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The True Cost of Drop Shipping: 16 Top Questions Answered!

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At first glance, dropshipping looks like a foolproof business model. Dropshippers don’t keep inventory and they don’t pay for the products they sell until a customer has already bought them. All you have to do is set up your listing, mark up your prices and collect your profits, right?

Not quite! Dropshipping is a great way to start making money online, but it’s not always easy when it comes to balancing costs and profits. In this article, you’ll find answers to some commonly asked questions about the true costs of dropshipping and how to make your dropshipping business profitable.

How Much Capital Do I Need to Start a Dropshipping Business?

The biggest perk of dropshipping is that you don’t need to front the costs for the products you’re selling. There will be some startup costs, but you won’t need to invest thousands to start your online business. Here are some of the startup and maintenance costs of dropshipping:

  1. Your online store. If you use a selling platform such as eBay or Amazon, you’ll need to factor in listing and sales fees. Running your own store lets you avoid these fees, but in exchange you’ll need to pay for hosting and any extras such as website themes or add-ons.
  2. Supplier fees. Some suppliers might charge a fee to use their dropshipping services. Choosing the right dropshipping supplier can save you time and money in the long run.
  3. Marketing costs. These costs can vary depending on the scale and methods you choose for marketing your online business. Social media, blogging, and email marketing are a few ways to market your products.
  4. Other business expenses, such as obtaining a tax ID, business credit cards and local business licenses. Be sure to check with your local laws to make sure you have everything you need to start your dropshipping business.

Is It a Profitable Business Model?

Dropshipping is as profitable as you make it. This isn’t a get-rich-quick business model; drop shipping takes time and effort if you want to have a successful online business.

What Are the Benefits of Dropshipping?

If you’re looking for an easy way to start an online business, dropshipping has a few benefits.

The lower startup costs are the most obvious perk. Without the need to keep inventory, your costs are limited to hosting/listing and other setup fees.

You’ll be able to start and run your dropshipping business anywhere you can carry a laptop, since you won’t need to store your products.

Dropshipping also offers the freedom to explore a wider range of products than wholesale buying. Is one of your product lines or niches not working out? No problem. You don’t have inventory to sell off, you can just find what you want to sell next and make new listings.

Since your “inventory” is unlimited, so you can try out new products whenever you like. If your business doesn’t take off like you hoped, you can walk away with very few losses.

What Are the Disadvantages of Dropshipping?

Dropshipping has a few disadvantages, and unfortunately most of these factors will be out of your control.

One of the largest disadvantages of dropshipping is that you won’t get the same discounts that you would from wholesale buying. Suppliers usually aren’t willing to provide you with the wholesale price for items unless you’re buying in bulk, so you can expect dropshipping surcharges in the pricing they give you, up to a few dollars more per item than you would pay wholesale. In turn, you’ll have to raise your own prices if you want to profit from your sales.

Another disadvantage is that you will have very little control over customer service. If your supplier is late with shipping, ships out poor-quality items or suddenly disappears, your online business will take the heat. Remember, your customers are expecting their orders from you, not your supplier, and just a few negative reviews can be a death sentence for online stores.

What Kind of Profit Margins Can I Expect with Dropshipping?

If you think dropshipping offers high profit margins, think again. In truth, the margins for dropshipping are generally low, for a few reasons.

Firstly, you won’t see the discounts on products that you’d enjoy if you purchased your items wholesale from your supplier. Dropshipped items often come with markups.

Secondly, the easy business model that dropshipping provides means there’s plenty of competition out there. You’ll have to keep your prices low to get sales.

There’s no “right” way to price your dropship products. Consider factors such as the MSRP (Manufacturer’s Suggested Retail Price), additional costs such as listing fees, hosting and marketing, and the niche your item falls under. Certain product categories, such as electronics, might sell in higher volumes but with a low profit margin, while other products might have a lower sales volume but enjoy a higher profit per sale.

Thankfully, there are ways to boost your dropshipping profit margins, but overall, tight margins are to be expected.

How Much Does Selling Dropshipped Products Cost?

The cost of dropshipping depends mainly on your sales platform.

The most common method of selling dropshipped products is through a marketplace like eBay. This option comes with perks such as increased traffic and ease of use, but you’ll face heavy competition. You’ll need to account for listing fees, usually a few cents per listing, and a percentage of the final sale price, which can be up to 10% per sale on eBay or even higher on Amazon.

If you’re looking for a more hands-on approach to your dropshipping business, you can choose to build your own online store.

Do Dropshippers Provide Customer Service and/or Talk with My Customers?

Usually, no. When you run a dropshipping business online, your business is the face the customers see. Think of yourself as the middleman between you customers and your supplier, with your supplier working behind the scenes.

This means that customer service and all customer interactions are up to you. Finding reliable suppliers for your dropshipping business is very important because of this.

How Do I Submit Orders to Suppliers?

Talk to your supplier about how they prefer to receive dropshipping orders. For lower sales volumes, submitting an order might be as simple as forwarding the confirmation email containing the order. If you sell in higher volumes, however, your supplier might want you to generate a daily sales sheet containing all the necessary data (item #, shipping address, etc.).

It’s a good idea to keep a list of backup suppliers on hand, just in case your primary dropshipping supplier doesn’t have the right items in stock.

How Do I Pay My Supplier?

Once your dropshipping supplier has your order, they will enter it into their system and get the order ready for shipment. You might be charged per order, or in daily, weekly or monthly invoices.

Most dropshipping suppliers will charge a company credit card provided by you for all expenses. Be sure to talk with your supplier about how they handle payments and invoicing.

Who Pays for the Shipping Costs on Orders?

Your dropshipping supplier will have their own arrangements with their local couriers, but they will pass the costs of shipping and handling on to you. It’s up to you to decide how to reflect those added costs in your pricing models and whether to charge for shipping.

How Do I Account for Dropshipping Costs for Ecommerce Sales?

Striking a balance between sales and profits can be a challenge. You want to enjoy a healthy profit per sale, but those higher prices might lead to fewer sales. Pricing your dropshipped items can be tricky, but understanding how to account for dropshipping costs can help you raise your sales volume as well as your profits.

Volume-Based Charges

Dropshippers will typically price shipping by either weight or volume. Start with a base charge for shipping to cover packaging and handling costs, then increase the cost in increments by either the number of items sold or the total weight of the final order.

Flat Fee Shipping

This means that the customer pays the same for shipping no matter what they order. This can be an easy method, and it works well if all of the items you sell are roughly the same size and weight. Be careful, though: a high flat rate can drive away potential sales, while pricing too low can lead to losses on high-volume orders.

Free Shipping

This method tends to attract more sales, especially in the days of Amazon Prime and their free shipping model.

There are a couple of ways that dropshippers make up for the loss of the shipping fee. You might set up a minimum order threshold to qualify for free shipping, which can increase your average order value. You can also cover shipping by hiding the costs in the listing price.

How Do I Get Tracking Information for Orders?

It will be up to your supplier to provide you with tracking information for each order. When choosing your dropshipping suppliers, make sure you find ones that provide tracking info on all orders and find out how and when that info will be delivered.

Do Orders Appear like They Came Directly from My Company?

Yes! You’ll need to work with your dropshipping suppliers to coordinate how you want your orders to be shipped to your customers. This includes factors such as packaging, shipping labels and item tags, if applicable.

Having your company’s name and logo on your dropshipped items is important to customer satisfaction, because they make the order look like it was shipped directly from you. Customers might wonder why they’re receiving a box from Dropship Co. when they ordered from OnlineStore Inc. Look for dropshipping suppliers that offer customization options.

What Is the Turnaround Time for Fulfilling a Dropshipped Order?

This will depend on both your supplier and you. One of the keys to having a successful dropshipping business is keeping up with fulfillment to maintain good customer service. Your supplier can’t send orders to your customers if they don’t know about the orders in the first place.

If you’re willing to put in just a few hours each day, you can easily keep up with daily order fulfillment. Stay in touch with your suppliers and make sure they’re shipping out orders in a timely manner. Quick turnaround times make for happy customers!

How Do Returns from Customers Work?

Return policies will vary by supplier. Some dropshipping suppliers will only accept returns for certain items, while others might not accept returns at all. In these cases, you will need to determine your own return policies.

In order for returns to be handled smoothly, be sure to clearly read and understand all return criteria, and pass that information to your customers accurately. Most suppliers will issue a Return Authorization (RA) number that allows them to identify the item in their system. Once a return is processed, your account will be credited.

Who Pays for the Shipping on Returned Items?

Suppliers will have different criteria for who pays for return shipping. Typically, damaged or defective items will be reshipped at the supplier’s expense, with no need for return shipping. If the customer changes their mind about an order, however, or ordered the wrong thing, they should expect to pay to return the item.

Offering free returns is an attractive sales model that might lead to more sales and higher customer satisfaction.

Finding the balance between sales and profits can be tricky, but it is possible to create a profitable dropshipping business online with a little research and understanding of the costs involved. Begin with your setup costs, hosting/listing fees and sales fees, then decide on the best way to price your items and finally create your policies and price models for shipping and returns.

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