What Is Dropshipping and How Does It Work?

What is Dropshipping?

Dropshipping is a retail fulfillment method where businesses don’t hold stock of the products they sell. Dropshipping retailers purchase goods directly from manufacturers, wholesalers, or other retailers who then ship the items directly to customers.

You are, therefore, acting as a storefront for your business when it uses drop shipping. Consumers pay you once they place an order, and drop shippers charge you once they do. There is no merchandise you handle.

Dropshipping is used for everything from technology to food. The dropshipping industry is more than $200 billion in size, and dropshippers focus on a specific niche and market their listings online using digital marketing strategies.

How Does Dropshipping Work?

Dropshipping is a supply chain management technique. If you have recently opened a business or an online store, a supply chain is an organization of suppliers, materials, manufacturers, and retailers responsible for the creation and distribution of a product.)

In dropshipping, the following parties are involved:

• Manufacturers. Instead of selling directly to the public, they usually sell in bulk to wholesalers and retailers.
• Before selling to retailers, wholesalers mark up the products they buy from manufacturers. They usually stock products from different manufacturers.
• Retailers mark up products before selling them to the public.

The way it works is as follows:

• Your business, the retailer, receives an order from the customer.
• Dropshipping partners – either manufacturers or wholesalers – package and ship the product to the customer once you alert them.
• Dropshipping partners charge retailers for their services, and retailers charge customers.

Since there are fewer parties taking a cut, it is generally more profitable to have a shorter supply chain. Direct contact with the manufacturer is considered a short supply chain.

Benefits of Dropshipping

1. Easy to start

Starting a new business used to be hard – however, business models like dropshipping have made owning a business a simple process.

As a dropshipper, you don’t need to worry about: 

• Renting an office space
• Hiring staff
• Packing and shipping your orders
• Handling return shipments and inbound shipments
• Managing stock levels and ordering products 

Later, after your company has grown to a reasonable size, you may hire virtual assistants to assist with running the company.

2. Less upfront capital is required

With dropshipping, you can launch an eCommerce store without investing thousands of dollars in inventory upfront. In the past, retailers had to tie up large amounts of capital purchasing inventory.

As a dropshipper, you act as a middleman who receives money from an online shopper and pays the supplier for the ordered product. What you need to start and scale a dropshipping store is nothing more than a computer and Internet connection.

If a product stops selling well, you will only need to research and find other hot-selling products and list them in your store. You won’t have to create any products yourself. 

It’s possible to start sourcing products and become a successful dropshipper with a small amount of money without investing in significant inventory upfront. As a dropshipping store doesn’t require an upfront purchase of inventory, there’s less risk involved in starting the business.

3. Low overhead

For many traditional online businesses, overhead is a big problem. You do not have this problem if you run a dropshipping business. Since you do not keep an inventory of the products you sell – and keep in mind that overhead is usually related to managing inventory – there’s nothing to manage. That’s a significant amount of overhead you can save. These include:

• Cost of space – facility in which the inventory is housed i.e. warehouse depreciation, insurance, utilities, warehouse staff, storage racks, etc.
• Cost of money – Interest cost associated with the cost of borrowing money to pay for inventory e.g. bank loans, credit cards, etc.
• Cost of obsolescence – Some inventory items may never be used or will be damaged while in storage, and so must be disposed of at a reduced price, or at no price at all. Depending on how perishable the inventory is, or the speed with which technology changes impact inventory values, this can be a substantial cost.

4. Access to a wide selection of products

If a product can be shipped, whether domestically or internationally, you can market and sell it through dropshipping. There are literally hundreds of thousands of products you can sell through the dropshipping model. All you have to do is make a selection. 

A common misconception about dropshipping is that you can only sell one or two products through a dropshipping website. That’s not true. You can sell dozens or even hundreds of products in your online store and dropship every single one of them. 

Sure, the more products you add to your assortment, the more difficult it becomes to manage the different orders. But that’s not the point. The point is that there is no upper limit to the number of unique products you can promote and sell through a dropshipping website.

5. Easier to scale

With the dropshipping model, all you have to do is add more products to your assortment or set up another dropshipping website that offers a new product selection to expand your business. 

Setting up another website requires little time and effort from you, especially if you use a pre-made template. 

With a dropshipping template, all you have to do is customize the look of the website, upload your product images and descriptions, add information about your business, and install any plugins or software programs you need.

6. Flexible location

If you have an Internet connection, you can run a dropshipping business almost anywhere. So long as you can communicate easily with your suppliers and customers, you can run and manage your business.

Your job is to drive customers to your website, accept their orders, process them, and send them to your supplier or manufacturer, who handles the rest of the transaction cycle.

7. Easier to test

You can use dropshipping for both launching a new store and testing the appetite of customers for new product categories, such as accessories or wholly new product lines. 

As with dropshipping, the main benefit of dropshipping is the ability to list and potentially sell products before committing to a large inventory purchase. You could list thousands of products in your store and find out which type of products is popular. 

For your store to list various products, simply create different sections, especially if it’s an independent one. On the same dropshipping store, you can list headphones, totem bags, phone cases, belts, shoes, etc.

Cons of Dropshipping

Dropshipping offers all the benefits we discussed, making it an appealing model for people looking to open their first online store or to expand their existing offerings. It is not without its drawbacks, however. Convenience and flexibility usually come at a price. 

The following are a few shortcomings to consider.

1. Customer service issues

The shipping aspect of the business may be under your supplier’s control, but customer service is still your responsibility. It’s not hard to see why this can cause you a lot of headaches. 

You are not the one handling packaging and shipping, so you often have no idea how or when products will reach your customers. That’s a recipe for disaster when it comes to customer service. 

There are so many factors you need to know about the shipping process so you can provide answers and solutions to disgruntled customers. You need to know when the product was shipped, what the tracking details are, and when the product is expected to arrive. To know these things, you need to communicate with your supplier and manufacturer.

2. Quality control issues

Quality control is one of the things you have to do when you get involved in a dropshipping business. You can try to agree with the supplier on quality issues, but that does not always mean that the quality standards will remain the same. 

You’ll just have to hope that the supplier holds up their end of the bargain. Since you do not own any of the inventory, you will not know about any deterioration in product quality until the number of customer complaints and product returns increases. 

At that point, the damage has already been done. You need to rebuild a positive relationship between you and your customers.

3. Inventory issues

Dropshippers rely on the supplier’s good faith for supplies to remain available. If you receive orders from customers and your supplier tells you that inventory is not available at the moment, that’s not good. If that happens too often, you might as well close your business.

There are always big ups and downs when ordering products. For example, let us say that in a given week you get a couple of orders a day. What if the next week the orders suddenly swell to hundreds of orders per day? 

Generally, the supplier or manufacturer cannot fulfill your orders as quickly as you wish. You do not have complete control over inventory. When customers do not consistently purchase products from your dropshipping website, this can be very problematic.

4. Shipping complexities

Shipping a product to a customer is never an easy task. The good news is that this responsibility does not lie with you, but with your supplier or manufacturer. However, that does not mean you can ignore the complexity of the process. 

There must be a smooth connection between your sales process and the supplier’s shipping procedures. So, when a customer orders a product from your dropshipping website, your supplier is notified of the order immediately. 

The faster the supplier is notified of the sale, the faster they can ship the product to the customer. If there is not an efficient line of communication between your business website and the supplier, complex shipping issues will occur, affecting the business.

5. Supplier errors

Your supplier or manufacturer will make mistakes. You must allow for that. No supplier or manufacturer is perfect. They all have their weaknesses and are not immune to making mistakes. 

A supplier mistake could be anything. It could be the wrong product being sent to the customer. It could be the right product but sent to the wrong customer. In the dropshipping industry, it is common for products to be sent to the customer with the wrong specifications. 

This happens all the time and can be very frustrating because as a dropshipper, you have no control over these errors. If a customer complains that they received the wrong product, you need to make sure that the product is recalled and the correct product is reshipped.

6. Limited customization and branding

While dropshipping doesn’t give you much control over the product, custom-made products and print-on-demand do. Suppliers usually design and brand the dropshipped product.

Your supplier may be able to accommodate some changes to your products, but he or she always has the final say. Manufacturers usually require a minimum order quantity for any changes or additions to the product.

7. Low margins

Dropshipping businesses face the greatest disadvantage of low margins. In order to increase revenue, many competing stores set up eCom stores and sell items at rock-bottom prices because it is so easy to start and has such low overhead costs. Their startup costs have been so low they can operate on minuscule margins.

You need to put a price tag on your products that are reasonable compared to your online and offline competition.

Also, it is actually more expensive to dropship a product than to buy it in bulk and sell it as a direct seller. Since you are buying the products at a higher cost as a dropshipper, it means you will have a lower profit margin. This will always be the case unless the dropshipping model is fundamentally changed.

How Much Do You Need to Start Dropshipping?

It is difficult to predict the exact costs of any dropshipping business, but there are a few things every business will need to purchase in order to get started. Here are a few essential expenses.

Online store

Estimated cost: $29/month

For your online store to be created and hosted, you’ll need an eCommerce platform or website builder. Shopify is a great choice. Your business will be able to seamlessly sync with DSers’ marketplace to source dropshipping products, and you’ll have access to the full offering of themes and free branding tools so you can get started quickly.

Domain name

Estimated cost: $5–$20/year

Without a domain name, it’s hard to build trust with customers. While there are many top-level domains available (e.g., example.shop, example.co), we recommend finding a .com that matches your brand. 

Test orders

Estimated cost: Varies

While dropshipping lets you have minimal involvement with your overall product catalog, you should take some time and money to test out the items you intend to sell. You risk listing a product with too many flaws or defects, resulting in unhappy customers and a lot of return processing time.

Online advertising

Estimated cost: Scales with your business; we recommend budgeting at least $500 to get started

Organic channels like content marketing, SEO, and word-of-mouth can reduce the average cost of acquiring new customers for eCommerce businesses. However, in most cases, advertising is still an essential channel for businesses that sell products. Google AdWords, Facebook Ads, Display Ads, and Mobile Ads are some of the most common channels.

How Do Dropshippers Make Money?

Dropshippers sell goods online to make money. They source cheap products in markets like China and sell them in developed markets like the U.S., UK, and EU. The business is challenging, and competition only increases with time.

In order to remain competitive in the market, dropshippers need to improve their product sourcing and marketing techniques. Let’s take a look at how dropshippers make their money.

Selling Products

Dropshippers provide the infrastructure they need by using an independent website or a company like eBay or Amazon.

Profitable products are found in emerging markets and sold in developed markets. A dropshipper’s margin determines its profitability. So they must find cheap products at a high price in order to run their business.

Sourcing Cheap Suppliers

For their products, dropshippers rely on affordable sourcing strategies. It is more likely that a dropshipper will be able to sell it in other markets for a profit. Dropshippers are usually sourced from China or other Asian suppliers. Establishing supplier relationships is an essential element of the business.

To remain profitable, dropshippers must watch their margins closely. Product sourcing and research are critical components of the dropshipping business model.

Streamlining Logistics

There is no inventory held by dropshippers. They can sell into any market in any location around the world because they can work from anywhere. They must, however, ship the products from distribution centers or directly from suppliers.

Fees are charged by distribution centers to process transactions and ship goods to consumers. Those costs eat into dropshippers’ margins, and they need to control those margins in order to stay profitable.

Is Dropshipping Legal?

Dropshipping is legal. It is a fulfillment model used by many global retailers. The question usually arises because people don’t understand how dropshipping works. 

As with any business, meeting customer expectations and building a brand that resonates with the right audience remains essential to success in the long run.

The majority of retail stores do not manufacture the products they sell. Using dropshipping, businesses are able to utilize this curated approach to fulfill orders.

As a business owner, you still have to comply with a number of fundamental legal obligations. You should consult an attorney specializing in these matters if you want to make sure you are doing business legally.

Can you do dropshipping on Amazon?

Dropshipping through Amazon is a way to operate an e-commerce business. Depending on the type of product, dropshipping fees range from 10% to 15%. Profit margins on Amazon are slimmer. Also, Amazon has some housekeeping rules you should follow. You can find these on the dropshipping policy page. 

Can you dropship on eBay?

On eBay, dropshipping is allowed. It is not allowed, however, to list a product on eBay and then buy it from a retailer or marketplace that ships the customer’s order.

How To Start a Dropshipping Business? 

If you’ve never run a dropshipping business, it can seem intimidating. Fortunately, others have already done this, so you can copy them and avoid common mistakes.

Here are the steps that will help you with everything from identifying your dropshipping niche to choosing suppliers. 

• Decide on a dropshipping business idea.
• Conduct competitive research.
• Select a dropshipping supplier.
• Create your eCommerce store.
• Establish a business structure.
• Organize your finances.
• Promote your dropshipping store.
• Analyze your offering and make improvements.

For more information on starting your own dropshipping business, read How to Start a Dropshipping Business: 9 Proven Steps.

Is Dropshipping Still Profitable in 2024?

The dropshipping business model can be profitable for merchants because there is no need to manage shipping or manufacturing. You can earn a good profit margin with the right suppliers and it’s a low-risk business model without incurring massive costs as a wholesaler would.

With a successful dropshipping store, dropshippers can make up to $100,000 per year. You will need to choose the right suppliers and build a brand if you want to make $100,000 per year as a dropshipper. 

However, it can be difficult to start a dropshipping business. Due to the fact that you can start a dropshipping business for free, you might find that there are a lot of companies offering the same product at similar prices.

If you need more guidance, sign up for my online business coaching.