Dropshipping is a model of commerce in which a retailer, rather than stocking items, passes orders onto a supplier who then fulfills the sale directly to the retailer’s customers. It’s been around for a few decades now, but expanded in the 2010s with online platforms such as AliExpress, Shopify and Oberlo. Each expedites different aspects of the process, from setting up a virtual storefront to contacting suppliers.
Given these conveniences and the low initial costs, dropshipping gained a reputation as an easy business to get into. The growth of ecommerce, driven in part by the COVID pandemic, has helped bolster its appeal as well.
As with all businesses, however, dropshipping has burned its fair share of would-be entrepreneurs. Seasoned dropshippers caution against seeing it as a quick-profit venture. And with various changes in logistics, ecommerce regulations, and the nature of online shopping, people are rightly wondering: will dropshipping be profitable in the years ahead?
You can definitely make a profit on dropshipping.
The dropshipping market, with an estimated value of over USD 160 billion, is expected to grow 18.3% per year in the near future. This presents plentiful opportunities for recent entrants or people about to get into it.
The more pertinent question is how to make a profit in dropshipping, especially given recent trends and changes. This article will go over some basic principles of dropshipping, as well as considerations specific to the last couple of years, and the foreseeable future.
That said, since dropshipping presents so many opportunities and can be tapped into in myriad ways, it’d take more space than we have to get into everything. Think of this, instead, as a guide to finding profitable opportunities in dropshipping, and avoiding some of the pitfalls.
As always, turning a profit means earning more than what you spend. Revenue is the more variable aspect, so we’ll start by covering dropshipping’s costs.
While it’s theoretically possible to get into dropshipping at no cost, it’s far from advisable. Many things that give you a much-needed edge in the competitive dropshipping market involve fees. These include platform features, designs, and even supplier benefits. Of course, they have the potential to pay off in the long run.
The usual route into dropshipping — and indeed, what made it so popular — is through Shopify and Oberlo. The former provides scalable access to a virtual storefront, while the latter (recently purchased by Shopify), allows for easy access to dropship suppliers.
Oberlo has a free version, but it lacks shipment tracking and bulk orders, which can put you at a major disadvantage. Similarly, while Shopify has a free trial, many functionalities (e.g. cross-selling, action-based popups, etc.) rely on paid add-ons or apps. Good storefront themes also cost extra.
Expect to spend:
- $29/mo. Oberlo subscription
- $29/mo. Shopify subscription
- Approx. $15-30 per month
- $150-200 once-off Shopify theme
There are alternative options, of course. Spocket and Dropified are fairly popular options, especially since they link to suppliers from the US and Europe; Oberlo links only to AliExpress. This is important to note when considering where you want to get supplies from (more on this later). Pricing for their standard tiers are more expensive, though, at $49 and $47 per month, respectively.
Meanwhile, alternatives to Shopify are a bit more varied. If you can code, you could make your own storefront for free with WooCommerce or Magento (or outsource this to someone else at whatever rate they quote). Other no-code options include BigCommerce, priced similarly to Shopify.
Branding and Marketing
Two of the most common ways to advertise are through social media, and through paid ads (e.g. social media, search engines, Google display ads). Costs for these can vary widely based on your target audience and the market you’re in, since costs-per-click are calculated according to the users and keywords you choose.
To estimate your potential marketing expenses, look into common benchmarks for your audience and niche, including:
- Ecommerce conversion rate
- Ad clickthrough rate (CTR)
- Cost-per-click (CPC) on your chosen search engine or social platforms
From these you can work backwards to determine how much you should be spending on marketing to reach your sales goals. (That said, common estimates on the internet place an initial budget at around $100-200 per month for the first few months; you’ll be able to judge for yourself from then on.)
You can perform similar calculations on organic methods, though data on these may be less consistent, since this relies more on, well, organic communication.
In addition to the cost of products themselves, suppliers typically charge a per-order fee of $2-15. Some suppliers offer paid memberships that off-set per-order costs — if you’re making a lot of sales each month.
Be sure to consider the rate of product returns/refunds as well. Clothing and electronics, for example, tend to get returned a lot. While a strict returns policy could reduce this, it could also drive away a lot of customers.
You should also set aside some funds to order samples from every supplier you plan to work with. This is good to test not just quality, but shipping procedures.
Dropshipping Risks (2021-22)
In addition to the usual costs, dropshipping businesses have faced some added hurdles over the past year. These include worldwide shipping disruptions, new tariffs, and changes in taxation. These are likely to remain in place for quite some time, so they’re worth preparing for.
The international shipping crisis is expected to persist into 2022 at the very least. It’s a complex problem with many moving parts. The Ever Given’s mishap in the Suez Canal may be an iconic image, but everything from overloaded ports to insufficient truck networks have been compounding the problem for months, leading to a remarkable backlog.
According to Lond-based Dewry Shipping, the cost of transporting international cargo has increased by as much as three to seven times over. It’s also rendered supply times quite unpredictable, with shipments only half as likely as last year to arrive in the US on time compared to last year.
While disruptions extend to local, land-based logistics, they’re not as severe as the international delays. Dropshippers would do well to account for this in choosing their suppliers, as well as their dropshipping platforms.
Tariffs, Taxes and Trade Wars
Recent years have seen the US engaged in trade tensions with both China and India. These have resulted in some unfavorable regulations, which have either been put into place (China) or are being contemplated (India).
These issues won’t be a concern for most dropshipping businesses, since the point at which duties are imposed is quite high. Still, if you deal in products worth $200 or more, you should take this into account.
That said, if you cater to overseas customers, keep in mind how taxes in their regions work. Europe applies a minimum 15% VAT on ecommerce products, though some countries impose more than the minimum.
Outlook: Dropshipping opportunities
In addition to the problems mentioned above, dropshipping is also facing a sort of saturation point. With more people aware of it, it can be harder for new entrants to compete, especially if they haven’t identified a niche to corner.
There are, nonetheless, some opportunities that dropship retailers can exploit to come out ahead. Here are some of them:
Mixed Dropshipping Businesses
Some businesses have found success integrating dropshipping into a broader ecommerce business. In these cases, they can focus on a few core products, which they keep in stock or produce upon ordering, while offering dropshipped products as add-ons. Dropshipping serves as a cross-sell, supplementing their main income.
Having a unique or specialty product helps them build a distinct brand, while still exploiting the advantages of dropshipping.
Dropshipping success is still largely based on storefronts and marketing, so distinguishing a business this way can give a competitive edge. In this sense, trends in social media, website design (especially for mobile devices) and community-building can all translate into dropshipping advantages.
As many retailers will be reconsidering their suppliers, it’s a good time to think more broadly about sustainability. Consumers are increasingly concerned with the ecological impact of their shopping habits. Businesses addressing such concerns stand to benefit.
Of course, one drawback with dropshipping is minimal control over actual products, so this typically means choosing ecologically minded suppliers. Or, combining this with the point above, source materials sustainably while appealing to green-conscious consumers.
Summary: Dropshipping remains profitable despite hurdles
Many people are drawn to dropshipping since it lets you start a business without much initial investment. This still holds true. It also holds true that by choosing the right niche, dropshipping remains profitable. Though with the usually small margins, significant returns will take some time.
That said, the state of international trade — especially the shipping crisis, which will likely persist into the near future — imposes new challenges. These may stifle some of the competitive advantages of products sourced from or sold overseas. Dropshippers would do well to give further consideration to their suppliers and the niches they can target with their products.