Dropshipping is an attractive business model because of its low barrier of entry – both in terms of financial investment and the effort required. It may not be a “get-rich-quick” strategy as some would advertise but it’s worth consideration for eCommerce store owners. It’s also easy to set up dropshipping on Shopify, and we’ll help you quickly get off the ground.
What is dropshipping?
Dropshipping is a type of eCommerce business model where a seller (aka a dropshipper) accepts orders but doesn’t actually hold any stock. Instead, they transfer orders to manufacturers, wholesalers, or other entities that take care of fulfillment duties. A seller makes a profit on the price difference, minus any applicable fees and taxes.
Drop shipping process
Let’s now go into more detail about how the entire process works.
- The manufacturer (let’s say Xiaomi) produces an item – let’s say it’s a shiny new shovel, 5G-compliant, with the latest in tech built-in. They then sell it in bulk to wholesalers or suppliers for $40 who will, in turn, try to make a profit off it by selling shovels to resellers.
- A reseller (let’s call them China Electronics) buys a bunch of shovels and puts them on sale for $50 apiece via their website. Technically, they’re also dropshippers as they buy products with the goal of reselling them at a higher price.
- A retailer from Europe (Kate’s Shovels) decides that 5G shovels are a great market to get in. They buy one, test it out extensively and decide it’s something they want to add to their offering. They sign an agreement with China Electronics (reseller), upload product pictures and descriptions to their site, and start marketing the shovels.
- A customer comes in and buys a shovel off Kate’s Shovels (retailer) website. They pay $80.
- A representative of Kate’s Shovels then logs the purchase on the China Electronics platform (or, more commonly, it’s done for them automatically).
- China Electronics receives the order details, packs up the shovel, and ships it directly to the customer.
- Kate’s Shovels makes $80 (price a customer paid) – $50 (the price they paid to China Electronics) – any associated fees
- China Electronics makes $50 – $40 (Xiaomi’s price) –any fees
- Xiaomi makes $40 – fees
Dropshipping business model – pros and cons
Dropshipping business model relies on several pillars that make it particularly attractive, both for small store owners and huge retailers.
- Low initial investment – selling your own products typically requires a large investment in research, development, manufacturing, or stockpiling. Since dropshipping businesses don’t store any products, all these costs are off the table. Instead, they spend their resources on marketing products they sell.
- Low risk – shipping new products always bears a risk. If you produce thousands of products but the sales don’t follow, you’ll be left with a full warehouse and no easy way out of this situation. With dropshipping, you can gauge the demand first by selling similar products from other vendors. If the results meet (or exceed) your expectations, you’ll have a solid confirmation of the actual demand for a product.
- Easy to manage and scale – all you need to run a dropshipping store is a laptop and a stable internet connection. You’re flexible to choose your working hours and can work from virtually anywhere in the world. Many eCommerce businesses struggle with scaling up a business as the sales grow. Dropshipping gives the store owners the flexibility they need in such situations
Of course, dropshipping isn’t without its downsides:
- Huge competition – Because it’s so easy to start dropshipping, a lot of companies and entrepreneurs take advantage of the opportunity. Many markets are overcrowded with dozens of brands selling identical products, competing only on prices. This inevitably leads to…
- Slim margins – Trying to stay on top of competitors, dropshipping businesses dump their prices, sometimes operating on very slim margins. The bigger the company is, often the lower it can go, making some markets unfeasible for small players.
- Product out of your control – When dropshipping, you have no touchpoints with a product and completely rely on a supplier when it comes to quality, For that reason, testing each product you sell first is often a must.
- Problematic customer support – If any issues arise (either with a product, shipment, refunds, or others), solving them may prove difficult. Customers will complain to you and you’ll need to go back and forth with them and a supplier to find a solution. If the former is based in a distant different time zone, the resolution may be significantly delayed too.
Dropshipping profit margin
Profit margin is, in other words, how much you make on a sale of a single product. The most common dropshipping profit formula is:
Profit Margin = 100% * (Revenue - Costs) / Revenue
- Revenue is the price you sell the product for to the customer
- Costs are all costs associated with an item
- The price you pay for a product
- Payment and platform fees that you pay to, for example, Shopify
- Marketing expenses it took to sell a product
- Any other fees and taxes associated with an order
For example, if you sell a product for $100 that you simultaneously purchase for $60, and all other costs amount to $10, then your profit margin is:
Profit margin = 100% * (100 - 70) / 100 = 30%
This is the margin for a single product you sell and is sometimes referred to as a net profit margin. It’s handy for comparing the profitability of different products and building the pricing strategy.
In reality, to get a real overview of the profitability of your dropshipping business, you also want to also incorporate the gross profit margin. It uses the same formula as its net equivalent but in the costs category includes all operations costs, including salaries, licenses, rent (if applicable), etc – basically, any costs associated with running a dropshipping business.
Most often, though, these are not taken into consideration when discussing profit margin and we’ll follow that logic for the duration of this article.
What’s a good profit margin in dropshipping?
It depends. If dropshipping is your only business model, it’s worth maintaining at least the 30-40% margins on each order so you can cover your costs and still make a decent profit.
If, on the other hand, dropshipping is just a side gig, and you’re making a good profit elsewhere, you could probably go even lower than that. Some suggest that you should make at least 10% on each item, all associated costs excluded, to justify the effort.
Ultimately, the profit margin is just the function of the product price and the volume you can sell — it is almost meaningless itself. A 30% margin on a $1 product earns you just 30 cents per sale. A 10% margin on a $100 product means $10 every time a customer hits the buy button.
Volume inevitably matters too, and the more expensive a product, usually the less frequently it will be bought. If you can sell 10 thousand of these $1 products every month, you’ll close the month with a higher balance ($3,000) than if you had sold 25 of the $100 products ($2,500).
There are different pricing strategies for dropshipping, some common ones are:
- High margins, cheap products – very cheap products (such as electronic adapters, or other small electronics) can sometimes be sold with very high margins going into hundreds of percent.
- Low margins, expensive products – expensive products (high-end electronics, art, etc) don’t sell so often but their price allows for lower margins. A single purchase can net you hundreds of dollars in revenue.
- Low margins, very high volume – when there’s lots of competition, you may need to cut down on margins to stay competitive. But if you sell a lot this way, this all can add up into a reliable source of income.
How fast can you profit from dropshipping?
In theory, you could start making money off dropshipping minutes after listing your first product. But if we’re talking here about consistent revenues, a few weeks is an absolute minimum. And that’s only if you found a winning product right off the gates.
For most dropshippers, it takes a few months to start seeing sizable profits, capable of covering their costs and generating something extra on top.
Why is that? There’s plenty to take care of first. You need to:
- Learn how all of this works
- Find the high-grossing product(s)
- Find reliable suppliers and, ideally, test them out first
- Build online presence, set up accounts with major platforms like eBay, or build your own website
- Gain some reviews to make your store look more trustworthy
- Build the communication strategy and figure out how to drive traffic – and not just any traffic – highly targeted one.
All of this can’t be taken care of overnight. Having experience in the field or simply adding a new business model to an existing business certainly helps. But if you’re new to the field, don’t expect immediate results. Be patient and slowly execute the plan, trying out different products, and eventually betting on the winning horses. Results will come with time.
Shopify dropshipping – is it worth it?
Shopify is often recommended as one of the best ways for getting started with dropshipping. It’s easy to set up an online store in a matter of minutes and add the first products. Its intuitive UI makes operating a store simple even for inexperienced sellers.
Shopify also offers a handy integration with Oberlo, its child company, as well as with a number of other dropshipping solutions on its marketplace. With them, dropshippers can research thousands of products and add them to their store with a few clicks. These tools also automate the dropshipping processes, making it easy to pass orders to suppliers and speed things up.
Dropshipping with Shopify – how does it work?
In many ways, dropshipping on Shopify works in the same way as regular sales on the platform. The difference, of course, is on the fulfillment level, where an order is taken care of by the supplier. But let’s start from the beginning:
- Once you’ve done the research and chosen the products you want to sell, you add them to your store manually by inserting a name, price, description and photos. You could also upload a .csv file, if the your product list is larger, or use a dedicated app.
- Each time one of your customers places an order, you need to inform the supplier know as soon as possible. They might be able to ship the product that same day. You can either enter the order manually on the supplier’s website or, if you use a dropshipping app, it will be automatically done for you. More often than not, all you’ll have to do is confirm an order or choose the desired shipping method.
- Once the seller ships the order, you add its tracking number to the corresponding Shopify order. You could also have it pulled automatically from AliExpress or another similar platform. A customer then receives a notification from your store and can track their order as it travels to its destination.
How to start a dropshipping business on Shopify?
Building a dropshipping store on Shopify is straightforward, especially if you start with just a few products.
As with any business, there are some country-specific things you need to manage yourself – like registering your company, creating a bank account and managing your taxes. We can’t offer much advice on those tasks here, but it’s something you’ll need to look into before you start selling.
Once you’ve finished the administrative work, it’s time to get started.
- Decide on what you want to sell
The first, critical stage is proper market research. You want to find a niche in the market with considerable customer demand, but not one that’s oversaturated. If there aren’t any big retailers working in your niche, even better.
A few interesting product ideas to consider:
- Charging cables and docks
- Wooden accessories
- Fitness trackers
- Unique or unusual phone cases
- Organic teas
- Cheap Bluetooth headphones
- Yoga accessories
- Welcome mats
- Many, many others.
How do you gauge if there’s an interest for these products?
- Use Google Trends to see user interest for given keywords over different periods of time.
- See the search volume and related keywords with a tool like Keyword Generator.
- Verify if the products you have in mind are frequently sold, and how many are being sold. You could use eCommerce platforms like AliExpress or dedicated Shopify integrations like Oberlo or Spocket (more on those in the ‘Shopify dropshipping suppliers’ chapter).
- Set up a Shopify store
First thing’s first: you need to register for a Shopify account and confirm your account. There’s a number of details you’ll need to confirm by hitting the Settings button in the bottom-left section of the dashboard.
In particular, make sure you:
- Configure a payment method. You have PayPal, Amazon Pay, Skrill, and dozens of others available.
- Add your company details (for invoicing purposes), and specify the taxes to be charged according to your local regulations
- In the Legal tab, add vital files, such as refund policy or terms of service. You can also generate them from a template provided by Shopify.
Read our more detailed article on how to set up a Shopify store.
- Design your online store
One of the best things about Shopify is that it comes with lots of different templates you can build your store on top of. Most are free, but some of the more advanced ones require a one-time fee.
Explore them all at https://themes.shopify.com/ and pick the one that suits your needs best.
Simultaneously, you also want to come up with your company name, preferably corresponding to the niche you’ll dropship your products to. Once you have that sorted out, register a domain and connect it to your Shopify store.
- Add products to the store
At this point, you should already have figured out which products you want to dropship first. Now it’s time to add them to your store.
Dropshipping apps, such as Spocket, let you browse thousands of products and add them to your store right away. All product details will be imported and you’ll just need to specify the price, shipping, and other optional details.
There’s also a manual way available. Open the Products menu, click on Add product, fill in all details and Save.
Once you’ve finished, the product will immediately appear in your store, ready to be bought by the first customer.
If you plan to both dropship and store physical products, be sure to check out our guide on Shopify Stock and Inventory Management.
How do you choose a Shopify dropshipping supplier?
Choosing the right supplier will have a paramount impact on the success of your dropshipping business. After all, these are the people twho will take care of your customer’s orders. The quality of products they offer, their shipping time, even the way they pack orders – all of this will impact the interactions users have with your brand.
It’s not difficult at all to sign up as a Shopify dropshipping supplier. There are dozens of platforms with hundreds of thousands of products on offer, frequently easy to integrate with Shopify. It takes quite a bit of work though to find a reliable supplier with very competitive prices that you can trust with your orders.
Here’s how to find the best of the kind for your store:
- Establish a relationship. Contact a supplier you like and ask them any questions you may have. Discuss how they resolve issues, what their shipping times are, what’s the best way to submit orders, etc. Assess how responsive they are and if they’ll be willing to address problems should they arise.
- Order and test out samples. Quality is everything. For that reason, it’s worth ordering some sample products from a supplier and testing them out yourself. If you find any shortcomings, see if you can resolve them with a supplier. Only when you’re very confident about the products you try, add them to your store.
- Decide on domestic or international suppliers. Consider the pros and cons of both. Most international suppliers will dispatch their orders from Asia, with longer shipping times and, possibly, customs involved. Domestic suppliers will deliver much faster but, at the same time, will charge more for the same products. There’s no rule though – analyze the options available and pick what’s best for your customers.
- Don’t limit yourself to just one supplier. Working with a single company makes you vulnerable to potential disruptions in service, border closures, or shipping delays. It’s particularly risky if you choose to work with a small vendor that perhaps offers a unique set of products. To avoid any surprises, it’s better to diversify – source the same products from different suppliers, be ready to ship from different continents, etc.
Dropshipping on Shopify – calculating profits and margins
As the orders start to flow in, you want to have an easy overview of how much you make off each of them. You also want to see what’s worth promoting and how low you can go with prices.
The Shopify dashboard is a bit limited in that regard. You can add a cost per item for each product in your store and then generate profit reports based on that. It doesn’t, however, offer a field for any customization, taxes, fees (including Shopify fees), etc. As such, it gives you only some of the data you need to build a successful business.
A solution is to export your data from Shopify into a spreadsheets tool – for example, Shopify to Google Sheets. There, you can view the details of each order, add any custom fees, experiment with different product prices, and a lot more. And we did precisely that.
We have a sample store on Shopify and we’ve exported all the existing orders and products into Google Sheets using Coupler.io. Coupler.io lets you import your store data from Shopify to BigQuery, Google Sheets, or Microsoft Excel on-demand or automatically, according to a predefined schedule. No coding required.
For starters, we exported all products. Coupler.io lets you extract over a hundred data fields about each product. We didn’t precisely need all of that so we decided to fetch just product IDs, names, variant names (for products that have, for example, several colors available), and prices that clients pay.
You can view our export and see all calculations in this Google Spreadsheet.
From another source, we copied in the prices we pay to vendors (vendor_price) for each of the items. To make it more interesting, we added a custom tax rate for each product and included Shopify fees in the calculations.
Note that Shopify fees depend on the plan you’re on – the higher the plan, the lower the fees. We used the fees associated with the Basic Shopify plan (2,9% + $0.30) but feel free to adjust them if you’re on a different plan.
Our formulas were:
profit_before_tax = price - vendor_price - price * 0.029 - 0.3
net_profit = profit_before_tax - profit_before_tax * tax_rate
We also wrapped the formulas with an ARRAYFORMULA which automatically copies formulas into each new row. It’s useful because as new products are added to our store, we won’t need to copy formulas for each of them – it will happen automatically.
The fields we calculated are marked with a purple background. All the others were imported from Shopify.
Going into the second tab (Orders with line items), we exported several vital details about all our orders – IDs, date/time of order, customer’s email, product, price, and quantity. Using ARRAYFORMULA and VLOOKUP functions, we mapped the net_profit and profit_margins fields from the other tab with products in customers’ carts.
This way, we received both values for each of the orders exported from our store. The beauty of this is that new orders will be pulled by Coupler.io every hour. For each new item on the list, profit_margin and net_profit will be calculated automatically.
Feel free to copy our formulas, and reuse the spreadsheet in any way you please.
How do you make money dropshipping on Shopify?
How fast you can make money from dropshipping heavily depends on where you’re starting from. If you already have an established online presence – an existing store, a big mailing list, a loyal group of customers – you’ve got a major tailwind working for you.
But do not despair if you don’t.
The key to succeeding with dropshipping is a product. If you can find even one item that will be grossing you decent margins on a consistent basis, it will make for a wonderful start. Don’t regret any time spent on the research, comparing prices, margins, looking for a better supplier, etc.
Find products that solve problems for customers, rather than being just some gadgets they’ll put aside two weeks later. If they appreciate the value, they’ll be likely to come back for more or bring their folks along. This will also be reflected in the reviews you’ll so desperately need.
Look for a specialization. Don’t just sell anything that comes up. Instead, build a store specialized in something that customers often need. It can be as general as phone accessories or as narrow as Japanese matcha (though one could argue it’s also quite a big niche). Show your expertise – write blog posts on practical ways of using your items, or send tips along with order-related emails. Make yourself known as an expert in the field.
Make your store look professional. Engage a web developer to polish it if the templates Shopify provides are too limiting. Design a logo and work out the proper branding. Master the art of advertising – Google or Facebook ads can drive to your store a hyper-targeted traffic. If you can get plenty of that, an investment in ads may pay back tenfold.
How to set up shipping on Shopify for dropshipping
In general, you can decide on two approaches to shipping:
- Add a shipping fee that customers will have to pay.
- Offer free shipping with the fee included in the price.
This can be completely independent of your supplier. They can, for example, charge you for shipping while you include this fee in the product price already.
To set up shipping, first of all, go to Settings -> Locations -> Add location. Specify where an order will be shipped from. Since you won’t be generating shipping labels, just the warehouse city or province should be sufficient. Save when finished.
Next, in Settings to go to Shipping and delivery. If you’ll be using the same shipping rates for all orders, you may set them in General Shipping Rates field. There, click on Manage rates.
If you need a custom setup (for example, some products ship from China while the others from Spain), click on Create new profile and set up one for each location.
Here, specify your rates, the countries you ship to, select the products that this should apply to, and save.
How to fulfill Shopify orders when dropshipping?
Shopify doesn’t automatically fulfill orders when vendors upload a tracking number. Most often that’s something you need to do yourself.
To fulfill an order, find it on the list, mark it, press the Fulfill orders button, and confirm. A confirmation email about the order being dispatched will be sent to a customer.
Depending on the tools you use for dropshipping on Shopify, there may be other ways of fulfilling orders. Please check with them directly for details.
There are also dedicated tools that let you auto fulfill orders. The aptly named Auto Fulfill, for example, is one of the best-rated options.
Shopify dropshipping and taxes
Depending on where you’re based and where your customers are, you may need to charge sales taxes on top of order value. The same as with shipping, you can include it in the price or on top of it.
Shopify lets you add specific taxes for orders shipped to certain countries. They use various default rates, but you’re encouraged to double-check the values and update them if needed. Also, if you’re uncertain, be sure to consult a local accountant who is knowledgeable in the topic.
To add taxes for a specific country or territory, go to Settings -> Taxes, click on Set up next to a country, add the proper values and Save.
Is Shopify dropshipping for me?
Shopify can be an excellent place for hosting your dropshipping store. It’s got everything you need for running an eCommerce business and dedicated dropshipping integrations make it so much better.
It’s also easy to extract nearly any kind of data from Shopify and bring it to your favorite spreadsheet tool. If you haven’t yet, try out Coupler.io for free and see what kind of a difference it can make.
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