What is Dropshipping?

Dropshipping allows you to sell a product without initially having to purchase it from your supplier/wholesaler. You hold no stock, you only purchase the product from your supplier/ wholesaler once the product has sold which they then dispatch directly to your customer.

The business model requires minimal outlay as you hold no stock, you also don’t deal with the dispatch of your order. Initially it may sound an attractive business model, however it does carry more risks which we will detail in the article and we will discuss ways to avoid these.

Typical Amazon Dropshipping Model

A typical dropshipping model follows the following format:

1Identify a reputable dropshipper supplier with good reviews.
2Go through the supplier’s inventory list, locate items which are profitable using Amazon’s Revenue Calculator to calculate potential net profit not forgetting to include the dispatch costs of your dropshipper.
3List the potential profitable products on Amazon.
4Once a customer has placed an order, forward the order and customer details to your supplier.
5The supplier charges your account for the order and dispatches it to your customer. The supplied invoice contains your details not the ones of your supplier.

Pros & Cons of Dropshipping

Dropshipping benefits include:

Easy to set-up and no start-up costs

If you’re just starting out, dropshipping is an easy to understand business model which requires little to no outlay as you don’t have to purchase any stock in advance until you receive your customers order. Also, as you’re not bulk buying any stock, and as your supplier dispatches the order for you, it means you don’t need to store any products at home, saving you space.

If a product doesn’t sell it doesn’t matter

If you list a product and it doesn’t sell you haven’t lost any money as you haven’t bought any stock upfront. You can simply remove your listing and list another product.

Easy to scale up your business

You can list as many products as you like on Amazon. Therefore it is very easy to scale your business and allows you to sell a wide range of products from your dropshippers.

Dropshipping cons include:

No real control over your supplier

From the quality of the product you’re selling, to the time it takes to dispatch an order, all these factors are solely down to your supplier. If your customer receives a faulty or inferior product, or they receive an order late, these issues will need to be sorted out by yourself even though they’re maybe out of your control. You are therefore 100% reliant on your supplier, if they mess up, it affects you and this could have detrimental effect on your Amazon seller ratings.

Lower profit margins

As dropshipping requires no outlay, it means there’s no barrier to entry and therefore the market is often saturated. Profit margins can suffer as other sellers reduce their prices to compete on Amazon. Dropshipping pricing is often not that competitive, especially compared to wholesalers. If you consider the average referral fee on Amazon is 15%, you can clearly see that profit margins can suffer and this means it can prove challenging finding profitable products to sell.

Keeping track of inventory

What happens if you get a customer order and then later find out that your supplier has sold out of the product and won’t be receiving anymore stock until a few months time? This scenario can happen as it can often be difficult keeping track of stock-levels at your dropshipper. If your order cancellation rate on Amazon goes above 2.5%, your seller account could get deactivated.

What to Look Out for When Choosing a Dropshipper

With dropshipping, you’re totally reliant on your supplier, you’re only as good as them. It is therefore vital that you choose a reputable and reliable one. Choosing the wrong one could have a detrimental effect on your seller ratings which in turn could cause your Amazon seller account to get deactivated.

When looking for a dropshipper you need to carefully perform the due diligence. First you need to look at reviews from other customers and determine whether they are trustworthy. Never sign-up to any supplier who requires an upfront fee, reputable ones will only ever require payment for your orders.

Check the address and contact details published on their website, make sure they are located where they actually are. You don’t want to find out later that the dropshipper which you originally thought was based in the UK or US is actually based in China or somewhere else.

Call them up and find out their terms and conditions.

Some of the questions you may want to ask your dropshipper include:

  • Charges i.e. do you pay once you place your customer’s order or can you pay on a monthly basis for all your orders in one go?
  • What are their shipping rates and prep fees?
  • Dispatch times? Ideally you want your supplier to process you orders as quickly as possible ideally within less than 24 hours.  Amazon has strict dispatch times for orders.  Amazon requires sellers to keep their late dispatch rate to under 4%.  Anything over that may result in your account getting deactivated.
  • What happens with returns? If the customer is shipped a damaged product, you want your supplier to be able to dispatch a replacement as quickly as possible.  Also what happens if a customer changes their mind and returns an item, when would they refund you?
  • Changes in pricing? What happens if your supplier changes their product pricing, ideally you want to be informed about this before it happens.  You don’t want to be finding out that after a customer has placed an order, your dropshipper has increased the price and now you’ll be making a loss.
  • Inventory list updated on a daily basis. You want your supplier to provide a daily inventory list which covers currently stocks levels as well as any new products that may have been added or discontinued.  Make sure they supply one on a daily basis.

Once you’re happy that you’ve selected the right dropshipper, you may want to put in a test order to verify whether what they said is actually true. You don’t want to find out when you do have a customer order that it took your supplier 4 days to ship the order when they originally told you it would take at most 1 working day.

Can I Use Chinese Dropshippers to Increase my Margins?

As we mentioned earlier, dropshipping is extremely competitive which means profit margins can be slim at times.

You’re may be asking then, can you use Chinese dropshippers instead of local ones in order to keep costs down and therefore improve margins?

You could look into using AliExpress for your dropshipping needs. AliExpress is part of the Alibaba group and allows you to purchase products in small quantities at cheaper prices than local dropshippers.

One of the advantages of using AliExpress is the huge amount of products you can choose to dropship. The main issue though is the longer shipping times from China. Many sellers offer free shipping although this can take anywhere from a couple of weeks to 30-60 days to reach your customers in the US/UK. Even when using ePacket, your order could take anywhere from 12-22 days. With Amazon’s strict dispatch rate metrics it means it’s not a viable business model using AliExpress as your orders would take too long to reach your customers.

Dropshipping Recommendations for Amazon

If you’re first starting out, dropshipping maybe a business model you may want to consider due to its low start-up costs. As you can see though, it does have its risks especially as you’re totally reliant on your supplier. Any mistakes your supplier makes may have an effect on your Amazon seller metrics.

If you’re first starting out and have limited capital we would suggest looking into retail arbitrage instead (see our retail arbitrage article) as it’s less risky. If you have more capital, you can even look into wholesaling as margins will be much higher.

In the short-term, if you do decide you want to start dropshipping we would suggest finding local ones in your own country. The following directories are good places to find relevant suppliers.

 UK Dropshipping Directory 
eSourcesOne of UK’s largest directories of dropshippers.

You can contact suppliers free of charge but for a premium membership there is a cost.

With a membership, you get access to more suppliers (over 150,000+ verified suppliers).
1 month @ £20
6 months @ £50
12 months @ £75
Check it Out
 US Dropshipping Directory 
SaleHooA paid directory with over 1000 dropshippers.

One of the best directories out there (has 5 out of 5 starts on Trustpilot), all the suppliers are screened so only genuine suppliers are listed.

It has over 1.6 million branded products so you won’t be lost for choice.

Once you sign-up, you get free access to the Market Research Labs tool which allows you to see demand for a particular product as well it allows you to spot trends.
$67 annually (€55.8 per month)

Has 60-day money-back guarantee.
Check it Out
WholewideBrandsLike SaleHoo it’s a paid directory of screened suppliers.

Not only can you search for suppliers, you also have access to market research tools, training videos, wholesale protection and much more.
$299 one-time paymentCheck it Out

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