Dropshipping Guide for Beginners

Jun 2020
Nikolay Pasholok
Product Owner, Calcurates
Dropshipping is one of the most popular business models used by aspiring e-commerce entrepreneurs today. Indeed, a scheme that frees you from having a warehouse, pouring resources into production, and dealing with shipping looks enticing, but it is not all that simple.

As a dropshipping store owner, you deal directly with clients and offer them a curated assortment of products. When a client makes a purchase, it automatically goes through your store and on to the supplier the store is partnered with. The supplier, usually a manufacturer or a wholesale seller, then ships the product straight to your customer. Online stores that use the dropshipping model invest much in customer support, overall service quality, and marketing. That is what the dropshipping business is really about.

E-commerce dropshipping is not as straightforward as many sources would lead you to believe, so let's take a look in detail at how the model works, what ins and outs it has, and how you can configure dropshipping in Magento.

How Dropshipping Works

A standard dropshipping operation can be broken down into several steps:
The store owner creates a list of trusted suppliers based on the items the owner wants to see on the website. These suppliers are usually selected from a list of manufacturers or wholesale sellers, but there are no restrictions; a store can work even with a retail seller.
The selected items are displayed in the store and marketed to clients. Although the marketplace typically neither manufactures nor owns products, it is not uncommon for a store to put its brand on the items.
When the customer places an order, the order gets relayed to the supplier. This can be handled through special dropshipping apps and platforms or be done manually.
The supplier receives the order and ships it to the customer, following packaging and branding guidelines agreed upon with the store.
The client gets the product. Although it is the supplier that ships the order, this party remains anonymous to the customer. Receipts, packaging, and branding usually feature only the store's name.
As to how the dropshipping payment system works, it usually involves signing a contract with the supplier and providing that supplier with an account or a credit card number to charge for every order.

Since the marketplace effectively serves as a reseller, the income from dropshipping mainly derives from the margins on pricing. Despite most of the price going to the supplier, dropshipping businesses are profitable when marketed correctly.

Remember, the store charges extra for the careful curation of products, creating a satisfying customer experience, and handling any issues clients may have with their order.

Dropshipping Business Pros and Cons

Before starting a dropshipping business, it is essential to examine all aspects of this model. Although having a relatively low entry threshold, it has many undercurrents that can easily bankrupt an unwary entrepreneur.

Benefits of Dropshipping

There's no need to invest much to get the business going. You don't have to purchase inventory, rent out a warehouse, and pay salaries to several workers; the capital required to start a dropshipping business, in most cases, boils down to the cost of a well-made website and marketing. Recurring expenses are low as well, especially in the beginning, when a single person can perform customer support and order processing. Some dropshipping website owners don't even rent an office and prefer handling everything from home.
Financial restrictions do not limit business growth. Scaling up a traditional online store is a lot of work. It often requires hiring more people, investing in more inventory, and purchasing additional space at the warehouse. With dropshipping, however, all item handling is done by the supplier, and order processing is highly automated, so little is required from the store owner when the clientele increases.
You don't deal with physical items. Eliminating all the hassle of stock management means you don't have to handle packaging, shipping, or restocking the inventory.
The business is not tied down to a location. Compared to e-commerce models that imply a physical warehouse and an office, dropshipping is far more flexible; it can be effectively run from anywhere.

Disadvantages of Dropshipping

The profits are significantly lower than those of more traditional e-commerce models because it's an extremely competitive market; hundreds of ambitious entrepreneurs open new marketplaces every month. To stand out, many sell their products at the lowest price they can, thereby pulling down the market value of the items. This means that the average level of margins is smaller compared to offline retail.
You have little control over the product. Dropshipping entails that the critical features of the product, including its design, functionality, and branding, are mostly in the hands of the supplier. Although your name may be on the receipt, the product itself will likely be made with zero input from your side. That also means you will have to answer for every flaw in design and functionality without being responsible.
There may be possible issues with the suppliers. When you start a dropshipping business, it is essential to find trustworthy suppliers. Since it is the store that deals with all the customer's complaints, you may regularly apologize for another person's mistakes. Making sure the inventory is in order also becomes more complicated. While there are apps that allow you to monitor the supplier's stock in real-time and even sync it with your website, making dropshipping more automated, though situations, such as when a customer gets charged for an item out of stock, can still happen. Any mistakes with packaging and shipping can also lead to an increase in dropshipping delivery times.
Shipping rates can cause complications. Since any dropshipping system usually deals with several suppliers, there's a good chance the customer's order would be comprised of products shipped from different locations and using various services. Relaying such information to the customer and charging him three separate shipping fees doesn't reflect well on the store's image, and handling extra fees at the expense of your business can lead to financial loss. You can avoid such inconveniences with Calcurates: it aggregates multiple shipping rates and shows them to the customer as a sum.

Choose the Best Dropshipper for Your Business

Having the right dropshipping supplier is critical if you want your business to succeed, but finding one may pose a problem. Since wholesale sellers and manufacturers don't market their products much, relying instead on direct B2B contacts and trade shows, you will likely stumble onto a dozen companies pretending to be a legitimate dropshipping supplier. As the industry is booming, they implement a predatory model of ripping off inexperienced entrepreneurs by reselling them someone else's inventory with a significant mark-up and extra fees.

While many may ask, "Where do I find dropshipping suppliers?", the better question is, "Where do I find dropshipping products?". Deciding on a product and tracking down its manufacturer is one of the best ways to obtain a reliable partner. Manufacturers can give you the contact of an official wholesaler who works with them or even offer to handle the dropshipping directly. Of course, the fewer elements between the manufacturer and you in the supply chain, the better the prices are.

Here are some other ways of finding yourself a reliable supplier and pinpointing the product niche to work in:
Go to trade shows
Even in this digital age, manufacturers and large wholesale sellers rely on big worldwide trade shows to make new contacts. Purchasing a ticket to such a show may contribute to the research process since you can interact with the manufacturers, check out the product, and take a look at the competition. Only buy a ticket if you have your niche chosen; otherwise, it can be a waste of time and money.
Use supplier directories
Supplier directories are perfect when you need new ideas for product line-ups or when you are trying to decide on a product niche you want to follow. Since even the smallest directory has over a thousand suppliers and over half a million products, it can serve as an excellent overview of the market, pricing, and competition. While you can find a dropshipping supplier through such a directory, it is not as capable of a method as others. Access to such directories also often comes with a paid subscription or a one-time purchase.
Place an order with your direct competitor
After the order arrives, you will have the return address of the supplier who sent you the item. Finding him after that requires little work. Such an option can also give some insights into dropshipping from a customer's perspective.
Google it
Ultimately, you can find a supplier just by web browsing, although it is not that easy. As wholesalers don't pay much attention to digital marketing, their websites are usually way below the first couple of search pages. The key is to try out different keyword combinations and always look through at least several pages. It is more work, but it's free and can net you just the right suppliers.
The dropshipping business model requires both parties to be legal entities, so you won't be able to deal with a supplier as an individual.

When choosing a supplier, you need to make sure to find one that will help your business and not hinder its growth. Be on the lookout for a partner that meets the following criteria:
It's up-to-date
Many manufacturers and wholesalers out there modernize their production regularly, follow the latest innovations, and embrace modern forms of communication. But there are also a considerable number of more conservative players who can slow down a quick digital business like dropshipping.
It produces quality goods
It may be a given that a decent manufacturer should have a high standard for its products, but many entrepreneurs fall for lower prices and ignore the fact that they will have to deal with a massive number of flawed items and returns.
Its warehouses are conveniently located
Since shipping charges would form a considerable portion of the product price, it is better to look for suppliers whose warehouse locations cover the largest possible area. The more warehouses the supplier has across the country, the cheaper the shipping will be.

Dropshipping with Magento

As Magento is one of the leading e-commerce platforms, dropshipping business owners often use it as the backbone of their online stores. Among its other dropshipping solutions, Magento allows for a wide array of customization through built-in utilities and third-party extensions.

While setting up a dropshipping store is generally no different than a traditional online store, you can make your business routine much smoother by using the Calcurates extension to negate some of the common problems of dropshipping through Magento.

Calcurates makes working with several warehouses more convenient through its multi-origin option as well as the option to introduce rules and attributes to the product items. When you set up multiple origins for dropshipping, the Magento extension optimizes the number of warehouses for each order, bringing it down to the minimum necessary. Applying custom attributes to your products allows you to create custom rules for shipping and handling each category. Such an option is especially valuable when dealing with multiple suppliers that use different carriers and therefore charge differently for shipping.

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