale, once the ball gets rolling.
Sounds amazing right? Well, it is! But just how every thorn has a rose, every business model is going to have its challenges and complexities.
The Caveat to All This Drop-Shipping Awesome-ness
One of the main disadvantages of drop-shipping is low margins, particularly when operating in a niche industry. Since there are such low start-up costs and overhead, some merchants simply toss up a crummy website and sell products at rock bottom prices to grow revenue.
Despite having subpar sites, customers will still price shop and compare your prices to theirs. This cutthroat competition will usually bring a niche to minuscule margins.
Running into inventory and shipping issues are eventualities.
Suppliers won’t always have inventory in stock and sometimes a customer will place an order for multiple items to be shipped from 3 different manufacturers, driving up your shipping costs.
Imagine having a brick and mortar business and the challenges that would come along with that.
The toilet in the customer restroom is backed up, an unruly employee is doing weird things to customers’ food before serving, quarrelsome squirrel out front, etc.
When comparing the list of pros and cons between drop-shipping and a traditional brick and mortar business, I would personally choose to drop-ship any day!
Drop-Shipping Business Models: What to Expect in 2020
If any of you out there are a sneakerhead like me, you’re probably aware of how the sneaker game gets all messed up by greedy people that buy up all the inventory at the shoe release date and then sell them for triple their retail cost.
It messes it up for everyone else who’s a true fan and just genuinely loves sneakers…
Well, unfortunately, something very similar is happening in the world of drop-shipping. There are unprofessional sellers out there who are mudding-up the waters for everyone else. Low product quality, no customer service, high shipping duration, and overpriced cost of leads to negative experiences for the customers.
Once the bad taste of mistrust is left in a customer’s mouth of drop-shipping, it’s often never retrieved.
This translates to a loss of potential customers for all others out there who actually care about providing good customer experiences.
There is a solution. If drop-shippers (as a whole) would treat customers with respect and not be overly concerned about their profit margin (by selling goods at reasonable prices), then we can make this a positive experience for everyone, merchants and customers included.
Drop-Shipping vs Holding Inventory
From an operational standpoint, drop-shipping is far more appealing.
But there are drop-shippers out there that now wish they had started with a commerce store that held inventory; it really depends on your personal goals and your timelines for achieving those goals.
With an eCommerce store holding inventory, there are much fewer liberties to freedom and location independence.
Firstly, you have the large upfront expense of having to purchase inventory. Once you have inventory, now you need to store it which may require a warehouse.
And depending on the success of marketing your site, you may need to hire employees.
You can’t just slip away to vacation in Spain where you’ll be enjoying caviar and Pellegrino on the beach.
Oversight is required to make sure operations are going smoothly.
Well, for those of you who don’t care about having flamboyant fun in France while eating escargot, you may be drawn to these business models profit margins.
Margins of 80-90% are feasible. It will take longer to ramp up the business due to operational and logistic complexities, but at the end of the day, you will end up pocketing much more money per sale.
Drop-Shipping vs Amazon Affiliate
This is a tough one for many people.
The appealing factors are very similar to both business models:
- Both allow you to start a business without requiring inventory or shipping goods;
- And, both are low-risk business models with low start-up costs
But there are some defining differences:
Affiliate websites earn commissions by sending customers to the actual seller’s site, like Amazon.
Commissions are usually in the 7% range. Despite these low-profit margins, the cool thing about being an affiliate is you virtually have no need for customer interaction.
The manufacturer processes orders, ships them, deals with returns, etc., etc., etc.
Once creating all your content, you can pretty much sit back and keep collecting commissions without having to touch your site on a daily basis.
But for people like me, I don’t mind managing customer support, so I’d rather get that 30% with a drop-shipping model.
Finding a Drop-Ship Niche
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Niche, Niche, Niche! Niche the efff out!
I cannot understate the importance of choosing products to create your business that is within a niche.
If you don’t have a mythological approach to finding a niche product, your odds for success are very low. The main reason for this being, you’ll be out there competing for ranking on keywords with every Joe, Dick, and Harry out there.
Getting to the sweet spot of being within the top 3 results for a given keyword will be extremely challenging if not impossible.
Here are proven methodologies for finding your niche:
- Choose products in the $100-200 range. This price range can still allow room for people to make emotional purchases without spending a bunch of time overthinking while simultaneously providing a decent profit margin for you. Internet sales can just roll through and not require customer support. Whereas, bigger ticket items in the $500 price range will be much more inclined to needing some phone time with the customer before they make the purchase.
- Products that have a passionate following. Know anyone that’s crazy about their car? Always doing modifications to it? New lights, roof rack, portable keg, etc.? Products with a following of passionate customers have a captive audience, leading to easier, more fruitful sales.
- Niches with many accessories. This part is huge. Selling products with the potential to be matched with tons of accessories open up the door to even more sales opportunities.
- Products that are consumable or disposable. It’s much easier selling to a customer that’s already bought from you and established buying trust than to sell to a new person that’s never done business with your site. That’s what makes products that need to be continually renewed, like ink printer cartridges, very profitable to sell. Built-in reoccurring revenue due to repeat customers (granted you have good customer service).
- Not easily obtainable. If something is available at the neighborhood convenience store, there’s no reason for someone to go searching online for it. Part of the value you can offer your customers is providing products that aren’t easy to come by elsewhere.
Now that You’ve Found Your Niche…
Is there a demand for your product?
One of the first things you should always do is keyword research. This will tell you how many people are searching for your product. You should go for products that get around 3,000 monthly searches and have a substantial amount of long tail keywords that are also getting traffic.
This will improve the likelihood of making sales as your SEO campaign keeps you climbing through the search engines.
Are You Able to Compete with the Legends?
This is a vastly important component of success that cannot be overlooked.
With just starting out, having a website that hasn’t been indexed by Google makes it very hard to compete with businesses that are already established.
To measure competitive metrics of well-established business, there are 3 things to look at:
- Pagerank. All links aren’t created equal, and PageRank is a metric that considers the quality of inbound links. It’s also a representation of how much authority a page has. Homepages with PageRanks of 3 and 4 are standard and will likely be the minimum point of entry for most viable niches. Trying to outrank sites with PageRanks of 5 or higher will require significantly more work and an SEO campaign dedicated to getting quality backlinks.
- Quality of site. This metric might be the most important of the three. Browse the competition’s websites and ask yourself: “How likely would I be to purchase from this site?”
- Inbound links. Using a site like Open Site Explorer, you can see how many other domains are linking to the competition. Top competitors in any niche worth entering will have at least a few hundred inbound links, and this shouldn’t scare you away. But if every business has upwards of 1,000 inbound links, you’ll need to seriously consider the commitment required to compete.
How to Source Profitable Niche Products
Having reliable and competent suppliers is a crucial element of launching a new eCommerce store and needs to be a key consideration in the niche selection process.
This is especially true if you’ll be drop-shipping, as your supplier will be doubling as your warehouse and fulfillment agency. A bad supplier will cause an endless supply of headaches from botched shipments to perpetually out-of-stock items.
I strongly recommend having at least two suppliers for any new eCommerce store. Why is that?
- You’re not 100% dependent on a single supplier;
- Higher fulfillment rates and fewer out-of-stock issues with two warehouses;
- Better pricing when suppliers are competing for your business.
Competing with Amazon and Walmart Sucks
Many eCommerce retailers laugh at the idea of competing with Amazon as it being a sheer impossibility.
But what’s laughable is that most will allow this to deter them from trying to make money online.
Sure, you can never have the inventory Amazon has or Jeff Bezos, but that can’t stop you from creating great content and ranking for keywords.
This is possible if you’ve really narrowed down your niche.
You can totally beat Amazon on a couple of points, purely because it is too large.
Customer service, email marketing, writing content and subscriptions services are all things that Amazon is simply too large to compete with smaller business operating within a niche.
Start with a good web design company that understands all business models.
At Front Street Media, we have the first-hand experience in all business models to help you succeed. The owner, Brenan, has run successful inventory-held and managed websites, across multiple niches. Brenan and the team at Front Street Media, in El Dorado Hills, also have experience in affiliate marketing as well as successful drop-shipping business models.
Looking for an expert web design company that can design, develop and manage your dropship business model? Then, contact us today!