Dropshipping is a great business model if you want to be location-independent, don’t want the hassle of managing inventory, and want to be able to run your entire business from an iPad or a laptop. This post will explain what drop shipping means. Dropshipping is a popular option for many online businesses. Some may completely rely on it, while others may use it to supplement their catalogue. However, it has its challenges.
Challenge 1: Low Profit Margin
Drop-ship suppliers sell one unit per order, unlike regular wholesalers who would sell you merchandise in bulk. They sell one unit and have to deal with a lot more hassle for each order. To justify this, their prices are much higher than regular wholesalers.
You may be charged a drop-ship fee for shipping, packaging and labor.
This is a major problem for online store owners. The average margin we have left is between 15-20%. Things start to look really grim when you add up all costs like shipping and fees.
There are several ways around this problem. Each has its own benefits.
Higher prices are the solution
The best way to increase your profit margin is to raise your prices. You can increase your profit margin by increasing your prices. For example, if you were making $20 per order for a product that you feel is a little more, you could just raise the price $10 to make $27 (after fees). Although this advice may seem counterintuitive as you might think that the lowest price wins, it is not.
Even though I have poor margins, my top selling products are $10-20 more expensive than my competitors’, and yet, I manage to sell product.
While you don’t want prices to go up too much, a little bit here or there could increase customer perception of product value . The best prices may not always be the most desirable.
A Macbook Pro is being sold by an eBay seller for $600. Would you consider buying it? Would such a low price alert you to the possibility that this Macbook Pro was stolen from a truck’s back?
Solution: Compensation with Volume
The second solution to low margins is to sell more goods. A margin of 15% for $100 items means that you earn $15 per sale. It may not be worthwhile to open an entire store if you only get 30-40 orders per month. If you can convert 30-40 orders per month into 300-400, you’re talking business. The lower margins will be offset by the higher volume.
Although it’s a lot of math, business is just math.
Solution: Talk to your supplier
You can also negotiate a better deal for your supplier and get a deeper discount on their products. You can usually get anywhere from 5-10% margin, which is a huge benefit for those who sell expensive items like me.
This is the problem: A supplier will not take your request seriously if you haven’t given them enough business!
Challenge 2: Tough Landscape for PPC
Pay-per-click ads (Google Adwords, Bing Ads), is a world where dogs eat dogs. Keywords are becoming more expensive than ever before, with high competition and low profit margins. Although it is difficult to make a profit, it is possible. PPC professionals have said time and again that it is always viable. However, in my current niche I have not had any success.
PPC made some sales in an older store but not enough to bring the business up.
It’s back to math to find out if PPC is right for you.
A $100 product selling at a 15% margin will result in a $15 per sale. You must decide how much you will pay to run ads. Otherwise, ads won’t make sense.
This is all well and good but keywords can be quite expensive – from $0.40 to $1.50 up to $4 or $5 per click. If you don’t get one of the three to four clicks that converts, you will lose your money.
Ouch.
Solution: Hyper Optimize Ads
However, I am not saying PPC isn’t possible – it can and will. You must be prepared to optimize, optimize and test, then optimize, then test some until you see a profit. You need to have enough cash in your business to cover all of the optimizing and testing.
Optimizing your ads means that you keep weeding keywords out until you are left only with those keywords and ads that work. Eventually, you will have super-specific keywords that target a small number of products.
It is unrealistic to assume that every product in your store can be sold using advertising.
This statement is likely to be disagreed with by many of you. Please leave a comment if you disagree!
Solution: Concentrate on other traffic sources
Google Adwords are not the only traffic source – there’s tons more like organic, social and referral email. You can also use Facebook ads to grow your email list and guest blog and create links to improve your SEO. Also, you can develop a content strategy for your blog and drive traffic and HTML3_ increase your email marketing HTML3_. Most importantly, happy customers will refer you to their friends!
Challenge 3: Too Much Competition
Dropshipping is simple – anyone can set up a store to start selling products immediately. It also presents a problem.
Everybody, even you, ends up selling the exact same product. There are now hundreds of people competing for customers’ attention and the market is very crowded. There is also Amazon and Walmart that sell the same or similar products.
What now?
Solution: Be the best of the best
Everybody has a shop selling blue widgets, even you. Right?
All stores are different. One store may look like it was built in 2000, but the store isn’t exactly the same.
Although one store may be better than another, there is still room for improvement.
You might not find a single store that focuses exclusively on your product.
Another store may not have a blog.
The majority of stores didn’t spend much time or thought on their product descriptions.
Can you fill in the gaps left by your competitors on your store? Your store will be the best, period. If you are able to pull it off, and if you put in the effort to make your store an authority, you will be a true star.
Solution: Go where no one else is
Marketing is 90% of managing an ecommerce shop. This is where there’s a huge opportunity. Many people try to market themselves in the same place.
Imagine if you could discover where your potential customers hang out and then market to them. This would allow you to effectively control the entire customer base and nobody else would know. Your competitors may not even be aware that you exist. However, you still do very well in your niche.
Reddit and forums are two great places to market yourself, especially if you’re a local or highly-specialized member.
NOTE: Reddit, forums, and other social media sites are notorious for spammers. Instead of pushing your products, focus on building trust and encouraging dialog.
Challenge 4: Very Little Branding Opportunity
Dropship stores don’t allow you to control the merchandise, packaging, labeling, and contents. It is difficult to personalize branding because of this.
You can make a lasting impression by writing a thank you note or packaging the product in something unique and memorable. Are you shipping dropped goods? There is not much space. Your parcels will look generic and ugly unless you are the sole merchant that a supplier dropsships to. How can you make yourself stand out and create a brand?
Solution: Provide excellent customer service
Even though you may not have direct control of the product, you can control the entire customer experience, from the moment they find your site to the time they make a purchase.
These are some of the ways you can wow your customers.
- Awesome product pages are essential. You need great images, strong descriptions, videos, and all the rest. Your pages should be so great that customers won’t have to look elsewhere for their research.
- You can have a very simple checkout and make it easy for people to get in touch with you
- Personalize confirmation emails to match your site’s personality. Stock emails from shopping carts are horrible.
- Send a personal email to big spenders thanking them for their business and offering your services. Sign off as John Doe – Founder
- You can also call to express your gratitude for their order
- Communicate! Communicate!
Solution: Get very active on social media
A strong and active presence on social media is another way to build your brand. Social media is more than just for marketing products. It’s also a way to interact with customers and show your human side. Chat, chat, post relevant content and make memes. Share a video. You can make new friends!
Challenge 5: Fulfillment issues
Fulfillment issues are the most difficult problem for dropship merchants. Although your store might say that a product is in stock at the moment, it may not be available when you are ready to fulfill it. In this case, you will need to email the customer and inform them that the order is backordered.
It is a pain!
The supplier who likes to be easy and sends the product as soon as they feel like it, often a few days after you sent it. The customer becomes impatient and asks why there isn’t a tracking number.
These are all facts of dropshipping. You have to accept them as they are back-end things you cannot control unless you stock the products yourself.
Solution: Let customers know that the lead time is slightly longer
This is the simplest way to alert the customer that shipping can take a while.
An online hardware store is owned by someone I know. Delivery takes 7-14 days. This is the reality of their business and they share that information with customers. He still makes a good living from his store.
It is possible to soften the pain of slow shipping by offering free shipping – people will be more open if you focus on the FREE part.
