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Sage Group plc

08/02/2021 | Press release | Distributed by Public on 08/02/2021 03:30

How to build a dropshipping strategy for your e-commerce business

The internet can be a rabbit hole in entrepreneurial money-making schemes, particularly when it comes to e-commerce.

One of the most hyped e-commerce business models in the past few years is dropshipping.

Dropshipping can be profitable, but it's not necessarily the get-rich-quick strategy that some YouTubers can often make it out to be. Like all e-commerce business models, it takes time and effort to be successful.

In this article, we want to give you a clear and realistic view of what dropshipping is, what it entails and how you can create your business from it.

Here's what we cover:

What is dropshipping?

Why your small business can benefit from dropshipping

The challenges of dropshipping for retailers

How to find and secure an excellent dropshipping supplier

How your dropship supplier affects your financial management

Final thoughts on dropshipping

What is dropshipping?

Dropshipping is a retail fulfilment method where a small business doesn't keep the products it sells in stock.

Instead, when a small business sells a product using the dropshipping model, it purchases it from a third party that ships it directly. As a result, the small business seller doesn't have to handle the product directly.

You'll need to partner with a dropship supplier to ship the product for you after a customer makes an order via your e-commerce store or through an online marketplace such as Amazon or eBay.

This way, you can run an e-commerce store without holding product inventory.

Your dropshipping supplier does all the distribution work, shipping goods the customer has ordered with you to their address.

Here's how the dropshipping process works

1. Your customer purchases a product for £100 from your online e-commerce store.

2. You purchase the product from your supplier for £75, which makes you £25 profit.

3. The supplier ships the product directly to your customer.

Why your small business can benefit from dropshipping

Here's some of the benefits you can get from dropshipping.

Lower startup costs and risk

If you're thinking of starting an e-commerce business with minimal upfront investment or risk, then dropshipping might be a good way of you satisfying your entrepreneurial urges. It's a popular option because it means you don't have to carry inventory.

Dropshipping is perhaps the easiest and cheapest of all e-commerce business models.

If you're more interested in marketing products and anticipating trends, and less so in the actual creation of a product, then dropshipping might be for you.

Any e-commerce business offers a low barrier to entry, as you don't require the funds needed to run a traditional brick and mortar retailer.

Lower overheads

Since you don't need to maintain physical inventory, you won't have as many managerial overheads, such as managing infrastructure and shipping or tracking inventory.

Easier to scale

Dropshipping businesses might get bigger quickly because fulfilment doesn't rely on how much physical space you have for products or workers to ship out orders.

Dropshipping can help you if you have fluctuating sales throughout the year.

Broader product offerings and flexibility

Removing the need for storage means you can offer a broader range of products. In addition, you can operate your store from anywhere, changing your range of products if the market demands.

The challenges of dropshipping for retailers

Reliance on suppliers

The benefit of using suppliers to perform all your distribution is also a negative, as you're pretty much entirely at the mercy of suppliers when it comes to stock.

It means you have less control over the customer experience.

If you sell an item in your online store, but your dropshipping supplier has a six-week delay in shipping, it will be your business that has to deal with a frustrated customer.

Suppliers will also be in control of quality and product availability - there's no way you'll be able to inspect products before shipping.

Low margins

One significant disadvantage of dropshipping is that you won't get the same discounts getting products from a dropshipping supplier that you'd get if you bought the products in bulk from a wholesaler.

Because you'll be paying more money for dropshipping products, your margins will be lower. And that means you may have to increase your prices to see a decent profit.

Competition

Be aware that because the barrier to entry is low, you may face a lot of competition.

Nothing is stopping any retailer from offering the same products you offer at similar prices. Your products might not be unique, so you may well have to provide a great customer experience through your e-commerce website and digital marketing experience (but you should do this anyway, no matter what type of e-commerce business you run).

How to find and secure an excellent dropshipping supplier

One of your most important decisions is choosing your product and dropshipping supplier.

If you don't have a product or supplier, do your research and see whether there's a product available that people might want to buy, and determine if there's a supplier who would allow you to purchase from them cheaply.

Instead of paying big money for focus groups, British entrepreneur Suhail Nurmohamed advises you to use your friends to test potential new items.

He says: 'I would conduct my mini market research. So my cousins and friends. And once you ask them, 'Bro, would you wear this?'

'If they'd laugh, I would say, 'Okay, cool. Not that one.' And if they would like it, I would be like, 'Yeah, yeah. All right. Cool.'

'So it's knowing what people would wear, what people would like.'

You may already have the product in mind, which means it's a matter of finding a dropshipping supplier that makes the product you want to sell and delivers it to the customer who has made the order with you.

The traditional supply chain consists of:

  • Manufacturers that create the product, selling bulk to wholesalers and retailers, with most not selling straight to the customer.
  • Wholesalers that buy products in bulk from manufacturers, mark them up slightly and sell.
  • Retailers that sell products directly to the public at a markup.

It's important to note that any of these three can act as a dropshipping supplier.

If you want to get the best pricing, you'll want to work with a legitimate wholesaler or manufacturer that offers dropshipping services.

You can find dropshipping suppliers by searching online through search engines or directories. There are many of them, which means you need a process to filter through the chaff.

Here are some tips on finding a reliable dropshipping supplier:

  • Make sure they dropship. Not all product suppliers offer dropshipping services. Some are wholesalers or manufacturers that only sell to retailers.
  • Look for experience and good reviews. Your dropshipping supplier will be responsible for getting the product to customers, so you need to make sure you can count on them. Look for businesses that verify their service, either through word of mouth or online.
  • Have quality products. Although you're not handling products before they get to the customer, you should at least take hold of some samples before committing. In addition, get some good images that you can use when listing the product on your e-commerce website.
  • Provide speedy shipping. Many dropshipping suppliers are in China, but you should make sure that customers receive their products as quickly as possible.
  • Low order fees. Because of all the heavy lifting they have to do for you (so to speak), some dropshipping suppliers might charge you a fee to use their services in labour, packaging and logistics.

Tim Koch is a German business owner who advises you to always place a test order for products you're thinking about selling.

He says: 'This will enable you to go through the entire purchasing process, just like your customers will when they place an order.

'You'll be able to review the quality of the products, the shipping times and standards, and take personalised product images yourself - it helps you to take your store to the next level.

'After I had placed a few test orders and reviewed the quality of my suppliers, I was very confident that my store had the potential to be successful.'

How your dropship supplier affects your financial management

When looking at suppliers, make sure you're aware of the financial implications your dropshipping supplier has on these areas of your e-commerce business:

Profit margin

As pointed out above, one of the disadvantages of dropshipping is that margins are low compared to buying wholesale.

You need to pick a dropshipping supplier that sells for a low enough price so you can make a profit when selling through your e-commerce website or online marketplace.

In addition, you need to keep order fees low.

The most obvious solution to increasing your profit margin is to increase prices. It's not always the case that lower prices win.

Customers could be willing to pay more if you offer a great customer experience or have something about your e-commerce brand that is particularly attractive.

Value is about perception, and if a customer accepts that your product is worth the value you've priced it as then you're well in.

Another way you can work with your supplier is by selling higher numbers of goods to compensate for the lower margins.

And finally, speaking to your dropshipping supplier could get some reward. If you can extract a better deal on the price you pay, it can make a massive difference on your bottom-line profit margin.

VAT

If you sell goods sent from dropshipping suppliers overseas in the UK (without using online marketplaces), you must register for VAT and pay it when required.

For an e-commerce store, the point of sale is at payment. It means the value of the goods is based on the price at which you sell to customers, rather than the value calculated at the point where the products cross the border.

Because of Brexit, and also to simplify the VAT system, the way VAT is handled for online sales from businesses worldwide to consumers in the European Union (EU) changed on 1 July 2021.

But while this may appear to be more business admin to tackle in the short term, in the medium to long term, these new EU VAT rules will make life easier for business owners.

Cash flow

Cash flow is a big concern for all businesses and is the one thing that could scupper your dropshipping dreams. Some dropshipping businesses struggled with cash flow during the coronavirus pandemic due to supply chain disruptions in manufacturing, shipping and importing.

Any issue with a dropship supplier can throw your cash flow out of whack pretty quickly.

Imagine, for example, paying an invoice for goods and finding that they are behind in shipping, or, worst still, not able to get the product out to you. You will have vital capital tied up.

Avoiding supply chain issues should be one of your priorities.

Keep in touch with your dropshipping suppliers and make sure you're informed early if they have any stock issues. Order well in advance, or arrange it so they only charge you at the point of shipping.

In terms of your e-commerce shopfront, you could also allow customers to purchase back-ordered items, listing on your site when they are due to arrive. This manages customer expectations and lines up future cash flow.

Final thoughts on dropshipping

If you're thinking about starting your own e-commerce business, dropshipping is an option worth considering. It does have some great benefits but there are downsides to be aware of too, so take the time to work out if it fits your approach.

And if you do pursue dropshipping, ensure you find a good supplier and make sure the communication lines are open so you can stay on top of any supply chain issues.

Finally, make sure you set your prices well to counter the possibility of low margins.

Getting these things right will increase your chances of e-commerce success.

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