What is Dropshipping, and How Does It Work?

what is dropshipping
Table of Contents

Let’s say you’re running an ecommerce business.

Tons of orders are coming in thick and fast from around the globe.

Third-party suppliers ship the physical products to your customers, and customers pay you for each sale. You don’t even need a warehouse for your own inventory.

This process paints a simple picture of dropshipping.

If you’re looking for more information on dropshipping, you’ve come to the right place.

I created this guide to discuss everything you need to know about dropshipping. I’ll also cover the following topics.

  • What is dropshipping?
  • How does dropshipping work?
  • What are the pros and cons of dropshipping?
  • What are the things to avoid when starting a dropshipping store?
  • What are some tips to start with dropshipping?

Without further ado, let’s dive in!

what is dropshipping

What Is Dropshipping?

Dropshipping gained traction as a profitable eCommerce business model in the US after AliExpress’s rise to prominence in 2010. It’s an order fulfillment method and ecommerce business model where dropshipping sellers sell products without carrying an inventory.

Dropshipping is a retail fulfillment method where a drop-shipping retailer buys items directly from a third party (a manufacturer, wholesaler, or another eCommerce retailer). The third-party supplier will then ship products straight to customers.

When an eCommerce business owner receives an order, they contact their dropshipping supplier and advise them to ship products directly to the customer’s door. Ecommerce businesses that use a dropshipping model don’t stock the products they sell.

By contrast, traditional ecommerce store owners handle the order fulfillment process themselves. Many store owners do everything, including renting warehouse space, conducting inventory management, and managing the shipping process.

Dropshipping allows store owners to act as an online storefront where customers can order products.

Whenever a consumer places an order, you charge them, and the dropshipper charges you, meaning you don’t physically handle any products.

Here are other things to know about dropshipping.

  • The process of running a dropshipping store is similar to running an online store. Customers place an order, and a supplier delivers the item.
  • Behind the scenes, dropshippers get the payment and place an order with a third party. These third parties can include AliExpress, DOBA, or even a wholesaler.
  • The seller doesn’t handle the product directly, but they can track the customer’s order shipment.
  • Dropshipping is a popular business model because it’s a relatively low-risk way to sell online and is easy to start.

How Does Dropshipping Work?

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With the dropshipping definition out of the way, I’ll discuss how dropshipping works.

The Key Players

There are four major players in the dropshipping business.

  • The store owner

As the store owner, it’s your job to find products, communicate with suppliers, create a website, attract customers, and process orders.

  • The supplier

The supplier is the source of the products you sell. When you receive an order from a customer, you contact your supplier, and they will ship the products directly to your customer.

There are three types of suppliers.

    • Manufacturers

This type of dropshipping supplier creates products. They often only sell in bulk to wholesalers and retailers, not the general public.

    • Wholesalers

Wholesalers buy products from manufacturers, then mark them up to sell them to retailers. Wholesalers often stock products from different manufacturers.

    • Retailers

These suppliers mark up and sell goods to the public.

  • The customer

Customers are the people who buy your products. Your job is to attract them to your store and convince them to buy your products.

  • The shipping company

The shipping company is responsible for delivering the products from the supplier to the customer. Many US suppliers will use the services of UPS and FedEx.

The Process

Here’s how the typical dropshipping process works.

1. A customer places an order on an ecommerce store.

2. The dropshipping store owner contacts the supplier to order the item from them.

3. The supplier contacts their shipping company to deliver the product directly to the customer.

4. The owner pays the supplier the cost of the product and shipping fee (minus any discounts they may have negotiated).

5. The owner earns a profit.

Note: The profit is the difference between the store owner’s asking price for the item and the cost of the supplier’s product.

Here’s an example.

Let’s say you have a dropshipping agreement with a clothing supplier.

Your online storefront lists T-shirts, and a customer orders one of your tees.

When the customer pays for the shirt, you send the order to your supplier, who charges you for the shirt price, shipping costs, and any dropshipping fees—the supplier packs and ships the shirt to your customer.

The shirt your customer bought will cost more than what your supplier charged you for the shirt itself and the shipping. What’s left here will be your profit.

The Pros and Cons of Dropshipping

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Pros

According to Statista, the global dropshipping market will be worth $196.78 billion by 2022. Statista also says global dropshipping will grow at a compounded annual rate of about 24%, reaching a forecast value of $476.1 billion.

Numbers prove that Investing in a dropshipping venture is a worthwhile endeavor. Here are the benefits of dropshipping if you’re still not convinced.

Low Start-up Costs

Unlike other business models or fulfillment methods, dropshipping doesn’t involve purchasing inventory upfront or renting a space for a brick-and-mortar retail store—two expensive costs for startups and small businesses.

The only expense in dropshipping is setting up and hosting your own website, which is nothing compared to starting a traditional retail business.

Easy To Set Up

You can set up your dropshipping business in four easy steps.

  1. Set up your online store.
  2. Decide what you want to sell.
  3. Partner with a reliable supplier.
  4. List your products.

Dropshipping is easy to understand and implement, even if you’re new to ecommerce retail.

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Low Risk

Without a physical inventory, you’re under no pressure to sell. You also don’t have to worry about outdated, so there’s not much to lose.

Product Diversification

You are free to decide how many products you want to sell. It doesn’t matter what your niche is or how many products you choose. There is a dropshipper for everything.

Easier To Scale

Suppliers package and ship your products for you while you earn profits. It means less overhead and more time to develop your store.

Cons

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Dropshipping may seem easy, but it isn’t a get-rich-quick scheme. It also has its downsides.

Low-Profit Margins

The fierce competition may force you to sell products at low prices to compete. You could end up with a much lower profit margin than anticipated, even though you have fewer overheads.

Bearing Liability

The customer will see it as your fault if your supplier messes up the delivery. You’re liable because the customer bought the product from you. It could be detrimental if your store and products don’t meet customer expectations.

Shipping Complexities

The dropshipping model is pretty straightforward.

However, you might run into inventory issues if you work with multiple suppliers who supply other retailers offering the exact same products.

Your suppliers might use different shipping solutions, which can be a hassle for both of you.

Shipping costs can also be expensive depending on your setup, especially when shipping multiple items.

Each supplier will have a different billing and processing structure, making it challenging to interact with dropshipping suppliers.

Reduced Control Over Your Brand and Customer Experience

In a typical ecommerce retail store, you can handle concerns yourself when customers complain about product quality, fulfillment time, or your return policy. However, in dropshipping, the supplier handles shipments.

You can’t include personalized branding, packaging, freebies, or notes to make the buying experience more satisfying for your customers.

Furthermore, you would need to cancel orders or delay deliveries if you sell items out of stock with your suppliers.

You give up responsibility for accurate and timely delivery with a dropshipping business model. However, you’ll still be accountable for supplier errors or product quality issues.

A Few Things To Know Before You Start Dropshipping

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Consider these factors if you want to have a successful business in dropshipping.

Oversaturated Market

You might have a tough time selling your products because of oversaturation. Research the market for the product you want to sell before launching it.

Avoid choosing items hastily. Find products that are unique or aren’t available on every retailer’s site.

Poor-Quality Products

Test a supplier’s products before you commit to working with them. Try out a few items for yourself.

It would be stressful to start using a supplier only to discover they have sub-par products. Remember, your customer is coming to you if there’s a problem, not to the supplier. It’s your reputation on the line.

Make sure you choose a high-quality supplier.

Shipment Delays

Fast shipping is essential in today’s market.

However, shipping might be an issue if your supplier is in another country. Therefore, you need to check your supplier’s shipping speeds to ensure they’re competitive.

Fees

Remember to check all the drop-shipping fees. Ensure you include the product price and supplier fees and factor them into your pricing. You could lose money if you don’t sell your products for the right price.

Licensing

Register your business before starting a dropshipping business.

Licensing processes vary by state and country. In South Carolina, for example, you can form an LLC or Limited Liability Company.

How To Choose the Best Dropshipping Suppliers

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Choosing the right dropshipper will determine your supply chain’s success.

Ideally, you’ll want to set up drop shipping arrangements directly with the manufacturers of the products you want to sell. Go straight to a manufacturer to avoid extra fees that other supply chain partners charge.

Having fewer go-betweens means more profit.

The following questions will help you find the right supplier.

  • How much do you charge?

Crunch the numbers before choosing a dropshipper. Shop around until you find a supplier that allows you to make a decent profit.

  • How does the billing process work?

Will the supplier charge your credit card immediately after placing your order? Will you get a monthly bill? Your cash flow should match your partner’s billing process.

  • Are there any handling fees?

If there are handling fees, figure out how they might affect your profit margin. Every expense and middleman affects your bottom line, so you want to streamline your supply chain much as you can.

  • How are products shipped?

Choose a partner that ships items with tracking numbers and sends them to you. This information lets you provide customers with accurate, up-to-date details.

Shipping also comes with returns. Learn about your supplier’s return and warranty policies. If they don’t guarantee their products or don’t accept returns, take your business elsewhere.

  • Do you have a license to operate?

Some suppliers aren’t as legitimate as they claim; sometimes, the source of merchandise isn’t clear. Many suppliers use a company’s intellectual property or trademarked logos without permission, which is deceptive and illegal.

Dropshipping Agreement Contracts can solve this potential problem, but only some upstarts know. Remember this when choosing suppliers.

How To Start a Dropshipping Business the Right Way

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This step-by-step guide can make drop shipping work for your online business.

1. Set up an Online Storefront.

The first step in the dropshipping process is to create an eCommerce website.

Simplify this task with Shopify, the best platform to start dropshipping quickly and efficiently.

Alternatively, you can also use WordPress, Squarespace or Wix, but they need much more time to setup and won’t usually get you the best results.

Or, you can even open an online store directly on ecommerce platforms like Amazon, eBay, or AliExpress, but this is rarely used for Dropshipping and not recommended for this business model.

2. Sell the Right Products.

Choosing from millions of products under numerous categories can take a lot of work, so decide what market you want to target first.

Selecting a specific niche and limiting your categories will help you sell more effectively. It doesn’t have to mean starting small. You sell anything from sustainable products to women’s products.

Perform market research to learn the latest trends.

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3. Search for Suppliers.

You’ll need to do a lot of research to find reliable dropshipping suppliers.

Google or another search engine can help you find suppliers for specific products. Find a dropshipping wholesaler you can trust.

Check out reviews from other merchants to help you decide. You can widen your product options by sourcing through a dropshipping marketplace. You get access to millions of products from vetted suppliers with dropshipping.

4. Add Products to Your Online Store.

Customize your storefront’s product listings.

Include high-quality images, engaging videos, and item details to add variation to your product pages.

Make it easy for customers to find what they need. If someone comes to your store and sees a hodgepodge of different products, they’ll probably go elsewhere.

Sort your product ideas into categories, collections, and filters. Understand your customers’ mindset and look at your online store from your customer’s perspective.

The next step is setting your pricing and shipping rules.

Keep your profit in mind. Consider wholesale and shipping costs when setting your prices. Maintain a balance between increasing revenue and keeping your products affordable.

5. Promote Your Business.

Promote your website and dropshipping products. Spread the word with a marketing plan that works for your target shoppers—it may not be easy, but it’s crucial to your success.

Frequently Asked Questions (FAQs)

How Do Drop Shipping and Retail Arbitrage Differ?

In retail arbitrage, sellers source products from retailers and resell them at higher prices. In simpler terms, a seller resells products already available to the public for profit.

Buying discounted items and flipping them to make a profit is labor-intensive, making retail arbitrage a hassle. Sellers who combine retail arbitrage with dropshipping as an order fulfillment business model might have trouble relying on retail arbitrage, especially if their business is already unprofitable.

How Much Should I Invest to Start Dropshipping?

It’s hard to predict the exact costs for individual dropshipping businesses. However, you’ll have to purchase a domain name and create an ecommerce site. You’ll also have to pay for online advertising.

Is Dropshipping Legal?

Yes, dropshipping is legal. It’s an ecommerce fulfillment model that many global retailers use.

Most retail stores you shop at don’t manufacture their own products. The concept of dropshipping takes this curated approach and adapts it to an online business.

How Profitable is Dropshipping?

This fulfillment method can be very profitable if you choose the right niche, find the right supplier, and target the right audience.

In general, profit margins are 15% to 45%. However, profit margins for luxury goods, jewelry, and electronics can reach 100%.

Is It Possible for Dropshipping Companies to Ship Internationally?

Yes, some dropshipping companies ship internationally.

Shipping rates, timeframes, and fees vary by company. Whenever you’re researching dropshipping options, be sure to check out international order fulfillment details.

For example, Amazon has fulfillment centers around the world. FBA international programs can assist you in reaching international customers if you have the proper shipping plan.

How Does A Dropshipping Supplier Make Money?

Dropshipping businesses mark up the price of their products in exchange for distribution. Since dropshipping stores drive additional sales that suppliers can’t make otherwise made, suppliers are fine with dropshippers marketing their products.

How Else Can I Start a Dropshipping Business?

Here are some tips to follow.

  • Set up a dropshipping business and commit to it.
  • Decide which dropshipping ecommerce business idea you want to pursue.
  • Conduct market research.
  • Find a dropshipping supplier.
  • Build your ecommerce store.
  • Establish a business structure.
  • Organize your finances.
  • Promote your dropshipping business.
  • Assess your offerings and make improvements.

Is Dropshipping Worth It?

There are probably better options than dropshipping if you’re looking for a quick way to make lots of money. But if you’re willing to invest time and money in the beginning, dropshipping can be a great side business.

The Bottom Line

Hopefully, my article has answered the question, “What is dropshipping?”

I also hope I’ve given you a clearer understanding of how dropshipping works and what are its advantages and disadvantages.

Don’t be afraid to start your dropshipping journey today. The time has come to roll up your sleeves, learn the ropes, and dive into the world of dropshipping.

You can also visit my blog for more ecommerce tips and strategies.

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