This post is by Michael Anderson of Etail Solutions.
The dropshipping business model is tough and it can be a difficult one to make profitable. Despite getting wholesale pricing, your product costs are likely to be the same as many other sellers, if not more.
In addition, suppliers will charge a per-order fee ranging from $2 to $10 for storage, shipping and handling. By the time these costs have been factored in, sellers all too often find themselves in uncompetitive positions, very close to being unprofitable.
But, as you’re about to discover, there is a way to make the dropshipping business model work. In fact, a few dropshippers have turned this highly competitive, low-margin model into lucrative seven-figure-per-month businesses that practically run by themselves!
In this article, you’ll find out what it takes from an operations standpoint, to go from a handful of SKUs to a hands-free dropshipping empire. You’ll discover how to leverage integration and automation to drive up sales and purchasing volume at the same time as driving down costs.
Why is dropshipping attractive?
What makes dropshipping so appealing – and so downright competitive – is the fact that anyone can do it. You don’t need lots of money to invest in inventory and you don’t even need a website to get started. All you need is an internet connection and a tax ID.
Since you don’t buy inventory until after it’s been sold, you don’t have to worry about slow-movers, markdowns, or cash crunches. There are also no overhead costs and no inventory risks, which significantly lowers the barrier to entry.
On the not-so-good side, along with no “bulk buy” discounts, margins are slim because many sellers don’t end up buying from actual wholesale suppliers. Instead, they buy from middlemen posing as wholesale suppliers.
If possible, always buy directly from the manufacturer – the creator of the product. This way, you’ll get the lowest possible prices because there are no middlemen or wholesale markups.
Many manufacturers, however, can’t process individual orders and shipments so they sell by the pallet and not by the item. This is where wholesale suppliers come into play and where it gets tricky for you as a seller.
What are the best products to dropship on Amazon?
Everyone uses the same set of tools to identify best-selling products on Amazon. Then, once they’ve found a winner, they try to find a supplier to source it from. This is not the best way to go about it.
It might seem counter-intuitive, but you want to search for suppliers – not products. Instead of comparing and offering individual products, compare and offer entire catalogs of products. Your goal should be to find suppliers to grow into, so don’t put all your eggs in one basket by focusing on individual products.
You want your business to be riding on hundreds of long-tail products in addition to, or instead of, a handful of best-sellers. Remember, you don’t have to invest in inventory, which is all the more reason to diversify your product range, and lower your risk, right from the beginning.
If you’re just starting out, stick with product categories that you’re familiar with or passionate about. It’ll make finding, approaching, and working with suppliers easier and more enjoyable. Do keep in mind, however, that Amazon requires pre-approval to sell in certain product categories.
Make sure that you check with Amazon for the latest list of gated categories and brands before you approach suppliers.
How do you find dropship suppliers with high-margin products?
Quality dropship suppliers with high-margin products are hard to find. Suppliers with low-margin products aren’t.
The big difference between the two, is that quality dropship suppliers buy directly from the manufacturer, or manufacture the products themselves, meaning there aren’t any middlemen. This is a big plus, as the more middlemen there are, the more you will pay.
It’s also worth being wary of suppliers that heavily market their ability to dropship for you, as it should be a clue that there isn’t a margin opportunity on Amazon or other marketplaces.
So how do you find quality dropship suppliers? Well there are six different methods you could try.
1. Go straight to the source
Use Barcode Lookup or GS1 Company Database to identify manufacturers, then contact them directly and ask if they offer a dropshipping program – some will, but most won’t. If they don’t, ask for a list of their wholesale suppliers.
Approaching manufacturers before searching anywhere else is a good way to find many legitimate wholesale candidates all at once.
2. Look for barriers to entry
This may seem backwards, but look for manufacturers and suppliers who don’t have it all figured out. Maybe their product catalog needs reformatting. Maybe their images or descriptions need editing. Maybe they’ve never dropshipped before but are willing to try.
Finding these situations will put off other sellers, but should spell “margin opportunity” in your mind.
3. Pick up the phone
Call and ask some questions to determine the legitimacy of a potential wholesaler. Do they answer the phone during normal business hours? Is the receptionist or customer service rep professional and knowledgeable?
The following questions should raise red flags if they can’t be quickly answered:
- What other costs are there besides the product cost?
- Are advance payments or deposits required?
- Do they sell to consumers as well as retailers?
- What is their return policy and procedure?
- Do they provide a data feed? If yes:
- What product information is included?
- How often is it updated? When was the last update?
- What format is it in and how do I retrieve it?
4. Talk face-to-face
Trade shows are a great place to connect with legitimate wholesalers. Use Wholesale Central to discover category-specific shows. ASD is the most comprehensive domestic wholesale trade show, while Canton Fair is the most comprehensive international wholesale trade show.
5. Make your business official
Real wholesalers don’t sell to small unofficial businesses. If you don’t fill out an application, or provide a tax ID or EIN number, and a “wholesaler” is still willing to sell to you, think twice. These legal requirements separate the legitimate suppliers from fly-by-night operations.
6. Search Google – backwards!
If you’ve exhausted all other options, and you want suppliers in a specific category, use Google. Just remember, real wholesalers don’t sell to the general public. They aren’t going to pop up at the top of the search results, because they aren’t what most people are looking for.
So instead of starting your search on the first page of Google, start on page seven or eight and work your way backwards.
How does your dropship supplier handle data?
The next step is to check out your list of potential suppliers. But, don’t base your decision wholly on price and reliability. Dropshipping requires suppliers and sellers to share data with each other at various points in the sales process.
There are five crucial pieces of data you need from suppliers, so keep the following factors in mind when making your final selection.
1. Product data
The more complete and accurate your listings are, the more likely your products will be found and purchased. Your goal should be to get accurate and compelling content. Having access to the following data is the first step to offering your supplier’s products for sale on Amazon and other sales channels:
- Wholesale price
- Width, length, height, weight
- Features (size, color, etc.)
- Cost of handling
- Manufacturer’s part code
- Minimum advertised pricing policy
- Suggested retail price
2. Inventory data
Your supplier’s inventory levels can change by the hour. To prevent overselling, you need to know their current availability on a regular basis. This is an often overlooked aspect of dropshipping – don’t make this mistake.
If your supplier can’t provide daily updates, strongly consider passing on the opportunity. The inventory data that your supplier should provide are the SKU and the quantity available.
You should also consider asking the following questions:
- Do they create products when they’re ordered, or are they held in stock?
- How much lead time do they need?
- How often do they publish inventory quantities? How automated is it?
- Do they sell to large retailers? And how many retailers do they supply? All available inventory can sell out within minutes if there are large retailers or many retailers being served.
3. Pricing data
How much do your suppliers’ prices fluctuate? You don’t want to place orders with out-of-date pricing. Ideally your supplier will honor the prices quoted on your purchase orders so you’re not stuck having to manually reconcile what could be thousands of invoices. Figure out these things ahead of time or you could get trapped in a relationship where you owe money and have to put up with whatever convoluted process your supplier uses.
4. Order data
It’s your responsibility to submit order data to your supplier soon after the sale, so you need to find out their process for receiving orders. Is it a self-service, manual portal, or do they offer automated file-based or web-based options? The order data you will likely need to provide is:
- Purchase order number
- SKU line item & SKU title
- Amount of product
- Name, address, phone number, and email address of customer
- Shipping method & preferred carrier
5. Shipping confirmations
Once your supplier ships the order to the end customer, they need to provide shipping confirmation and tracking information. Ideally this file is submitted electronically and in a format you can automatically, or manually, import into your system. You are then responsible for uploading this information to the sales channel where the order came from.
What are your dropship supplier’s payment terms?
How does your supplier handle invoicing? Some generate an invoice for every purchase order, while others generate an invoice summarizing all purchase orders from a given time period (for example a month) with a total payment due.
Find out what their policy is before you begin to do business. Ask for a sample invoice so you know what the cost breakdown looks like and if there are any other fine print details that may affect accounts payable.
When are you required to make full payment? Is it from the purchase order or invoice date? Usually these terms are negotiable and could mean the difference between being strapped for cash or not.
In fact, if you can convince your supplier to agree to favorable terms, you could scale your business with existing cash flow instead of taking on high-interest debt or outside investment.
How do you onboard a new dropship supplier?
This can be tedious and time-consuming – but it is critical. You need to download their catalog and ensure the product data meets Amazon’s requirements. You then need to list the products on Amazon by matching their UPCs to existing ASINs or by creating new listings.
Some, if not all, of your supplier’s product data will need to be edited so it’s consistent and complete. This means finding and fixing duplicate entries and missing records as well as removing non-text characters from the product titles and descriptions. You also need to standardize any abbreviations and acronyms that you are using.
Normalizing thousands of SKUs by hand, one at a time, is boring, low-value work and mistakes are going to happen. But, in order for your products to be found and bought, your product content must be complete, accurate, compelling and fit Amazon’s content and format requirements.
What happens if product data is mismatched on Amazon?
Many retailers match UPCs to ASINs by hand, which takes a lot of time and effort, or they take a chance on Amazon’s Inventory Loader. This tool can be hit or miss because it only searches for matches by UPC. The downsides to this are:
- Amazon’s data is only as good as the third-party sellers who provided it. Some products have wrong UPCs as well as wrong or missing manufacturer part numbers.
- There may be 10-15 different ASINs for a single UPC. As a result, Amazon’s Inventory Loader can, and often does, match UPCs to the wrong ASINs.
- Using UPCs to identify products doesn’t verify package quantity. Products offered in different units of measure (for example a six-pack) are not clearly identified.
One mismatch can lead to a flood of customer returns and order cancellations. Negative feedback is then likely to be left and account suspension may be close behind.
For this reason, some retailers avoid using Amazon’s Inventory Loader because the risk outweighs the reward. They end up at the other end of the spectrum where an actual person ensures that the UPC matches the ASIN. The problem with this approach is that even if you hire an offshore team, or a group of college interns, to do all the heavy lifting it is expensive and slow.
What are the challenges of dropshipping on Amazon?
Amazon allows dropshipping. However, it is committed to delivering an exceptional customer experience. So, regardless of their business model, all of Amazon’s third-party sellers are expected to meet the following performance targets:
- Order Defect Rate: < 1% – ODR is calculated by dividing the number of orders with “defects” (chargebacks, A-Z claims, or negative feedback) by the total number of orders from the same date range. If it’s greater than 1%, account suspension or even closure is likely.
- Pre-fulfillment Cancellation Rate: < 2.5% – This is calculated by dividing the number of orders that are cancelled before a valid shipping confirmation is issued, by the total number of delivered orders from the same date range. When calculating this metric, Amazon considers ALL order cancellations initiated by you for any reason.
- Late Shipment Rate: < 4% – Late shipment rate is calculated by dividing the number of shipments that aren’t confirmed by the expected ship rate, by the total number of delivered orders from the same date range.
How dropshipping can impact your performance on Amazon
Unfortunately, it’s not only possible but it’s relatively easy to break these rules at every point in the dropshipping process. It could happen when listing your supplier’s products, when publishing their inventory, and when processing and fulfilling orders.
- If your supplier’s product data isn’t accurate, or if you match a UPC to the wrong ASIN and the product sells, you’ll have to cancel all orders so your customers won’t receive the wrong product.
- If you offer inventory for sale when your supplier is out of stock and the product sells, you’ll have to cancel all orders as your customers won’t receive the product in time.
- If you don’t send a purchase order to your supplier right after you receive a sales order, the supplier could run out of inventory to fulfill that order.
- If your supplier is slow to process the order, and slow to issue a valid shipping confirmation or tracking number, there’s a good chance the shipment will be classified as late.
These problems negatively impact customer experience and will result in your Order Defect Rate (ODR), your Pre-fulfillment Cancellation Rate, and your Late Shipment Rate going up. This puts your Amazon seller account, and your entire business, at risk.
How do you manage pricing as an Amazon dropshipper?
Lowering and raising your prices on Amazon is essential to winning the Buy Box and maximizing your gross profit margin. But, when most dropshippers think about repricing, they think about reacting to competitors’ price changes and not their own internal cost changes.
Dropshippers can also often find themselves in a race to the bottom because they overestimate how much they can lower their prices and still be profitable because they don’t have real-time visibility of all their costs.
It’s important to remember that your product costs aren’t fixed. They can change on a weekly or daily basis whenever a new price and availability feed is published by your supplier. If your supplier’s prices go up and you don’t raise your floor prices, your items are underpriced and your gross profit margin shrinks.
But what if their prices go down and you don’t lower your floor prices? Your items are now overpriced and you could lose the Buy Box, and many potential sales, depending on how competitive your category is. Neglecting even a slight cost saving might be the difference between winning and losing the Buy Box. In either case, you’re putting your business in an uncompetitive position.
As a dropshipper on Amazon, you can’t realistically expect to manually change prices for all your SKUs, across all your listings, as frequently as your supplier’s prices, and your competitors’ prices, change. This is where automation is crucial to maximum success. Those dropshippers who set and forget their costs, or who adjust their prices manually, are shooting themselves in the foot.
What is the key to success for Amazon dropshippers?
To survive and thrive as a dropshipper on Amazon, you must achieve mass scale.
To drive up your sales and purchasing volume, you need to first drive down your costs and then your prices. This requires process automation, which requires data centralization, which requires end-to-end integration.
You can’t rely on manual processes or disconnected systems. You must automate as many tasks as possible so you don’t waste your time, or have to hire employees, as your business grows. This includes tasks like:
- Data cleansing
- Listing matching and creation
- Inventory publishing and delisting
- Purchase order creation
Reaching the next level of hands-free automated dropshipping requires an integrated platform. Every area of your business, from supplier to sales channel, must be connected. This enables you to onboard new suppliers and catalogs, publish listings, profitably reprice, and manage inventory faster, more accurately, and more cost effectively than your competitors. This in turn means you have a better chance of outpricing and outselling them.
With this in mind, here are six key features that your dropshipping software needs to have.
1. Integration between suppliers and sales channels
You’re often not the only merchant selling a specific product from your supplier. Other merchants may deplete your supplier’s inventory – inventory that you depend on. The result is out-of-stocks, upset customers, and potential penalties.
Advanced platforms automatically adjust your listings based on supplier inventory, delisting them when your supplier is out of stock and automatically relisting them when the product is available again. Supplier integration also allows for automatic purchase order generation and shipping confirmation.
2. Catalog management
Managing product data across different sales channels can quickly become a mess. Each marketplace (for example Amazon, eBay and Walmart) has their own set of requirements, categories and rules. Your system should allow you to retrieve product data from multiple suppliers, normalize it, and publish it to all channels, exactly as each channel requires.
3. Inventory management
Your Amazon or eBay account can be permanently suspended if overselling gets out of hand. So, your system needs to update your listings after receiving an update from your supplier. It must also be able to deal with unit of measure conversions between your supplier’s default unit of measure (for example a six-pack), and your listings, whether you offer individual products, three-packs, six-packs and so on.
Using your own master SKUs, instead of just Amazon’s listing ASINs, makes the process much easier, allowing you to list, delist or adjust the inventory levels you publish, all driven by supplier inventory levels.
4. Pricing and repricing
Each time the new feed from your supplier is processed, your pricing rules need to automatically update and recalculate your selling price or your floor and ceiling levels. Repricing based on total costs, including fulfillment costs from multiple suppliers of the product, is the only way to ensure you’re pricing correctly and protecting your margins.
5. Order processing
When a listing sells, you need to send that order to your supplier ASAP since other merchants might want that same inventory. Your system should receive the order and automatically create and send the purchase order to your supplier in the correct format (for example flat-file via FTP, EDI, Web-Services, or PDF via email).
Ideally, your supplier can accept an electronic file that flows directly into their system. This minimizes human error and delays.
6. Tracking confirmation
Amazon and most other marketplaces track how quickly you ship your orders. So it’s important that your supplier is able to electronically provide tracking information to you ASAP, and that it’s automatically forwarded to the marketplace. It can be as simple as a flat-file dropped on an FTP folder with the PO number and tracking number.
Automate and integrate your way to dropshipping success
Dropshipping isn’t nearly as easy and profitable as it’s made out to be. But, with the right mindset and the right tools, it can be a large and dependable source of income.
The dropshippers who continue to rely on manual processes, spreadsheets or entry-level software will have difficulty achieving mass scale. They will likely always be outpriced and outsold by other more sophisticated sellers that leverage integration and automation to drive-up sales and purchasing volume and drive down costs.
The most important competitive advantage created by a hands-free, automated dropshipping business is the time that’s freed up from automating repetitive or error-prone processes.
While your business grows, without adding any overheads, you have invaluable amounts of time on your hands. Spend this additional time to find and negotiate with new suppliers, investigate new channels, and focus on other strategies to grow your business.
This post was by Michael Anderson the CEO and co-founder of Etail Solutions.
Etail’s sales and supply chain management platform tightly integrates real-time sales activities with your supply chain and available inventory, providing dropship automation features and support for a range of other fulfillment models.