Ecommerce is a rapidly expanding market. Already, it accounts for more than 10 percent of total retail sales. That figure continues to rise steadily year-over-year.
For many potential business owners, however, questions remain. Is dropshipping profitable? Is it viable for new entrepreneurs?
If you’ve been asking yourself those same questions, here are the facts.
Dropshipping Basics
Dropshipping is a unique form of retail fulfillment. In a dropshipping arrangement, shop owners do not make, store, or ship their own products. Instead, they set up and manage an online store.
These stores can be independently set up, use platforms such as Shop1, or go through third-parties such as Amazon or eBay.
When customers place orders, shop owners purchase the ordered items from dropshipping suppliers they have contracted with. The suppliers then pick, pack, and ship the items straight to the end consumer.
It’s an appealing business model for many reasons. But would-be entrepreneurs tend to have one question that overshadows all others: is it profitable?
The short answer is yes, and here’s why:
1. Low Start-Up Costs
One of the reasons that dropshipping remains a profitable business model is its low start-up costs.
Per Small Business Administration (SBA) estimates, the average “micro-business” costs at least $3,000 to set up.
Depending on its niche and location, it could cost ten times that amount to open a small business. Of course, that is assuming that the owner can dedicate themselves to the task full-time and doesn’t need to hire other people to do key tasks for them.
Opening a retail shop using a popular platform and the dropshipping model, by contrast, can cost less than $100 a month. Entrepreneurs can construct business plans, do research, and set up their shops around a full-time job and other responsibilities.
The low entry costs put entrepreneurship within reach, even for individuals with very little space, time, or resources. With so little invested upfront, it’s easy to make the initial investment back quickly. It also makes it possible to earn money that can be reinvested into the growth of the business.
2. Dropshipping (Almost) Eliminates Overhead Costs
Overhead costs, put simply, are all the behind-the-scenes things you need to run your business. Common examples in brick-and-mortar retail operations include the following:
- Electricity and other utilities (“keeping the lights on”)
- Janitorial services
- Security services
- Warehouse space
- Inventory
- Rent
- Some Shipping and handling costs
- Stands, racks, and other display cases
- Administrative and financial support services
The dropshipping model can eliminate most or all of these types of expenses. Entrepreneurs with access to a computer and the internet have everything they need already in place. So, the profits dropship shop owners make on their sales stay in their pockets instead of bleeding out in the form of overhead.
3. Dropshipping Offers Clear Profit Margins
In traditional businesses, fluctuating overhead and operational costs can make profit margins inconsistent and hard to predict. This, in turn, makes it challenging for shop owners to:
- Price items well
- Estimate their future profits
- Manage cash flow
- Plan and enact concrete growth strategies
Under the dropshipping model, shop owners can avoid all of this uncertainty. When they contract with a dropshipping supplier, shop owners will know their working costs’ full scope. They’ll know how much each item costs to:
- Buy
- Pick
- Pack
- Ship
This information then allows them to price items so that they make a reasonable profit on each sale. It also makes it possible to accurately and consistently estimate, plan, and achieve growth.
Online tools such as Shop1’s Dropshipping Profit Calculator make calculating prices and profit fast and easy.
4. Dropshipping Can Lower Entrepreneurial Risk
Among the many challenges of starting a new business are the following:
- Finding products for which there is a market
- Identifying the correct market for a product
- Determining what pricing the market will bear for an item
Traditional entrepreneurs who do any of these steps poorly can find themselves with heaps of unsellable products and mountains of debt. Entrepreneurs who take the dropshipping route, on the other hand, have numerous advantages.
Dropshippers have extensive online tools available to help them explore which products are selling, whom, and at what price points. Thorough research makes it possible to open a new shop targeting the right clients with the right products at the right prices, paving the way to success.
Since shop owners are also not investing in inventory, their businesses can run lean and pivot quickly. This means that when the market changes, shop owners can keep pace, always offering what customers want when they want it. Even better, if they misjudge a trend, they are not left sitting on a warehouse full of expensive inventory they cannot sell.
All of this leads to the same end: more profit and less loss, even for new businesses just starting.
5. Dropshipping Lets You Focus on Branding and Growth
In today’s market, it isn’t the logistics of picking, packing, and selling a product that make or break businesses. Instead, modern shops thrive on their ability to create and leverage a distinct value proposition or unique selling point (USP).
Creating and leveraging a USP requires shop owners to focus on tasks like:
- Building their brand
- Building a reputation within their niche
- Delivering high-quality customer experiences
- Website development, optimization, and maintenance
- Setting or keeping up with trends in their niche
The average small business owner spends less than one-third of their time on the critical and strategic tasks that help businesses thrive and grow. Instead, they spend the bulk of their time dealing with day-to-day operations and minor tasks. Both self-reporting and overall statistics show that their businesses suffer for it.
Entrepreneurs who choose dropshipping can avoid this trap. By delegating the day-to-day tasks of picking, packing, and shipping to dropshipping companies, shop owners free themselves up to focus on the things that drive growth and profit in their businesses.
This translates to better sales, more profit, and faster growth year-over-year.
Is Dropshipping Profitable?
Is dropshipping profitable? Yes. In fact, it’s one of the most cost-effective and profitable models available for new and experienced entrepreneurs alike.
Interested? Explore the best dropshipping products available and start planning your new eCommerce venture today.
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