Starting an eCommerce business used to mean dealing with a lot of overhead costs and responsibilities.
Besides manufacturing products, you had to set up a warehouse to store your inventory. You’d need to buy trucks. Then you’d have to hire reliable staff to drive them.
This was all before figuring out how to ship products across multiple countries and currencies.
Then came dropshipping. What is it? For many people, dropshipping is a business model that has made online entrepreneurship possible for the first time.
Dropshipping: what it is and how it works
Dropshipping means you’re outsourcing key areas of fulfilling eCommerce orders. This includes procuring products, storing and shipping them to customers.
How to dropship depends on the partners and providers you use. In the most common scenarios, your focus as a seller is on marketing and attracting customers to your online storefront or marketplace. Then, as orders get placed, sellers confirm them to customers, pass the order information to their dropshipping service partners who fulfill them.
For sellers who master how dropshipping works, eCommerce becomes highly efficient. Instead of making their own products, for instance, they can sell goods from other vendors and take a cut. As long as they can ensure a good customer experience across the entire eCommerce journey, it can be a profitable business model.
Researchers estimate dropshipping will grow on a global level by nearly 24% between now and 2032, becoming a market worth more than $1.9 billion.
That said, sellers shouldn’t be fooled by images of sitting by the beach running an eCommerce business with little more than a laptop. Dropshipping has become highly competitive. You have to keep a close eye on profit margins and other key data points. Supply chain disruptions can grind your business to a halt. There are also a number of legal issues and liability risks to consider.
This post will not only answer the question, ‘Dropshipping: what is it?” We’ll also walk through the essential areas you need to know. We’ll not only cover what dropshipping is, but the differences of dropshipping on Amazon and other marketplaces. We’ll also look at the technologies you need you have in place for dropshipping and how to get started.
Dropshipping without a VAT number: Is it possible?
Dropshipping allows you to begin thinking about growing your business on an international scale from the moment you launch. While digital channels have made it easier to market and sell to customers in almost any geography, you also have to take into consideration legislation that governs these processes. The United Kingdom’s value-added tax (VAT) is a good example. Read before you try dropshipping without a VAT number.
Having a VAT number is a standard practice for many businesses, but the requirements from HM Revenue and Customs (HMRC) differ depending on where you operate. This is true for those using dropshipping suppliers as well. If you’re based in the U.K., for example, you’ll only need to register for a VAT number if your turnover exceeds more than £85,000 a year.
For those selling from outside the U.K., however, dropshipping without a VAT number is impossible if your target market includes U.K. customers. This includes those based in Italy or many other countries.
Fortunately, HMRC has simplified the process by offering VAT number registration through its website. Remember to talk to your accountant about whether expenses associated with VAT registration and import fees can be written off as part of filing your business taxes.
ATECO code for dropshipping
One of the most critical steps in getting your VAT number is using the correct ATECO code. First introduced by the Italian National Institute of Statistics in 2008, ATECO codes are a combination of letters and numbers that classify businesses according to the scope of their economic activity. This informs your business in terms of tax rates and social security contributions.
In this case, the ATECO code for eCommerce businesses, including those that use dropshipping services, is 47.91.10. It applies to both online stores that operate as a single brand as well as marketplace entities such as eBay, Amazon and Zalando.
Once you’ve submitted your ATECO code as part of the VAT registration process, you’ll also need to register your business with INPS to determine how much you’ll pay in contributions based on your business revenue. There are also fees you’ll need to pay to the Chamber of Commerce and municipality in which you’re operating. These range from €53.00 to a maximum of € 128.00. Always do your research to check for any changes to these requirements and consult a taxation or accounting expert to field any other questions.
Dropshipping suppliers: Which are the most reliable?
Although dropshipping takes away many of the headaches associated with selling online, you’ll only succeed based on the quality of your partners.
When you’re looking at manufacturers, for example, you may want to order samples to ensure your customers will get quality items. There should be consistency between what they see on your web site and what arrives at their doorstep, for example. It should work or fit as customers expect.
You also can’t afford to sell products that arrive damaged or incomplete. Items should be properly packaged and in a reasonable timeframe. For some product categories, pricing can be highly competitive, and you don’t want to opt for a manufacturer whose prices will cut in too heavily to your profit margin.
Apply the same attention to detail when you seek out dropshipping suppliers who will handle other stages of your customer experience. Depending on your target market, you’ll want to work with those who have warehouses in reasonable proximity to your customers to save on shipping costs. Suppliers should also be able to demonstrate speed and efficiency in every stage of fulfillment and delivery.
Take the time to discuss critical processes that will have an impact on customer satisfaction and your overall reputation. Things can always go wrong with e-commerce orders, whether it’s sending the wrong size or the customer simply changes their mind. Choose suppliers with reasonable return policies and refund policies. Check to see that they have adequate insurance to cover off any unfortunate errors.
Some sellers launch their business by having a network of several different suppliers that handle each aspect of manufacturing, order management and fulfillment. Another option is to work through an online marketplace. These sites may already have the visitor traffic you need to entice the kind of customers you want.
Better yet, marketplaces often operate a range of dropshipping services that make the process far more streamlined. Here are some of the most common examples:
Amazon dropshipping
Amazon is one of the best-known marketplaces in the world, especially in North America. That means there are likely a lot of potential customers browsing for their next purchase, which could include what you’re trying to sell.
Amazon dropshipping rules include making sure you’re the seller of record. This means you’re not only registered to let consumers make purchases, but that you’re setting prices and taking responsibility for returns. Even if you have other dropshipping suppliers shipping orders, you’re accountable to collecting sales tax and recording your revenue.
eBay dropshipping
It may have started as an online auction house, but eBay has become another giant in eCommerce and sees nearly 740 million visitors a month.
The biggest consideration for eBay dropshipping is to ensure you own the product you’re selling. For example, eBay does not allow you to take orders for a product from a listing you’ve posted and then purchase from another party that is also selling on eBay.
As long as you have a dropshipping supplier who can store your products on your behalf – or if you have a wholesale agreement – you can drop ship on eBay, which it also calls “product sourcing.” Other standard eBay dropshipping policies include making sure your items arrive safely based on the timeframe your listing includes, and that you take ownership of customer satisfaction and service.
Zalando dropshipping
With a focus on selling clothing and accessories, Zalando has continued to become a huge player in the European eCommerce market. Its most recent reports showed the overall volume of active customers have grown by 6%, reaching a total of more than 51 million shoppers.
Dropshipping on Zalando can be done through its Partner Program, which provides sellers not only with access to its marketplace but resources such as Zalando Partner University and the ZDirect platform to manage your online presence. Zalando governs dropshipping and other sales approaches based on its customer experience model (CXM), a set of key performance indicators it monitors to ensure it has the right members in its partner program.
What to sell through dropshipping? Discover the most searched products
The dropshipping model works for almost any physical product. You can find sellers who have been successful creating eCommerce businesses around everything from air fryers and camping gear to interior décor and pet toys. Fashion, however, represents one of the most promising dropshipping niches.
In a study that compared categories such as electronics, toys, furniture and food, fashion emerged as the top dropshipping segment. The same research has forecast fashion dropshipping to reach a compound annual growth rate of nearly 25% by 2030.
Signature clothing and apparel is a natural choice for dropshipping sellers. The products are always in-demand among online shoppers and easy to advertise through digital channels such as social media. Luxury fashion and style products also present considerable upsell and cross-selling opportunities, given that footwear and accessories can often complement existing purchases.
A category like fashion also provides a good reminder of choosing the right supplier. Signature clothing may be more prone to competition and returns, which means sellers should aim for providing an experience that is as easy and seamless as possible. Customers will expect to find the items they want quickly, and feel confident they’re ordering what is already in stock.
How much can you earn through dropshipping?
The revenue you’ll generate by operating your eCommerce brand with dropshipping services can be difficult to predict. Research the following areas to inform your calculations:
- Google trending searches: Use keywords that represent your niche and its products and get a sense of how often consumers are using them as they browse online. This can give an indication of current and future demand.
- Average order value: Explore retail industry analyst studies that show how much consumers tend to spend on the kind of products you’ll be selling.
- Average monthly visitors: Estimate the traffic you could achieve through online advertising and other marketing tactics. Alternatively, look at visits to popular online marketplaces where you could feature your brand.
With these data points in place, you can develop a conservative estimate based on a conversion rate of 1.01% and 1.04% and apply it to your expected average monthly visitors based on the average order value.
Successful sellers spend a lot of time in this area, factoring in macroeconomic conditions, tracking regional online shopping trends and ongoing analysis of the top competitors in their respective niche.
Dropshipping and invoices: Step-by-step operation
Managing stock, order fulfillment and other areas bring a lot of value to busy eCommerce sellers, and your suppliers deserve to be paid consistently and on time.
Invoicing for dropshipping services works a little differently than in a traditional physical retail environment, where a customer pays a merchant directly for a product it manufactured itself. The process usually looks something like this:
Step 1
A consumer browses the seller’s virtual store, which is fed with product catalog data connected to all key suppliers.
Step 2
Consumers place orders which are sent by the seller to the dropshipping suppliers, who then fulfill the orders.
Step 3
Suppliers generate a purchase order and invoice the seller for each item. This is where special discounts, dropshipping service fees, returns allowances and other terms are applied.
Step 4
Sellers pay the invoices, often through a business credit card or payment portal.
Step 5
Suppliers sent a receipt to sellers confirming payment.
Sometimes sellers can work out agreements with suppliers to be invoiced on a weekly or monthly basis. Volume discounts may also be available for sellers who manage to achieve high conversions and orders.
While dropshipping and invoicing may look simple at a high level, there’s a lot that can go wrong behind the scenes. That’s because everything in the steps above is predicated upon using accurate and up-to-date data across both seller and supplier eCommerce platforms.
Invoices don’t just been to be dated properly, for instance. Each one needs to be associated with a PO number from the seller’s ordering system. Ship dates, tracking number, delivery method, handling fees, miscellaneous charges – these are all key pieces of the puzzle. The invoice status needs to be recognized too, as either “outstanding” or “paid.”
Besides ensuring all parties are clear on return policies and handling fees, sellers and dropshipping suppliers will need to negotiate whether batch invoicing is permitted. Advertising co-op dollars and rules around paying for single-item orders are just two examples of other variables to consider. When it’s done well, invoicing should be a simple formality that both dropshipping suppliers and sellers take for granted.
Advantages of dropshipping using Highstreet.io
The potential upside of using dropshipping to power an eCommerce business brings a lot of new players into the market. When it comes time to find the right tools, however, you’ll want to work with solution providers with a proven track record that you can trust.
At Highstreet.io, for example, we’ve created the technologies that can bring greater peace of mind and confidence to sellers who see dropshipping as the backbone of their business. Work with us because:
- Highstreet.io is already the product feed management and marketplace integration services platform of choice for some of the world’s leading retailers.
- Our software ensures the product catalog data shown on a seller’s site or within an online marketplace is the most recent and accurate picture of what’s in stock
- We can not only assist with selling through a seller’s web site or marketplaces but through the most popular social media channels, including Instagram, TikTok and more.
- We work fast – many brands have gotten up and running on marketplaces like Amazon and Zalando in a matter of weeks.
- We’re a true partner – our team provides deep expertise in eCommerce to help guide your long-term marketing and sales strategy.
- Highstreet.io is constantly evolving with new features and capabilities to keep pace with the expectations of eCommerce brands and their customers.
Ready to take advantage of dropshipping? Connect with our team to learn more about our solutions, and how we can help you move forward today.