How To Validate A Dropshipping Business

Together with one of my coaching clients I'm going to start a dropshipping business. And I'm going to use this project as public case-study to show you, how to build a dropshipping business from scratch.

I helped Kevin from Gemeinsam gegen Depression (german blog) to successfully launch his blog and infected him the virus of online business. He's a passionate guy and so we're expanding our relationship. I'll continue to mentor him on blogging and personal branding but we're also going to launch a dropshipping business!

I'm really excited about this and that's why I want to share the complete story with you. In one of the comments I said that I'm going to publish an article about the latest niche site that I'm working on, but I think this dropshipping idea will be far more interesting for you. It will also include keyword research and traffic analysis, so you're still seeing how I do those things.

Let's get right in to it!

What Is Dropshipping?

Dropshipping is a popular business model to earn money online. Tim Ferriss is teaching it in his bestseller 4 Hour Work Week and entrepreneurs like Andrew Youderian from eCommerceFuel hit half a million Dollar in yearly revenue with it. If you want to know more about Andrew you can listen to this episode of The Suitcase Entrepreneur by Natalie Sisson where she interviews him about his business.

Basically what you do is the following. You find a target market that you can sell products to. Not your own products, but existing physical products. You negotiate with wholesalers and suppliers and try to find one business partner that will deliver products in your name. Then you set up an online shop and present the products of your supplier online. Orders can be automatically forwarded to your supplier, so that you aren't actively involved in the main process.

Your customers are paying you upfront, which reduces the risk of loosing money massively. With that money you're ordering the product from your supplier who then ships it to your customer. The margin between the price your customer pays and you're paying your supplier is your profit. Sounds easy, right? Wrong.

There are a few important things that you need to know about dropshipping. They have been discussed in every detail in this Guide to Dropshipping brought to you by Shopify. Please go through this guide if you want a general description - I'm continuing with my own process now.

How I Found The Opportunity

I was doing keyword research as I found the dropshipping business. My coaching student Kevin and I were going through opportunities for him to build niche websites as it hit me like a hammer.

There it was, a keyword perfect to create a german dropshipping store. Please excuse that I'm not feeling comfortable with publishing the domain or the keywords (yet). Instead I'll give you all the metrics from Long Tail Pro, so that you can see everything except the keyword.

This one is my main keyword: ergonomische Bürostühle.

I can hear some of you saying that I'm only using low competition keywords for my case studies - but come on. Isn't it about finding those keywords and monetizing them? Wouldn't I be stupid not to leverage that keyword? And after all, the related keywords are more competitive, so it will be interesting to see how they perform.

That is the exact situation in which I thought for the first time that it might be profitable to build a dropshipping business targeting those keywords. But obviously it's not enough to have a few keywords. So I started research and validation.

Validating The Dropshipping Business

The one advice that I can give to anyone of your regardless of your field of interest is to validate any of your ideas before you start executing. I learned this the hard way in the first weeks of my web design business and now I can say that validation will save time and money.

Luckily, platforms like Udemy have fantastic courses on Dropshipping at reasonable prices. You should certainly check those out if you want to start your own venture with this business model!

I knew that I'd be able to rank my online store for those keywords, especially for the main keyword. I'm planning with 1,000 monthly visitors so far. Since they're searching for a long tail keyword and thus are very targeted visitors, I'm hoping for a conversion rate of 3%. Assuming the conversion rate is 3% and the average profit is 30€ per product, that would be a profit of 900€ per month. I know the prices I have to pay and I can say that 30€ margin is definitely possible. So this side of the validation looks good. But what about the competition?

In order to find out whether my idea was good or not, I started to search for similar online shops. Of course I found several of them. Really big shops selling thousands of articles including my intended ones. I'd never be able to compete with them in any kind of way.

That's where you can see a drawback of dropshipping. The entry to market barrier is really low, so you'll most likely won't be the first dropshipper in your niche. But if you accept this, you can start niching down and find ways to avoid competing with the big players.

So I started to search for ways to establish a brand for my online shop that won't ever conflict with the big players. It took Kevin and me two days of random thinking, mindmapping, discussing with each other and just surfing around the web to find the right niche for us.

We're going to use a very small range of products. Instead of selling all products our supplier is offering, we're picking 5 or 10, maybe 15 products - and that's it. This allows us to focus heavily on the benefits of our products (not their features). While the big player promote lots of products with various benefits and fields of applications, we're focusing on one benefit and one field of application. Our customer will know from the first second which benefits to expect from our products.

Kevin and I decided that we won't compete on price. Our products are in a price range from 200€ - 500€. It doesn't make sense to compete on 10€ or 20€ in this range and in fact, we want to brand ourselves as premium shop. The product benefits are essential for the everyday routines of the customer. That's why we believe that buying from a premium brand and getting more information compared to the other shops will help us to have higher margins and sell the products at a higher price. We won't be more than 20€ above our competitors though.

So, we know that we have a good chance to get 1,000 monthly visitors, our margin looks good, the refund rate is below 5% according to our supplier and we've got a good concept to differentiate ourselves from the competitors. Seems that I just successfully validated the idea of launching a dropshipping business.

If you have any questions or think that I'm wrong, please don't hesitate and leave a comment! You may save me time and money 😉

Goals For The Dropshipping Business

You might wonder what goals I have for this business. In fact, dropshipping is known to be a source of residual income. Tim Ferriss says that it's the best way to achieve a four hour work week.

That's exactly what I want to achieve! I'm currently thinking whether I should represent the shop on social media, but with respect to the four hours, I probably won't if I don't have to. My competitors aren't present on social media, which would give me another nice advantage. We'll see how the store performs and maybe we'll create a Facebook page for it later on.

For now the goal is to keep maintenance efforts as low as possible. It takes a decent amount of work to get this shop up and running. But I don't want to do marketing or maintenance for it when it's running.

The content will be very comprehensive and I'll do my best to avoid presales questions. I probably won't automate the ordering process at first because I want to learn how it works. But in the end I'm going to automate the process as good as I can.

The only thing that won't be automated is customer service and handling of refunds. When I want to make the shop popular, I need happy customers, so I'll take care of them personally. But that workload won't be too high with a refund rate of 5% and an estimated 50 purchases per month.

Now you know what I'm up for these days. Despite the fact that I'm launching a german speaking blog, I'm also working on a dropshipping business.

I'm happy that I started mentoring Kevin! The shop wouldn't probably exist without his passion and his will to learn new stuff. He already is learning about sales psychology and marketing, so he's going to help me with content creation for the shop.

That's it for today, I hope you had a great week and have a fun weekend in front of you!



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Jan Koch

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