304: Dropshipping – Everything You Need To Know With Steve Chou

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You’re listening to the My Wife, Quarter, Job podcast, the place where I bring on successful bootstrap business owners and dig deep into what strategies they use to grow their businesses. Now today I’m doing a solo episode because I want to address one of the most commonly asked questions that I get online. And every single week I probably get at least 30 to 35 emails asking me how to get started in drop shipping. And if you followed me for some time, I’m not a fan of this business model. However, I decided to put out this episode to provide everyone with a balanced view.

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of this ecommerce business model. But before again, want to give a quick shout out to Klaviyo, who is a sponsor of the show. Klaviyo helps brands build relationships across any distance, delivering email marketing moments your customers will appreciate, remember and share in good times and bad. And since it’s all driven by real time ecommerce data, you can make sure every interaction feels more personal. Now when you have a 360 degree view of the customer, the growth possibilities are endless. So visit klaviyo.com slash my wife and try it for free.

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That’s KLAVIO.com slash my wife. Now on to the show.

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Welcome to the My Wife QuitterJob podcast. In this episode, you’ll learn the pros and cons of dropshipping, why dropshipping isn’t that simple and easy as you think, and the best way to succeed with a dropshipped online store. And the reason for this episode is because many of the questions that I receive in my inbox at mywifequitterjob.com are related to opening a dropshipping store. And I can definitely see the appeal of dropshipping. After all, when you run an online store that only offers dropshipped products,

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You don’t have to worry about inventory and you don’t have to worry about product fulfillment. And in fact, all you got to do is you got to sell the product, take orders and make a decent profit. Sounds easy, right? Unfortunately, it is not that simple. And with anything that sounds too good to be true, there are always going to be gotchas. Now in theory, drop shipping sounds like a great idea because it’s inherently scalable without you having to do a lot of work upfront. But when you dig down deep into the details, there’s actually a lot of complications that you need to be aware of. Now let’s start at the beginning.

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What exactly is dropshipping? Well, dropshipping is an e-commerce business model where you can sell physical products online without having to deal with any inventory, without having to own a warehouse to store your products, and without having to deal with any shipping and handling. Basically, your supplier handles all of your product fulfillment needs, and when order comes in, all you gotta do is you notify your dropshipper and they ship your products directly to your customer on your behalf. Now, as a result, there’s practically zero upfront cost to start a dropshipped online store because you don’t have to invest any money in inventory.

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And you can literally start dropshipping for under three bucks with an open source shopping cart. All you need is a website, free credit card processing, and you can start taking orders immediately. Now, if you’ve been following me for a while, recently, my nine and 11 year old kids launched their own dropshipped e-commerce store, selling entrepreneurship t-shirts for only $2.95 a month. And you can actually check out their shop over at kidincharge.com. Now, how much money can you make dropshipping? Well, dropshipping first and foremost carries a much lower margin than a traditional e-commerce store.

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And in my experience, dropshipping margins range anywhere between 10 and 30%. But this number can obviously vary depending on what products you have to sell online. For example, I have friends who achieve 50 to 60 % margins dropshipping perfume, jewelry, and large oversized items like stoves and outdoor grills. I also know a colleague who dropships personalized funeral urns and caskets of all things that command really high margins because his niche is not price sensitive. But overall, your margins are going to depend on how crowded your market is and the level of competition.

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But for a typical dropship store, should assume a 10 to 30 % margin on average. And the best part about dropshipping is that your e-commerce business is infinitely scalable once you gain traction. And without the need to carry inventory or physically ship orders out, you can focus all of your efforts on marketing and sales. Now, how do you get started dropshipping? If dropshipping sounds like an attractive business model for you, here’s what you need to know to get started. First off, you need to set up a website or a platform to take orders from.

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Then you have to partner up with a dropship wholesaler or distributor that is willing to ship products directly to the end customer. Now as part of your partnership, you and the dropship supplier will decide on a wholesale price for the products that you want to sell. And once you have an agreement in place with your supplier, here’s exactly how dropshipping works. First, the customer places an order for a product on your online store, and then you collect the money. Then you forward the order and the shipping details directly to your dropship supplier and pay the agreed upon wholesale price for the product.

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Your dropshipper supplier then packages and ships the order directly to the end customer as if it were shipped from your own eCommerce store. And then you basically get to pocket the difference between your selling price and wholesale price. So does that sound good to you? Well, here’s how you can get started in a couple of easy steps. So first things first, you got to set up your website. And this is actually the easy part of the entire process because there’s so many easy to use options available today. And overall, your eCommerce platform decision will be based on your budget, what features you need and how tech savvy you are.

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And the three cards I typically recommend are Shopify, BigCommerce, and WooCommerce. Now for my kids store over at kidncharge.com, we opted for WooCommerce because launching an online store on WooCommerce is practically free. Now the hardest part, I guess, of the whole process is to find drop ship suppliers. And because drop shipping is so popular and the internet is ripe with scammers, you got to learn how to spot a fake wholesaler. So first off, a real drop ship wholesaler will never charge you a monthly fee.

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just for the privilege of accessing their catalog of goods. Real dropship wholesalers are merely distributors and their goal is to actually sell their product in bulk and not run a monthly membership site. Second of all, a real dropship supplier will never sell their own products to the end consumer at wholesale prices either. And the key thing to realize here is that a wholesaler’s primary customer is a retail shop and in general, it would go against their best interest to compete with their own customers. So once you know what to look for, you can actually begin starting to look for real suppliers

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using the strategies that I’m about to talk about. Now the easiest way and the most reliable way to find a dropship wholesaler is to simply contact the manufacturer. Simply call the manufacturer and then ask them for a list of wholesale distributors. And then once you have this list, you can contact the distributor directly and ask them if they are willing to dropship. Now what’s nice is that most distributors will carry a wide variety of products from a number of different manufacturers. And as a result, if you can land a big distributor, you can almost always gain access to a large catalog.

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of items to carry in your shop. But establishing a partnership with a distributor can be hit or miss and you need to be prepared. After all, most legit suppliers only want to deal with legit retailers. So you got to make sure you have all of your ducks in a row before you reach out to them. And as part of running Bumblebee Linens, we actually get asked to drop ship our products all the time. And in order for a distributor to want to invest their time in you, they need to know that you’re legit. So you definitely need to have a mock website up and running to show them you are serious.

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and you need to prove to your suppliers that you’re the real deal and that you can actually move product. Now, the other way to find a drop ship wholesaler is if you know that one of your competitors runs a drop shipped online store, then you can find out who their suppliers are by simply placing an order on their website. And then once you receive the package, all you got to do is you got to look at the shipping label for a return address. And while the shipping label might not have the supplier’s name on it, you can actually easily Google the address and find out the name of the distributor.

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Now, if you don’t want to do all that legwork, another way to find wholesale distributors is by going to a trade show. And oftentimes with the trade show, because all the vendors are all congregate in the same place, it can be much more efficient to find your suppliers that way. And not only does meeting face to face make it easier to develop a personal relationship, but you can also touch and handle the vendors entire product catalog as well. Now what’s nice is that most trade shows, at least in the U.S., are 100 % free as long as you have a business license. As a result, you have nothing to lose for attending.

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and most major cities actually have a wholesale trade show many times per year in a variety of niches. And the final way to find dropship suppliers is to use a directory. A dropship directory is a database of suppliers that are organized by niche, and it can be a convenient way to quickly find products to sell for dropshipping. So there’s a couple companies out there like Worldwide Brands, and what they do is they pre-vet every company in their directory to make sure that they’re legit.

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But of course, it’s a downside of using a whole directory is that the distributors and the products are easily accessible to other members who sign up for the directory as well. And as a result, the products you find in a directory are probably going to be a lot more competitive. However, that being said, wholesale directories can be a great way to brainstorm and find vendors immediately. I’ve actually had a worldwide brands membership for 10 years now. And while I don’t use them at all anymore, by the time it was a convenient way to find a list of wholesale suppliers, but there weren’t that many in my niche.

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Now, once you find a couple of drop ship wholesalers that you want to work with, you got to vet them because your business hinges on the quality of your drop shippers. And here’s some attributes that you want to look for when you’re evaluating your suppliers. Because remember, successful drop shipping requires a partnership between you and your distributor and trust is absolutely essential. And as a result, before you rely on any sort of drop ship vendor, you should always place a test order to see how your order is going to be handled. And specifically, this is what I look for. I look for how fast the order ships.

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And after all shipping time is extremely important for an e-commerce store. And it’s essential that orders are shipped between one to two business days. The other thing you want to pay attention to is how the order is packed. Is it just shoved in a crappy box with some packing peanuts? And is the box unmarked with the supplier’s business name? How is the customer service? Do they respond in a timely manner? Do they provide tracking information and invoice? Do they give refunds for defective merchandise and returns? These are all things that you got to check before you go with a drop ship vendor.

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Now here’s some other questions that you might want to ask depending on what you want to sell, but you might want to ask if they can customize their products, meaning if you can insert inserts and your own marketing paraphernalia into the box. What are your pricing terms and are there quantity discounts? Oftentimes when it comes to price breaks, you actually want to negotiate quantity discounts upfront so you know what the pricing to expect as your store grows. After all, if you decide to negotiate after you’ve already hit a certain milestone,

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Guess what? The drop ship vendor is going to know that you need them and they’re going to be less likely to negotiate. You also want to ask what their drop ship fee is. Most drop shippers charge a pre-order drop ship fee just for kind of like the privilege of packing up the order for shipment. You also want to ask about the return policy. Even though drop shippers ship on your behalf, all returns will actually be sent back to you. As a result, you need to understand the return policy to get your money back. You also want to ask if you can actually purchase all these items wholesale at lower prices.

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After all, you might want to carry inventory for your most popular products to make a higher profit margin. Now, in general, the price for buying wholesale inventory should be less than your drop ship price. Now here’s an advanced question they might want to ask. You might want to ask if the wholesale vendor uses EDI. EDI stands for electronic data interchange, and it’s an automated way for a drop ship supplier to transmit their inventory stock to your website in real time. And basically EDI allows your store and your supplier to stay in sync, which makes customer support that much easier.

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Now, in addition to all these questions that I just outlined, it’s also important to ask for a single point of contact at your wholesale vendor to deal with customer support and product issues as they arise when you start selling your product. After all, there are a bunch of things that can go wrong. So for example, what happens when a product goes out of stock? What happens if you sell a product that’s been discontinued? What happens if shipping is late or misses a deadline? You’re going to want someone there that you can talk to. Now, when it comes to problems and running a drop ship store, it should in theory be more hands off than a traditional online store.

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but there’s actually specific aspects of dropshipping that you need to be aware of. So as I mentioned before, handling returns and refunds. Even though you’re not in charge of product fulfillment, you are still responsible for accepting returns and providing customer support for defective merchandise. After all, the key thing to realize with dropshipping is that you are the face of your business and the customer is not even aware of any of this. They don’t know about your dropshipping arrangement that you have with your supplier. As far as the customer is concerned, you are the supplier.

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And as a result, have to deal with returns yourself and you actually can’t depend on your supplier for customer support. Here’s how returns are typically handled for a drop ship store. First off, the customer asks for refund by contacting your customer support phone or email. Then you contact your supplier for an RMA number. Your customer sends the product back to your supplier with the RMA number clearly indicated on the packaging. And then the supplier refunds the wholesale costs back to your account when the package is received. And then finally you provide the refund to your customer.

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Now this product sounds like there’s a lot of moving parts to it. And in addition to this, sometimes your supplier may charge a restocking fee, which you can either pass along to your customer or you can actually choose to eat the cost. Either way, returns are a part of doing business. Now, when a customer orders a product that is out of stock, it is also your responsibility to communicate this to the customer. And typically you should give the customer three options. One, you can wait for the product to come back in stock and provide an estimated time of arrival. You can provide an exchange or you can just refund their money outright.

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Now here is actually where things get really complicated. Oftentimes you’ll deal with multiple dropshippers in your store. And if you work with multiple dropshippers, your customer may purchase multiple products that span multiple suppliers. And when this happens, the customer will actually receive their order broken apart into multiple shipments. In addition, you’ll be charged a separate shipping costs from each dropship supplier. And when situations like this arrive, you must inform the customer so that they’re not confused when they receive multiple packages for their order.

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Furthermore, because it costs you a lot more money to ship across different dropshippers, you can either charge an additional shipping cost or eat the cost altogether. Alright, so now I’ve gone over some of the complications, let’s just talk about straight pros and cons of dropshipping. Now if you’re able to find a quality dropship supplier, then dropshipping is really attractive because you can run your business from anywhere. All you need is a computer and an internet connection and you are good to go. As a result, if you’re brand new to ecommerce with a very small budget,

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you can actually use dropshipping as a stepping stone to get started and then transition to a more lucrative business model when you are ready. And in addition to convenience, there are a number of pros for dropshipping. Number one, the set of costs are practically zero. There’s no upfront inventory costs. There’s no warehouse costs. There’s no overhead. I can’t think of any business model that is less expensive to start. And my kid store over at Kid in Charge was pretty much free. The next advantage is that the risks of starting a dropship store are much lower and the beauty of dropshipping

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is that there’s no upfront costs and because you’re investing so little money upfront, there’s very little to lose. And because your business is inventory-less, there’s no pressure to make sales because you don’t have to bear the overhead of storage or shipping. In addition, you can carry a huge variety of items in your store because you don’t have to store any of it. And if you browse dropship directories or go to trade shows, you’ll find dropship suppliers for practically every single niche that you can think of. You can choose to carry just a single product or thousands of products online. It doesn’t matter.

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Once you figure out what you want to sell, you can usually find a vendor that will supply you. The other thing that’s great about dropshipping is it is location independent. A dropshipping business can be run from anywhere. You don’t need an office, you don’t need a warehouse or any employees at all. And as a result of this freedom, you can focus your efforts on growing your business instead of taking care of inventory and overhead. So overall, dropshipping is actually one of the most scalable e-commerce business models out there because your overhead does not grow linearly with your sales.

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And in fact, have several colleagues who run good sized dropship businesses with just a handful of employees. Now, does this sound too good to be true to you? If your gut is telling you that dropshipping sounds too good to be true, then your instincts are correct. As with everything in life, there are always downsides to every single business model. And most people stumble into dropshipping with the expectation of quick riches, only to realize that making money with a dropship store is actually much harder than you anticipate. So here are some cons.

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First off, you’re not going to be getting the lowest price. Most people open up a drop ship online store with the misconception that they’ll be receiving the same wholesale pricing as everyone else for their products. But in reality, drop ship distributors often charge extra fees and tack these fees onto the quoted wholesale price. After all, put yourself in the distributor’s shoes for a moment. Would you prefer to sell a large bulk quantity of products all at once to a store? Or would you rather sell onesie twosie amounts to individual customers and be forced to individually ship and pack each item?

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The distributor is doing all the work here and this will certainly be reflected in your wholesale price. So just to throw out some numbers here, most dropship stores get between 10 to 30 % gross margins, whereas most traditional shops that carry inventory have 50 % gross margins, which is a huge difference. And because your wholesale prices are higher than a traditional store, you will not be able to compete as effectively on price unless you take a good size profit hit. But more importantly, lower margins will inhibit your ability to advertise on sites like Facebook and Google.

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Not only that, but less profit per sale also makes customer service more problematic. So for example, with our online store, our margins are between 70 and 90%. And as a result, whenever we get an angry customer, we just give them a refund and tell them to keep the product. No harm, no loss. Because our margins are so high, we can actually afford to take the hit. But with drop shipping, the convenience of not having to fulfill orders comes at a cost. The next disadvantage is that you’re going to have to charge more for shipping.

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Sometimes when you run a dropship store, you’re going to have to use more than one dropshipper. And using two or more different dropshippers means that two or more companies will be making separate shipments to your customer, which means that two or more companies are going to be charging you their own separate shipping costs. Now, if I’m a customer and I buy products from your store across three different distributors, for example, you will have to charge me a much higher shipping costs just so you can break even. And the only way around this is to use one dropship distributor, which may not carry the breadth of products that you want in your store.

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And the result is that you will have to pass these extra costs onto the consumer, which reduces your price competitiveness. Running a drop ship store can also be a logistical nightmare. Now you might think that since your drop ship distributor is doing all the work, that he can just sit back and relax, but unfortunately you actually have to deal with your customer base. You got to be the one to answer all the questions. You got to be the one to apologize when an order doesn’t arrive on time, even if it’s not your fault. And the main problem here is that when you use several different drop ship distributors,

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Getting the entire order to the end customer can be a logistical nightmare. All distributors will have different shipping times and will be shipping from completely different locations. And if a customer orders products across three different distributors, they’ll end up receiving three different packages at varying times. And if an order is particularly time sensitive and needs to be rushed, you will have to make sure that all of your distributors can actually deliver their products on time. So bottom line, you are actually staking the reputation of your online store

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and linking yourself to all of your dropship distributors in a single chain. If even a single distributor is unreliable, then it will reflect negatively on your online store.

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If you sell on Amazon or run any online business for that matter, you’re going to need a trademark to protect your intellectual property. Not only that, but a trademark is absolutely necessary to register your brand on Amazon. Now I used to think that any old trademark registration service would work and that could even try to register my own trademark by myself on the cheap, but I was dead wrong. Securing a trademark without a strategy in place usually results in either an outright rejection or a worthless, unenforceable trademark.

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Now that is why I work with Steven Weigler and his team from Emerge Council. They have a package service called Total TM, which provides the same attention to detail and process that large law firms do at a fraction of the price. Now for me personally, I like Emerge Council because of their philosophy. Their goal is to maximize IP protection while minimizing the price. So before you decide to register a trademark by yourself or file for other IP protection, such as a copyright or a patent, check out Emerge Council first and get a free consult.

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For more information, go to emerge council.com and click on the Amazon sellers button and tell Steve that Steve sent you to receive a hundred dollar discount on the total TM package for Amazon sellers. Once again, that’s merged council.com over at EMERGECOUNSEL.com. Now back to the show.

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Now most importantly, and this is probably the biggest disadvantage of dropshipping is that customer service and your online reputation can make or break your business. And all this customer service is basically out of your hands with the worldwide web, social media, and Twitter news of a botched transaction can spread extremely fast. So it is absolutely crucial that you maintain a great image for your online store. So for example, whenever I receive a call for our wedding linen store, I actually always take the time to ask how they found us.

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And the majority of the time that people will find us do so because they were referred to us by one of their friends. Word travels fast. Now with dropshipping, you unfortunately have very little control over your customer service. Since you are not in charge of product fulfillment, you can’t actually control when a customer will receive their product. And if a customer wants to make a return, it’s actually a major pain because you have to make sure that you get your money back before you can actually provide a refund.

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Sure, there many ways to mitigate these problems, but the solution always involves either raising prices or taking a profit hit at the expense of customer satisfaction. And finally, these days with Amazon, Amazon actually makes dropshipping a lot less attractive. Because prior to Amazon, it was much harder for companies to sell their goods to the masses. And as a result, distributors had to rely on traditional retailers and dropshippers to help them move product. But today, Amazon controls such a large piece of the e-commerce pie,

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that most companies can get by with just selling on Amazon as a third party seller. Amazon handles your sales, your product fulfillment, your customer service, basically everything that a traditional retailer would typically take care of. But the difference is that the distributor gets to keep all the extra product. And if you are a drop chip store selling the exact same products that can be found on Amazon, it will be impossible for you to compete on price. And as a result, you have very little leverage. As a consumer, would you rather buy from Amazon at a lower price?

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Or would you pay more to buy from an unknown shop? Chances are they’re going to go with Amazon. Now, thus far, I’ve been talking about dropshipping in the traditional sense where you have your own website and you actually find a real distributor to dropship on your behalf. But there’s actually other dropshipping business models that I kind of want to mention here. Now keep in mind the dropshipping methods that I’m going to talk about right now are not recommended and you should not pursue these business models. So you may have heard about dropshipping from Amazon to eBay.

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And drop shipping from Amazon to eBay became popular because it literally requires zero upfront costs. You don’t need a website and all of your sales come directly from eBay. Here’s how it works. You put up a listing on eBay for a product that you want to sell at a higher price than Amazon. Then when a customer places their order on eBay, you make an identical purchase on Amazon and have it shipped directly to the eBay customer and you pocket the difference in price. Now, a couple of things about this business model. This form of eBay drop shipping is no longer allowed.

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and eBay reserves the right to ban your account if you are ever caught. And while dropshipping is technically legal on eBay, they only allow dropshipping when orders are fulfilled directly from a wholesale supplier. So you are not allowed to fill your goods from Amazon, Walmart, or any other marketplace. Bottom line, do not do this. The other dropshipping model is dropshipping to Amazon from AliExpress. Now dropshipping is technically allowed on Amazon as well, but the order must be fulfilled from a legit

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wholesale supplier. And like eBay, Amazon reserves the right to ban your account if you try to fulfill your order from a third party marketplace. Now for the past couple of years, get rich, quick business owners started drop shipping cheap junk from AliExpress on Amazon and pocketing the difference in cost. And this process was called AliExpress drop shipping. Here’s how it works. You put up a listing on Amazon for an AliExpress product that you want to sell.

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And then when a customer places that order, you make a purchase on AliExpress for the identical product and have it shipped to the Amazon customer. And then you pocket the difference in price. Please do not try this business model as it relies on a shipping loophole called ePacket that will soon be obsolete. Now here’s when drop shipping makes sense. While I would never personally start a pure drop ship store today, there’s actually many ways to use drop shipping to your advantage. Because you don’t have to carry inventory, you can instantly throw up an online store with hundreds of products in a short period of time.

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And then you can use this shop to conduct market research and based on which products sell well, you can pick and choose the most successful products to buy inventory for and enjoy higher margins. Now, dropshipping in my opinion is best used as a vehicle for product validation or for flushing out an online store that is sparse in certain categories. So overall it’s best to use dropshipping when you need product validation, when you are on a major budget, you are new to e-commerce, or if you want to carry a large variety of products without putting forth the money upfront for inventory.

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Now here’s when to avoid dropshipping. Unless you are a brand new entrepreneur on a budget or an online store owner who is exploring new products, dropshipping is generally not a good choice for seasoned shop owners. Because you are selling other people’s products, it is difficult to build your own brand. After all, there’s so many aspects of your supply chain and your customer that are beyond your control. So for example, you have no control over the customer unboxing experience. If an order is shipped late or never arrives, the blame is on you and you have no control over inventory.

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If have a hot selling product, but the supplier is out of stock, then you won’t make any money. So in a nutshell, your drop ship business lives and dies with your suppliers. And if they’re not reliable, then you’re not going to succeed. So therefore, if your goal is to build a brand, then drop shipping is not the way to go. So overall, if any of the below describes your situation, then I would avoid drop shipping. If you’re trying to build a brand, if you want high margins, if you want exclusivity, all those things are not part of drop shipping.

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And if you’re trying to build a brand especially, don’t do dropshipping. So the million dollar question is, is dropshipping really less work? And it really depends. Arguably the time that you save and not having to deal with inventory and fulfillment will be spent dealing with customers unless you have a reliable core of dropship distributors. And one thing I forgot to mention is that most vendors that you’ll encounter do not use EDI, which means that if an item is out of stock, you’ll actually have to interface with the customer to let them know when they can have their items.

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And unless your shopping cart is closely tied to your dropshipper’s database, it’s going to be difficult to maintain an accurate inventory account. So bottom line with dropshipping, you’re basically trading off not having to deal with fulfillment logistics with having to deal with more customer service headaches. And depending on your personality, this may or may not be a wise trade off. But don’t get me wrong. Many people have been successful with dropshipping as it works very well with small niche stores. But my personal opinion is to avoid it if you can. All right. And so

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If you’ve been asking me lots of questions via email about dropshipping, hopefully this episode covers every single aspect.

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You can easily put together automated flows like an abandoned card sequence, a post purchase flow, a win back campaign. Basically all these sequences that will make you money on autopilot. So head on over to mywifequitterjob.com slash KLAVIO. Once again, that’s mywifequitterjob.com slash KLAVIO. Now I talk about how I use all of these tools on my blog. And if you are interested in starting your own e-commerce store, head on over to mywifequitterjob.com and sign up for my free six day mini course. Just type in your email and I’ll send you the course right away. Thanks for listening.

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Thanks for listening to the My Wife, Quit or Job? where we are giving the courage people need to start their own online business. For more information, visit Steve’s blog at www.mywifequitterjob.com.