Signals #27 – All about Dropshipping

Overview

It’s been a while since dropshipping’s been in the news. In fact, the last time there was significant attention paid to dropshipping from traditional media outlets was at the start of 2020. Since then, there has been a whole global pandemic, complete lockdowns, Brexit, and a new US president.

Dropshipping is a process where the selling merchant purchases their inventory from a third party and has it shipped directly to the customer. As a result, the seller only needs to worry about the marketing aspect of the business. While it’s a great business model, it’s also heavily populated by fake gurus making outrageous claims. That’s part of the reason why mainstream attention has waned. However, looking at Google Trends, the truth is that dropshipping is still climbing in popularity.

image.png

In this issue, I dove deep into the world of dropshipping to separate the signal from the noise and learn about what’s truly going on.

Opportunities

Dropshippers 🚢 sell products they never touched, from places they’ve never been, and to customers they’ve never met. So why does it work? Because dropshipping is all about marketing; dropshippers don’t just advertise their products, they sell them to their customers. In the space of a few minutes, they convince their customers to discover, understand, and purchase the product. It’s a perfectly choreographed dance where every step needs to be perfect. And that’s where the opportunity is.

  • Advertising 🏬 – Dropshippers primarily advertise on Facebook, building funnels and hyper-targeting their customers. It’s a hard, really hard process. That means there’s a huge opportunity to build tools that are specific to dropshippers to measure performance or even create the ads themselves.
  • Design 🖌️ – Design is a large part of both advertising and on-page conversion. Almost every single dropshipper is currently doing their own design. That means there’s a huge opportunity for both creating out a specialty design firm geared towards dropshippers or building up a tool to make designing everything from ads to websites quicker.
  • Inventory 📦 – One of the biggest pain points of dropshipping is working with suppliers. Most dropshippers come from western countries with suppliers in Asia. As a result, that’s led to a lot of horror stories for both dropshippers and their customers. What if there was an online wholesale marketplace specifically for dropshipping like there is for retail?
  • CRMs 📇 – Customers are at the center of every dropshipping operation. Most dropshippers optimize for the sale and forget about the customers, leading to a bad reputation of dropshipping. However, most of the successful operators are actually looking to build lasting brands that one day take on inventory and become more traditional. To do that, they need recurring customers which requires a solid customer relationship management system.
  • Data 💾 – The backbone of every operation is the data. Beyond just dropshipping, every e-commerce store is looking to gain visibility into the best ad channels, website copy, product images, and a myriad of other details. Right now, most merchants use Excel or custom tools to track this data. That’s a huge opportunity to create even a simple dashboard that can highlight all of this data.

How to Launch

Most dropshippers turn to dropshipping because of the low start-up cost and low risk involved. Instead of sinking in thousands or millions to start a brick-and-mortar store, dropshipping allows entrepreneurs to get started with only $100. For products that sell to dropshippers, this is fairly bad news. Not only does this mean that dropshippers have little budget to spend, but also that products targeting dropshippers need to do multiple things at once. But this also means that competition is greatly muted. Below are a couple of tips to help you get past that initial hurdle.

  • Start with branding ⚜️. Despite all the work on ads on platforms like Facebook and Instagram, few dropshipping companies have built a commercial social media presence. The ones that do, like Gymshark, Notebook Therapy, and Wayfair have found success far beyond other dropshipping companies. Start by selling your product to these brands, even at a discount, and leverage the experience to publish case studies to attract newer dropshippers.
  • Figure out pricing 💵. Most companies use a flat-rate monthly subscription model in e-commerce. This doesn’t work for dropshippers with small budgets who are extremely cost-conscious. Start with variable pricing, or even per transaction pricing, and go from there. For example, if you have an advertising product, create a variable tier where your customers pay you based on how much they spend with Facebook. This allows early entrepreneurs to leverage your product and helps you scale with their operations.

Cases

Platforms

  • Shopify – A store in a box that’s the top platform for dropshipper
  • Big Commerce – An alternative to Shopify that has more customized options
  • Oberlo – A content-driven empire built from dropshipping
  • Wayfair – Did you know that Wayfair dropships almost all of its products?
  • Gymshark – Gymshark got its start from dropshipping and is now a billion-dollar business

Market Data

  • The global dropshipping market size was valued at USD 102.2 billion in 2018 and is expected to register a CAGR of 28.8% from 2019 to 2025
image.png
  • Online shopping has been growing at breakneck speeds. In 2020, retail e-commerce sales totaled roughly 4,280 billion. In 2014, that figure was only 1,336 billion. In other words, that’s roughly a gain of 8 Walmart market caps.

Forecast

  • Dropshipping is definitely here to stay. A personal prediction after researching for the past week is that more companies will start to move their lower margin products to dropshipping. For example, retail air filters are very expensive to store during off months in the winter. As a result, adopting a dropshipping model would eliminate much of the cost.
  • Over time, as more sophisticated players enter the dropshipping market, current tools will no longer be enough. Companies will be spending more to gain an edge over competitors and a variety of specialty products will pop up. However, they’ll likely all revolve around themes of customer acquisition and inventory management.