E-COMMERCE EXPLAINED
E-commerce refers to any business model that allows companies to buy & sell goods through the Internet, through 4 main portals: smartphones, computers, tablets, and other smart devices. E-commerce companies include Amazon, PayPal, and Netflix, which are all very different models, but share a common denominator: their business revolves around online transactions. So, how can average individuals start an e-commerce company without having a multi-billion dollar capital?
One of the easiest approaches is to set ourselves up to be the middleman between a supplier and a consumer. We find suppliers for unique products that aren’t available to the general public. We offer these products on our own website, while marking up the prices. This way, we profit when the item sells. To avoid having sunk cost to hold inventory, or be obliged to ship out these items manually, we can drop-ship these items.
INTRODUCTION TO DROPSHIPPING
Dropshipping is one of the most popular business models inside the e-commerce industry. It’s a fulfillment method where a company doesn't hold the products it sells in stock. Instead, when a (online) store sells a product, the owner purchases the item from the supplier and has it shipped directly to the customer. As a result, the owner never sees or handles the product - while keeping the excess profit. Let’s go over some of the benefits of dropshipping:
LOW STARTUP CAPITAL – Arguably one of the biggest advantages is that it is completely possible to launch an e-commerce store without having to invest thousands of dollars up front. Traditionally, retailers have had to tie up massive amounts of cash purchasing inventory. With the dropshipping model, you’re not required to purchase a product unless you already made the sale and have been paid by the customer. In some words, you’re making money without spending money first.
EASY TO GET STARTED – Running an e-commerce business is much easier when you don't have to deal with physical products. With dropshipping, you don't have to worry about:
Handling returns and inbound shipments
Managing or paying for a warehouse
Packing and shipping your orders
Tracking inventory for accounting
Continually ordering products and managing stock level
LOW OVERHEAD – Because you don't have to deal with purchasing inventory or managing a warehouse, your overhead expenses are quite low. In fact, many successful dropshipping businesses are run from a home office with a laptop for less than $50 per month. As you grow, these expenses will likely increase but will still be low compared to those of traditional brick-and-mortar businesses.
FLEXIBLE LOCATION – A dropshipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.
WIDE SELECTION OF PRODUCTS – Because you don't have to pre-purchase the items you sell, you can offer an array of products to your potential customers. If suppliers stock an item, you can list it for sale on your website at no additional cost. This gives you the option to pivot into virtually any niche, at any given point in time.
EASY TO SCALE – With a traditional business, if you receive three times as much business you'll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work.
From our personal experiences, we have gained financial independence from utilizing this business model. We can now travel around the globe, while working out of our phones. Trust us, not being locked into a 9 to 5 traditional “career” is the best, most liberating feeling in the entire world. With dropshipping, you can easily make thousands of dollars daily, while only doing a fraction of the work entailed in any other job.
DROPSHIPPING IN ACTION - THE ORDER PROCESS
STEP 1 – Customer places an order with the merchant (you), and once the order is approved, a few things happen:
Customer and merchant get an email confirmation (likely identical) of the new order that is automatically generated by the store software.
The customer's payment is captured during the checkout process and will be automatically deposited into your bank account.
STEP 2 – You place an order with the supplier
This step is usually as simple as you forwarding the email order confirmation to the supplier. The supplier has your credit card on file and will bill it for the wholesale price of the goods, including any shipping or processing fees. Typically, the supplier's bill will cost less than what your customer has paid you. The difference (profit margin) is for you to keep.
STEP 3 – The supplier ships the order
Assuming the item is in stock and the supplier was able to successfully charge your card, the supplier will box up the order and ship it directly to the customer. Though the shipment comes from the supplier, your store’s name and address will appear on the return address label and its logo will appear on the invoice and packing slip. Once the shipment has been finalized, the supplier will email an invoice and a tracking number to you.
STEP 4 – You alert the customer of product shipment
Once the tracking number is received, you will send the tracking information to the customer, likely using an email interface that's built in to the online store interface. With the order shipped, the payment collected and the customer notified, the order and fulfillment process is complete. Your profit is the difference between what you sold the product to the customer for and what you paid the supplier.
Note: The turnaround time on dropshipped orders is often faster than you'd think. Most quality suppliers will be able to get an order out the door in a few hours, allowing merchants to advertise same-day shipping even when they are using a dropshipping supplier.
PICK YOUR APPROACH
Now that you’re more familiar with how dropshipping works, we can dive into a few different approaches you can take:
LONG-TERM - Also known as year-round stores. We focus on building e-commerce stores for the longevity of it. We pick a niche or a product that isn’t related to a specific season, and we build an entire brand around it. For instance, a furniture store. The furniture industry isn’t tied to a season, meaning we can make sales year-round.
SHORT-TERM - These stores aren’t built to last more than a few months. We focus on selling items based off online memes, viral videos, or trending shows. Short-term stores won’t be remembered for their brand name, but rather the item they sold. A good example would be fidget spinners from a few years ago. It’s unlikely people will remember the store selling fidget spinners, they remember the product they bought.
SEASONAL - Also known as seasonal stores. This approach shares a few traits with short-term stores, but it’s slightly different. Seasonal stores are built for upcoming seasons, special occasions, or holidays. You launch the store a month or two prior to the occasion and close the store after the occasion. Examples would be Halloween, Winter, Christmas, New Year, Valentine’s Day, Spring, Summer, and more.
Once you’ve decided on an approach, you can start browsing wholesale websites for unique products.
PICK YOUR PLATFORM
With your products picked, suppliers secured and your business established, it's time to start building. You need to decide how to get your products in front of prospective customers. You'll most likely choose selling on your own online store, eBay, or Amazon. Let’s go over a few of the benefits and downsides to each of the listed platforms, to give you a brief summarization:
DROPSHIPPING ON EBAY - As the world's largest online auction site for physical goods, eBay is a site most people know well. The following are some reasons you might want to consider – or avoid.
THE PROS:
EASY TO GET STARTED – With eBay you can immediately dive in and start listing your wholesale products. Create an account, add a listing and you're in business.
ACCESS TO A LARGE AUDIENCE – When you list on eBay, you have access to the many online buyers who frequent the auction giant. Millions of people will see your listings, and the fairly robust and active market will help ensure you get a decent price for your products.
LESS MARKETING – Because you're able to piggyback off eBay's enormous platform, you don't need to worry about marketing, SEO or paying for traffic. This saves you time, as marketing is one of the biggest challenges associated with launching a dropshipping business.
THE CONS:
LISTING FEES – The biggest downside to eBay are the fees you'll have to pay. The most notable is the success fee, which can be up to 10% – or higher – of the sale prices of your items. In the dropshipping market, where margins are already fairly thin, this will cut into a large portion of your profits.
CONSTANT MONITORING AND RE-LISTING – eBay is an auction-style marketplace, so you'll need to be constantly monitoring and re-listing the products you want to sell. Some tools help automate this process, but it's still not as straightforward as listing a static product for sale on your own e-commerce website.
CAN'T CUSTOMIZE YOUR SALES PLATFORM – Your product listings need to follow eBay templates, making it more difficult to create a professional, value adding page for your items.
NO LONG-TERM CONNECTION WITH CUSTOMERS – You might have a few repeat eBay customers, but most will probably never buy from you again. Any goodwill you bank up through excellent service will likely be lost. The marketplace structure is created to serve itself. eBay doesn’t want to focus on the merchants (you), they only want to focus on the products. You will be significantly restricted in how you communicate with customers, how you brand yourself, the design of your store, and so on.
YOU'RE NOT BUILDING AN ASSET – When you create a store that generates traffic and has repeat customers, you're building a real business with value that you can sell to someone else. When you sell on eBay, you're not building a lasting brand or web property with any tangible value that can be sold in the future.
DROPSHIPPING ON AMAZON - Although Amazon stocks and sells a number of items, many of the products listed are actually sold by third-party merchants via Amazon's website. Like eBay, Amazon acts to help facilitate the sale and to resolve any problems that arise.
THE PROS:
The advantages of selling on Amazon are similar to the ones discussed for eBay: it's easy to get started, you have immediate access to a large audience and you don't need to worry about marketing or SEO.
Amazon also offers its own fulfillment warehouses (Fulfillment by Amazon), which allow you to complement your drop-shipped items with products of your own without having to deal with packing, shipping or warehousing.
THE CONS:
LISTING FEES – As with eBay, you pay for access to this large network of buyers through fairly substantial commission fees. Amazon's commission fees vary by product type but are usually in the 10% to 15% range. Again, if you're working with relatively small dropshipping margins, this will take a hefty chunk out of your profits.
EXPOSURE OF SALES DATA – One risk you take using Amazon's platform is that Amazon can see all of your sales data, from the items that sell best to how much you're selling overall. Amazon has been accused of using this data to identify great selling opportunities and strengthen its own involvement in the niche, ultimately pushing out other merchants selling through its marketplace.
NO LONG-TERM CONNECTION WITH CUSTOMERS – Same deal as eBay, it’s unlikely that you’ll be able to grow a long-term relationship with your customers. Amazon exists to help themselves, so it’s in their best interest to focus on the products and not the sellers. Be prepared to be severely restricted on how you can brand your business, display your products and communicate with your customers.
NO CUSTOMIZATION – Again like eBay you’re going to be really limited in terms of customization. Everything you do in terms of branding, UI, marketing, and everything else is under Amazon’s control.
DROPSHIPPING ON YOUR OWN STORE - The alternative to selling through third-party sites like Amazon and eBay is establishing your own online store to sell products. This is the method that attracts most people interested in building a successful dropshipping business.
THE PROS:
MORE CONTROL – With your own online store you get to create a shopping environment that's conductive to selling your products and – most importantly – adding value to your customers. You can customize the look and layout, and create custom product pages optimized to best inform your customers about the products.
EASY DESIGN – Building your own e-commerce store is easy, especially with platforms like Shopify. Simply choose a store design out of hundreds of options, make any customizations you want, add your products, hook up a payment gateway and you’re up and running. Depending on the type of online store you’re looking to create, you can be up and running in one day.
MOBILE READY – Selling on eBay and Amazon via mobile can be a pain. If you choose to build your online store with well respected hosted e-commerce platform your site will likely be responsive, which means it will look great on an iPad or mobile phone. This is increasingly important these days, as nearly 30% of online purchases are made via a mobile device. Some online store platforms, like Shopify, let you manage your entire business from your mobile device. This is particularly attractive to dropshipping business owners who often like to run their business on-the-go, or even on the beach somewhere.
NO THIRD-PARTY FEES – You won't have to pay 10% to 15% of every sale to eBay or Amazon, which will significantly improve your profit margins. All-in-all you’re going to save more money by setting your dropshipping business up with an online store.
BUILDING A REAL BUSINESS – You're able to build a long-term business with a distinctive feel, known expertise and repeat customers. Most importantly, you'll be building a business with equity. It's much easier to sell a business built around an independently owned website.
THE CONS:
LESS FREE TRAFFIC – With your own site, you'll be responsible for generating traffic through marketing, SEO and paid advertising. There's more cost involved – either money or time invested – and you'll need to be willing to invest in a long-term campaign to promote your new store.
INCREASED COMPLEXITY – On Amazon and eBay, you don't have to think too much; simply fill out the standard template and publish your product listing. With your own site, you're ultimately responsible for configuring the design, layout and structure of your store. And if you're hosting your own store (versus using a hosted service like Shopify), you'll be responsible for any technical configuration related to the software and servers.
WHAT SHOULD YOU CHOOSE?
There's a lot to consider, and different platforms will be better suited for different people and situations.
If you're looking to dip your toes into the dropshipping waters and explore it as a hobby, selling on eBay and Amazon can be a viable way to move forward if you can find products with enough margin to cover your fees and still make a profit. There are many people making money selling on eBay and Amazon so you shouldn't dismiss it.
But if you're serious about building a long-term business, we recommend starting your own e-commerce store. As discussed above, it offers the most flexibility, customization, ability to connect with customers, the chance to build real brand equity, and so much more. You'll need to invest in marketing and promotion, especially in the early days, but it offers the best long-term potential and is truly the only option for those serious about selling online. Also, there's nothing wrong with selling a few items on eBay and Amazon while you're in the early stages of building your store. In fact, a number of mature, established brands sell merchandise this way, particularly through Amazon.
Remember, the key to succeeding in any business is to take the first step, even if you’re not ready. Learn as you go. But just before you do, continue reading for the final few tips!
ADDING VALUE
ADD VALUE IN NON-PRICING TERMS – Offering valuable information that complements your products is the BEST way to differentiate yourself and charge a premium price. Entrepreneurs set out to solve people's problems, and that's no different in the world of e-commerce and dropshipping. Offering expert advice and guidance within your niche is the best way to build a profitable dropshipping business. For instance, let’s say you have a furniture store. Create a visual showroom for your products, while simultaneously providing design & architectural inspiration.
ADDING VALUE IN E-COMMERCE – Just add value! Simple enough, right? Well, that's easier said than done. Some products and niches lend themselves to this strategy more than others. You should look for a few key characteristics that make adding value with educational content much easier. Specially, you'll want to look for niches that:
Have many components – The more components a product needs to function properly, the more likely customers are to turn to the internet for answers. Which purchase is more confusing: buying a new office chair or buying a home security camera system that requires multiple cameras, complex wiring and a recorder? The more components a product needs – and the more variety among those components – the greater your opportunity to add value by advising customers on which products are compatible.
Are customizable/confusing – Along the same vein, confusing and customizable products are perfect for adding value through content. Would you inherently know how to select the best hot water solar panel configuration for your climate or which type of wireless dog collar system is right for your yard? Being able to offer specific guidance on what types of products are best suited for specific environments and customers is a great way to add value.
Require technical setup or installation – It's easy to offer expert guidance for products that are difficult to set up, install or assemble. Take the security camera system from before. Let's say the camera site had a detailed 50-page installation guide that also covered the most common mistakes people make installing their own systems. If you thought the guide could save you time and hassle, there's a good chance you'd buy it from that website even if it was available for a few dollars less elsewhere. For store owners, the guides add tremendous value to customers and don't cost anything to provide once they're created.
OTHER WAYS TO ADD VALUE -
Creating comprehensive buyers' guides
Investing in detailed product descriptions and listings
Creating installation and setup guides (as discussed above)
Creating in-depth videos showing how the product works
Establishing an easy-to-follow system for understanding component compatibility
