Investment Strategies You Need to Know
Dropshipping Is Good Business
With barriers to entry being lowered to a hardly noticeable bare minimum, it is no surprise that dropshipping has taken the world of e-commerce by storm. But while the buzz has attracted people from all spheres of life, it seems that many dropshipping platforms often fail to take off as expected. And so it is, the business model seems to have earned a bad name when in fact, it really does not deserve one.
The truth is, there is no magic formula for money making. Real businesses know this. They always have. And that is the very reason for their success. No matter what a dropshipping ‘guru’ may suggest, the facts are simple: making money requires making thoughtful investments. Sure, it is possible to get started with zero dollars, but how far that will take you, is an entirely other matter. On the contrary, spending a lot on random features and products that are not likely to bring any value to the business is simply put, bad planning. At the end, generating revenue requires making initial investments, in the right amount and as strategically as possible. In this article, we include a step wise break down of the costs that are likely to be managed, and what, if anything, is the best way to go about investing in a dropshipping business.
The Origins of Dropshipping
To understand this, let us start by understanding what dropshipping really entails and why it gained the popularity it did.
Dropshipping is a business model that started garnering attention in 2006 as AliExpress became a popular e-commerce site in the United States. Online retailers would use third party sources, AKA a wholesaler, for product procurement but deal with the customer themselves; that is, they would buy the product from the wholesaler and use dropshipping services to sell it to the customer at a predetermined profit margin. Several years have now passed since AliExpress first entered the market. But as it always is with economic activity, an expected increase in market demand has driven many entrepreneurs towards the dropshipping business model.
As mentioned earlier, it is well known that many dropshipping businesses fail right in the starting stages; what is not discussed as frequently, however, is that many thrive as well, often getting huge turnovers. In fact, if done right, the return on investments is usually multifold as compared to traditional business models.
Failures versus Success Stories
It is worth mentioning at this point that the successes we talk about are not merely a product of good luck. Most of these businesses have kept a strategic approach towards things. The fact is, a good business owner knows what they should be spending on, and this is where all the profit ends up coming from.
Costs of Setting Up a Dropshipping Platform
While different businesses may opt for different kinds of cost analysis strategies, here are a few starting points, which we believe could steer cost assessment for a dropshipping model in the right direction. These may be broken down into the following categories:
- Choosing the Right Platform
- Setting Up the Store
- Inventory Management
- Customer Relations
Choosing the Right Platform
Before we go any further, let us address the elephant in the room- the platform. While this may not be the only cost incurred for a successful dropshipping business, it is certainly one of the first. A basic market research will show you that, in terms of e-commerce platforms, currently the following companies may be taken as the biggest market players:
- Square Online
- Salesforce Commerce Cloud
Each of these platforms has a different costing structure. But as we’ll see, the main difference usually occurs in the functionality each of these can provide. To understand what we mean by that, let us take a closer look at two of these; namely, Magento and Shopify.
- Ease of Use
Before starting out, this is one of the fundamental steps you need to consider. If you are someone with a solid background in programming languages and knows the world of PHP inside out then sure, why not put all of that to good use and opt for a platform where you can make the most of your skills, all the while earning a hefty sum of money. Currently, Magento2 is the upgraded version of Magento that is being offered by the company, but just like the previous version, even this one requires having a command over computer languages. Once purchased, the setting up of Magento is entirely your own job. But this is business, which means that you can hire someone to work for you, instead of doing everything on your own. In fact, if you have been reading our blog for some time, you might have come across the idea of third party hiring and how it can be extremely useful for a business.
To put it simply, a good business is never a one-person show. Instead, it requires coordination from several hands-on-deck. Some people might take this to mean that they will need to have an in-house set up of programmers working for them, and sure, this is one way to go about it. But then again, costs matter. When people are hired as individuals, they tend to offer a fixed set of services, which is excellent for a company that is built solely around those services but beats the purpose when you talk about setting up a dropshipping platform. Think about it, no matter how promising a candidate may be, working on something such as Magento would require a varied skillset and on top of that, a considerable setting up time. This would mean that more than a few members would need to be chosen for the in-house team to be as productive as needed. While the accounting sunk costs are high as it is, don’t forget all the economic costs this could lead to, most importantly, the time it would take to ensure that each member of the team is as effective as needed. On the other hand, hiring a third-party remote source might be a far better strategy as it would allow you to focus on other, more important aspect of the business. The same analysis applies when choosing between third-party services and freelancers. While freelancers may offer reduced costs, ensuring that the quality of work is as needed can be difficult to keep track of- not to mention the extent to which your business can get negatively affected. Since pen and paper contracts are rarely ever signed with freelancers, the extent of their liability is limited, and this can become a serious drawback should the work delivered not be up to the mark.
Shopify on the other hand, requires considerably less setting up. The platform provides a much greater ease of use and that just might be one of the reasons why hundreds of aspiring entrepreneurs rush towards the site. The company takes care of most technical things and provides a very user-friendly experience.
This has been exceptionally useful for many small business owners who wanted to start out but did not quite have the technical means to do so. In fact, small and medium owners are where Shopify’s strengths lie. At the same time, however, the whole user-friendly approach to things has its limitations and rarely ever allows businesses to scale; and this brings us to our second point, that is, customizability.
Shopify is great with being there for its customer and helping them build the platform with easy access to tools etc. but it provides little room for customization. Since everything is dealt with by Shopify itself, the limited space for customization is understandable. And this may be great for a small or medium scale business that isn’t looking to achieve great scalability, but for big businesses which need to entertain more than just a couple hundred clients, a lot more is needed.
Contrary to this, Magento is a do-it-yourself approach, which means that while it may be extremely time taking and requires you to hire a separate team of specialists, it also allows you to build the kind of store that you want your customers to experience. Such value addition is something regularly sought by big companies such as Nike that use the platform for its hosting services.
Marketing is, simply put, crucial for a business. Whether online or offline, a customer will only know about the existence of a business if it is being marketed well. It might therefore be helpful to look at how these platforms either enable or support marketing for a dropshipping store.
Magento is limited if we talk about social media presence, although it does allow for great subscription services. Shopify on the other hand, has great flexibility in terms of social media but is limited in the other area. Knowing how much social media presence your brand is looking for and what your digital marketing strategy is going to be, can help you understand how to choose one platform over the other. A careful assessment might not only help you set up your store, but also, allow you to cut costs in other, cost intensive areas such as marketing and promotions.
- Overall Cost
The overall cost of choosing one platform over another, depends on your business needs. Magento’s community version is free, and Shopify offers a fourteen-day trial service package. But this is just the beginning. In truth, neither of these are free. The cost varies depending on what tools a business might need. For Magento, aside from paying to the company directly, other cost such as that of technical services exist. This might be stressful for small business owners who can not afford the upfront cost. But for a relatively bigger business, it might be more costly to opt for a platform that allows for limited scalability in the future and comes with fewer tools. In other words, choosing the right platform is the first step and to pick the right one, means assessing your business needs and knowing which one would be more cost-effective for you specifically.
*It is worth mentioning that whilst our analysis of platforms thus far has only compared two options, the same guidelines may be applied across other hosting services.
Setting up the Store
Now that we have gone through the biggest step, that is, choosing the right platform for hosting services, it is time to look at the costs that will be incurred once you actually set up the store. The first thing to cost money will likely be a domain name. Sites like Shopify offer the option of choosing a domain name and enable paying for it using their services. Other options, however, such as Domain.com also exist where domain names can be purchased for as low as ten dollars.
Next, to set up the store and get it going, certain things might be added by a dropshipping business, depending on what its business needs are. While hosting platforms can act as a CMS as well, depending on where a business can be positioned on the scalability curve, additional features such as software and plugins may also be incorporated. While these things are optional and adding them is obviously going to lead to an increased upfront cost, they will also allow customers to have a better user experience, add value to the business and in all likely hood, if chosen wisely, can lead to a satisfactory return on investment.
Now for a bit non-technical side of things. Yes, having a dropshipping business model means that inventory does not need to be handled by the sellers themselves. But even so, just because it never comes directly to the owner of a dropship business, does not mean that they can neglect inventory management altogether. What do we mean by this?
The key idea here is to know the products you are selling and instead of having random products up for sale, try and be selective instead. While dropshipping removes a great proportion of the burden that comes with setting up a business, it adds a lot at the same time as well. For starters, you don’t quite know whose products it is that you’re selling, neither do you hold all the reigns in your hands when it comes to quality control. One way to mitigate the risk this poses can be to select certain suppliers and order from them in advance. Learn about the products that you are selling and try and assess their likelihood of selling, before being stuck with bad product reviews to your stores discredit.
One way to ensure that a business is successful is by determining how many customers it draws. Typically, this is also one of the areas where many dropshipping businesses fail. A lack of inventory management often leads to a lack of quality control; and this, in turn, means that one-time customers are the only thing that a business is left with.
To avoid this problem from occurring, one useful solution to invest into, both in terms of time and money, is customer relationship management. Certain e-commerce businesses do this by automating the task of customer support. Depending on the platform you choose, CRMs may need to be set up independently or be provided by the platform itself.
So far, we have discussed all the costs that may be involved in the initial setting up stages. But it goes without saying that if a business wants to ensure scalability- let alone continued functionality, maintenance costs will always be there.
Overall Cost Analysis
Having read through some of the things that might require upfront investments, you might now be wondering how best to go about the investments that need to be made. As mentioned earlier, we recommend the use of third-party sources to deal with the technical side of things as this will cut down on costs, both time and money, in addition to offering greater reliability.
Where you get these remote sources from though, can heavily impact the extent of the upfront costs incurred. As an unspoken rule, it helps to know that developers and programmers in South Asia typically cost less than those in the West, with services starting from $20/ hour rates. Regardless of where you choose to hire though, or what services you engage with, the guiding principle behind all investments should be the same. That is, your investment strategy should be in sync with what your business needs, both in the short term before launch, and in the long-term to ensure scalability and growth.