Introduction

Many entrepreneurs aspire towards the same thing: a simple and successful business model that maximizes profit, minimizes risk, and requires limited work. By allowing entrepreneurs to sell products on sites like Amazon and eBay without having to deal with inventory or shipping, dropshipping seems to fit that model. The reality, however, is that a successful dropshipping business requires research, planning, and a lot of work. In this article, I’ll show you how to successfully establish a dropshipping business by using the popular Chinese based eCommerce site, Alibaba.com   

HOW TO ACTUALLY MAKE MONEY WITH DROPSHIPPING

The absolute best way to make money through dropshipping is to eliminate as many layers between you and the original manufacturer as possible.

This is easier said than done. Manufacturers don’t want to sell products in small quantities because it’s not worth their time. For this reason, most factories require a minimum order quantity (MOQ) before they start production. This MOQ makes it nearly impossible for a dropshipping company to buy a few products direct from a manufacturer. Alibaba can resolve that issue.

WHAT IS ALIBABA

Alibaba is the world’s largest eCommerce site that connects buyers and sellers. Thousands of manufacturers and suppliers from all over the world (but mostly from China) offer their mass produced, manufactured, or assembled products to anyone who wishes to purchase them. You can find almost everything on Alibaba, from auto parts to t-shirts.

HOW TO BUY PRODUCTS THROUGH ALIBABA

You must first understand that you’re not buying anything from Alibaba directly. Alibaba is a platform that facilitates transactions between a buyer (you) and sellers (manufacturers and suppliers). Suppliers advertise their products on Alibaba and buyers contact the manufacturers or suppliers directly (through Alibaba’s chat service or direct messaging platform) and begin negotiating with the factory.

While it sounds easy enough to start buying products, Alibaba is not a typical eCommerce site. Here are few things to consider when ordering products through Alibaba:

• Alibaba is not Amazon. When using Alibaba two words should stick in your mind: buyer beware. If the supplier makes a mistake and sends you the wrong color, or the shipment arrives two weeks late, don’t expect a refund. Therefore, it’s important to review every detail of your order before paying a supplier. You should make sure you have the MOQ, price, shipping costs, expected duty charges, shipping carrier, detailed pictures of the products, and other details in writing. You should also stay in constant communication with the supplier through email, chat, or text messaging to keep track of your order.
• Price and Quantity: Remember, the most important rule about buying products on Alibaba: the greater the quantity, the lower the price per unit. Alibaba is typically used for wholesale purchases, meaning the suppliers expect large quantity orders (i.e., 100, 1,000, or 10,000 units). Every seller will list their unit price and MOQ on their product page.
• Duty and Shipping: When you order products from anywhere else outside your native country (in the case of Alibaba, you are usually ordering from China) you must consider two things that can significantly increase your product price: shipping and duty. Having products shipped from China is expensive. For example, to ship a shoe box from Shenzhen to Los Angele costs between $30 to $40. Shipping products also takes time. Most small orders can be shipped relatively quickly by air using DHL or FedEX. If, however, your order is large enough, you can have your products shipped using ocean freight. Ocean freight shipping can take anywhere from 30 to 60 days. In addition to shipping, you may have to pay import tariffs, also known as “duty”. Tariffs are calculated on a number of factors, including the origin and destination of the product, the materials in the product, and the product’s value. To learn more about duty and tariffs, visit the US Borders and Customs Website

• Never pay cash. Paying an overseas supplier can be tricky. The last thing you should do, however, is send the supplier cash. You risk losing both your order and the cash. Instead of cash you should use alternative payment options, such as Alibaba’s own payment platform called AliPay or Paypal. I would recommend using AliPay whenever possible. Suppliers in countries other than China can’t use AliPay, but they will accept payment made by similar methods.

• Alternatively, you can use AliExpress.com AliExpress is a spinoff of Alibaba where you can buy individual products and pay with a credit card (Aliexpress uses AliPay to process credit cards payments). The suppliers on AliExpress can provide this kind of service because they exploit the manufacturers’ surpluses. When a wholesaler orders 1,000 watches from a factory in China, the factory will typically make 100 extra watches to account for defects and to keep extra stock for their customers. The suppliers will also sell any unused surpluses on sites like AliExpress (unbeknownst to their customer).

Speaking from experience, ordering products from AliExpress can be an adventure. The products may arrive in three days or they may not arrive at all. Nonetheless, AliExpress is a good starting point for finding manufacturers in China who are willing to sell individual or small quantities of products at a time.

DROPSHIPPING WITH ALIBABA

Now that I’ve covered the fundamentals of the supply chain, let’s explore how to use Alibaba to start your own dropshipping business.

As I’ve already mentioned, factories don’t want to sell individual products; they want to work with wholesalers that are buying and selling in bulk. You want to avoid buying products from a wholesaler or 3rd party supplier because, as we already discussed, the more layers between you and the manufacturer, the lower your profit margin. So how do you convince a factory in China to not only sell you individual products but also to ship the products directly to your customer?  By making it worth their while.

The reason suppliers work with wholesalers is cashflow. Running a factory requires a lot of money, so factories can’t afford to make products without having cash (or credit). It wouldn’t make sense for a factory to make 1,000 units of a product and sell them individually for $10 and hope that 1,000 individual buyers will eventually show up and buy all of their products. Factories need guarantees that the products they make will provide them with revenue.

 This a problem for dropshipping businesses because, by their very nature, dropshipping businesses aren’t interested in investing any money on inventory. So, in order to find a reputable supplier that will also dropship products for you, you must demonstrate to them that you can provide a steady stream of revenue over a long period of time. To do so, you should follow these steps 

Step 1 – Find the right product

First you must find the right product. You should do some research and select a niche product with relatively high demand. To learn more about finding a niche product, I recommend reading How to choose a niche product for my new online store. Also, I recommend selecting a product that fits inside a shoe box to avoid high shipping costs. Finally, pick a product that doesn’t require certification or complicated paperwork. Avoid things like baby food, chemicals, food and beverages, and industrial and safety equipment. (I once imported sunglasses and they got held up at customs because I needed paperwork to prove the lenses met a certain criteria which I was oblivious too.)

Step 2 – Find the right supplier

This is the easy part because for any given product, there are hundreds if not thousands of suppliers on Alibaba willing to fight for your business. Here are a few tips for selecting the right supplier:

• Look for suppliers with good credentials. Look for these certificates on the supplier page

A gold supplier means Alibaba has vetted the company and confirms their identity. If a factory offers trade assurance, it means Alibaba guarantees you will receive the products that you paid for. Supplier assessment means someone from Alibaba (or their agents) have inspected the factory on site..

Note: Gold Supplier certification, Trade assurance, and assessments don’t guarantee the quality of products.

• Pay attention to MOQ and FOB. MOQ stands for minimum order quantity. That’s the minimum number of units a buyer must purchase in a single order. FOB stands for freight on board. It’s the price of the product excluding shipping. So an MOQ of 100 with an FOB of $10 means you will get 100 units for $10 each for a grand total of $1,000 (plus shipping). It is also important to remember that everything on Alibaba is negotiable, including the FOB and MOQ. Always negotiate and never pay the asking price. Start by asking for a 40% discount and negotiate your way to a mutually acceptable agreement.

Tip: Don’t be put off by the MOQ. Many times the supplier will significantly reduce, or override, the MOQ. This may result in an increased FOB cost, however.

• Consider AliExpress.com. Remember, on AliExpress you can buy individual products and use a credit card. However, you must also remember that using AliExpress can be risky.

Step 3 – Order samples

Remember: Alibaba is not Amazon. You can’t ask for refunds. Do not commit to buying a product without seeing several samples. Most suppliers will provide samples. If they don’t, find another supplier.

A few notes about ordering samples:

• Don’t expect any discounts. For example, if the FOB for a product is $10 based on an MOQ of 100, the supplier may charge your $20 (plus shipping) for a sample. This kind of a premium is worth it to save you from massive problem in the future.

• Use PayPal or AliPay (China only) to pay suppliers.
• Inspect your samples carefully. Identify and document all flaws and defects (take pictures) no matter how small and ask your supplier to address any issues.

Step 4 – Place a Small order

I know this is contrary to the whole point of a dropshipping business, but here’s the thing; if you’re serious about running a successful dropshipping business, you must have a reliable supplier and quality products. This is especially true if you plan on selling items on Amazon. If your customers aren’t satisfied with their purchase, your business will fail very quickly. You cannot establish a successful dropshipping business by blindly sending products to customers.

I guarantee your supplier will make mistakes; it’s the nature of manufacturing. The last thing you want is a customer angry because they received the wrong product or worse, a defective one. It’ll destroy your reputation before you’ve even had a chance to prove yourself. For that reason, you should order a small batch of products before fully transitioning to dropshipping so you have the opportunity to test different suppliers, fine tune your product(s), and get a sense of shipping costs and duty.

You don’t need to order thousands of units to start. Remember, competition for buyers on Alibaba (and AliExpress) is fierce. You’ll have no trouble finding a supplier who will offer low MOQs (10 to 20 units). All you need to do is ask.

Once you’ve ordered from the same supplier a couple of times, the manufacturer will consider you a repeat customer and 2 things will happen:

1. They will make a few extra products on each production run
2. They’ll offer you favorable terms (price and quantity) to retain your business.

This in turn will make it more likely for them to consider dropshipping your products.

Step 5 – Transition to Dropshipping

Once you’ve successfully found a supplier with whom you’re comfortable with and have confidence in their ability to deliver a quality product, you can transition to dropshipping. A good way to test if you and your supplier is ready for dropshipping is to ask your supplier to “send the usual”. The supplier should know exactly:

• Which product(s) you want;
• How to package the products;
• How to ship the products;
• Where to ship the products;
• How much to charge for the products and shipping;
• How to invoice for the products.

If your supplier can pass this test, it’s time to ask them about dropshipping. To ask your supplier if they can dropship your products, contact the person you’ve been communicating with (this usually a chat agent named “Betty” or “John” whose only job is to translate your messages for the factory manager) and ask them to ask the factory manager if they will ship directly to your customer. Most people in China know what dropshipping is, so it really shouldn’t be an issue.

Here’s an example of what to ask your supplier once they have agreed to drop ship your product.

Here are some additional things to keep in mind before asking your supplier to dropship your products:

• You may have to pay your supplier a premium for the small MOQ (1) and for the headache of having to constantly ship to a different address. For example, the supplier may charge you an extra $1/unit or $2/unit.
• You will need to provide the factory with packaging and shipping boxes. It might be a good idea to find another factory that manufactures packaging and have them ship your packaging to your primary supplier.

Step 6 – Gather feedback

You should track your product as it goes from the supplier to the customer. As soon as the customer receives the product, you need to determine if everything was right. This means asking your customer if the packaging was ok, the product came as described, and it meets their expectations. If you notice there are differences from how customers normally rate their experience, then it’s cause for concern. Otherwise, it’s a green light to scale your dropshipping operation.

CONCLUSION

The idea of dropshipping is great: sell products and make money without having to deal with shipping or storing inventory. However, you must understand and appreciate the difficulties associated with a successful dropshipping business, specifically how to find the right supplier and optimizing the process for long term success. . While Alibaba comes with some of its own difficulties, if you follow the steps I’ve outlined above, you should be able to run a successful and profitable dropshipping business.