What is a Dropshipping Business and How Does it Work? The Complete Guide

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Dropshipping is an order fulfillment method that does not require a business to keep products in stock. Instead, the store sells the product and passes on the sales order to a third-party supplier, who then ships the order to the customer.

Sure, it seems like easy money — you sell other people’s goods and take a cut for yourself — but when you factor in all the drawbacks, obstacles and day-to-day management, it’s far from easy and can be hard work.

If you approach it the right way, though, dropshipping can still help you build a successful business… just not as quickly as you’d hoped.

From pros and cons of dropshipping to the right approaches, and from the best dropshipping companies to FAQs, here’s everything you need to know before you start dropshipping on your ecommerce platform:

Dropshipping is a retail fulfillment method that allows entrepreneurs to sell products without holding inventory. With dropshipping, store owners partner with a supplier or manufacturer to ship orders directly to customers. This enables sellers to run an online store without investing in warehouse space and inventory costs.

Dropshipping has grown in popularity in recent years due to the rise of ecommerce and people wanting to run online businesses In this comprehensive guide, we’ll explain everything you need to know about dropshipping and how it works

What is Dropshipping?

Dropshipping is a retail fulfillment method where the store owner does not physically keep products in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer.

As a dropshipper you would list products for sale on your online store or sales channels without actually stocking inventory. When a customer places an order you forward it to your supplier or manufacturer, and they handle packing and shipping the product to the customer.

The biggest difference between dropshipping and the standard retail model is that with dropshipping, the selling merchant doesn’t have to store inventory. The merchant also doesn’t have to deal with packing and shipping orders. This makes dropshipping appealing for entrepreneurs or small businesses that want to focus on marketing products and customer acquisition.

How Does Dropshipping Work?

The dropshipping order fulfillment process has three main steps:

A customer places an order with a dropshipping retailer.
The retailer forwards the order details to their supplier and pays them for the product.
The supplier packages the product and ships it directly to the customer

The supplier could be a wholesaler, manufacturer, or third-party logistics provider that handles warehousing and order fulfillment.

Dropshipping allows both retailers and suppliers to focus on their core competencies. Retailers can concentrate on managing their online stores and acquiring customers without inventory concerns. Suppliers can focus on order fulfillment and shipping.

The Pros and Cons of Dropshipping

Dropshipping offers some great perks, especially for new ecommerce entrepreneurs or small businesses. However, there are also downsides to consider.

Benefits of Dropshipping

Low startup costs: Dropshipping eliminates the need to invest in product inventory upfront. You don’t have to worry about warehouse space, equipment, or shipping materials.
Easy to start: With dropshipping, you can launch an ecommerce store in just a few weeks. You don’t have to bother with purchasing inventory or complex fulfillment operations.
Low overhead: You won’t have the overhead costs associated with purchasing, storing, and managing inventory. This makes dropshipping a very capital-efficient business model.
Flexibility: You have the flexibility to test and pivot to new products based on demand. Since you aren’t stuck with inventory, you can add or remove products fluidly.
Scalability: You can scale up or down seamlessly since you aren’t tied to managing physical products. This makes it easy to grow sales.
Location independence: Dropshipping businesses can be run from anywhere with an internet connection. You don’t need a warehouse or physical storefront.

Potential Drawbacks of Dropshipping

Low margins: Dropshipping businesses tend to have lower profit margins, especially when selling highly competitive products. The supplier receives most of the margin.
Inventory risks: If your supplier has an item out of stock, you can’t fulfill orders. This can hurt your reputation and customer experience.
Shipping complications: Since the supplier handles shipping, there’s more opportunity for shipping mishaps. The retailer has little control or visibility into the shipping process.
Lack of quality control: You rely on your supplier for quality control and branding. For branded products, you must trust they will package them properly.
Customer service challenges: If a customer needs to make a return, you have to coordinate with the supplier to handle it properly. This adds complexity to the returns process.

How to Start a Dropshipping Business

Starting a dropshipping business consists of these seven key steps:

Research dropshipping niches: Select products or niches that are profitable and align with your expertise. Avoid oversaturated niches.
Find reliable suppliers: Search for suppliers that have high-quality products, excellent fulfillment services, and competitive wholesale pricing.
Build an online store: Create an ecommerce storefront to showcase and sell your products. Shopify and WooCommerce are popular platforms for dropshipping stores.
Add products: Populate your store inventory by importing product listings from your suppliers or adding them manually.
Set up payment processing: Integrate payment processing so customers can pay online. PayPal, Stripe, and Square are commonly used.
Automate order processing: Set up automation rules to forward orders to your suppliers. Apps like Oberlo for Shopify help automate this.
Market your store: Run marketing campaigns such as social media ads, influencer collaborations, and SEO to drive traffic and sales to your store.

Tips for Running a Dropshipping Business

Here are some best practices for operating a successful dropshipping business:

Focus on high-profit-margin products so you can maximize income.
Curate your product selection instead of selling everything.
Offer excellent customer support and set proper delivery expectations.
Automate processes like order forwarding to improve efficiency.
Maintain strong relationships with your suppliers and evaluate them regularly.
Avoid long shipping times by working with local suppliers or warehouses.
Create quality product listings with detailed descriptions, specs, and images.
Leverage tools like analytics and CRM to gain business insights.

Is Dropshipping Profitable?

Dropshipping can be quite profitable if executed correctly. According to Statista, the global dropshipping market is projected to grow to $463 billion by 2025. With low startup costs and overhead, dropshipping offers an accessible path to generating an income online.

However, building a profitable dropshipping business takes consistent effort. As with any business model, success isn’t guaranteed. Lower margins, supply chain hiccups, and stiff competition make it imperative to run dropshipping operations efficiently.

Overall, dropshipping represents an exciting opportunity for entrepreneurs to get started with ecommerce and build a successful online business. By understanding its intricacies and challenges, you can create a profitable dropshipping model. With the right business acumen and execution, dropshipping provides an appealing way to sell products online.

Frequency of Entities:

dropshipping: 45
supplier: 13
inventory: 12
customer: 10
product: 10
order: 9
shipping: 8
ecommerce: 5
fulfillment: 5
retailer: 5
supplier: 5
business: 4
store: 4
entrepreneur: 3
margin: 3
online: 3
warehouse: 3
challenges: 2
competitor: 2
niche: 2
startup: 2
automation: 1
branding: 1
capital: 1
channels: 1
competencies: 1
consistency: 1
curation: 1
customer acquisition: 1
efficiency: 1
experience: 1
income: 1
insights: 1
intricacies: 1
leverage: 1
location independence: 1
logistics: 1
mishaps: 1
opportunity: 1
oversaturation: 1
packaging: 1
partners: 1
perks: 1
physical: 1
processes: 1
profitability: 1
projections: 1
quality control: 1
relationships: 1
reputation: 1
returns: 1
scalability: 1
seamlessness: 1
small businesses: 1
specifications: 1
storefront: 1
supply chain: 1
visibility: 1

what is a dropshipping business

How do I incorporate dropshipping into my business?

Dropshipping can be a complement to a traditional ecommerce business model.

Assuming you already have an online presence in one or more stores (or at least know how to set that up), incorporating dropshipping is similar to launching any other new product, with a few distinctions.

Here’s a quick step-by-step guide:

Research what products would fit well with your strategy, market, and customer base.
Research how your competitors are selling the product, namely pricing.
Find the best supplier (see our checklist above).
Finalize a fulfillment process that works for both of you and incorporate it into your system. Depending on your sales management software, this could be easy or require ironing out some wrinkles.
List and promote your new product. Be sure to specify any special conditions, such as changes in shipping times or locations.

Yes, dropshipping is legal.

You may run into other legal issues depending on who your supplier is, but dropshipping on its own is a perfectly legitimate method of order fulfillment.

Just remember to protect yourself with a Dropshipping Agreement Contract.

Legal liability issues.

Although this isn’t a common problem for dropshippers, it’s worth mentioning. Some suppliers aren’t as legitimate as they claim, and you don’t always know where the merchandise comes from.

Even more deceptive is when suppliers illegally use a trademarked logo or another company’s intellectual property, which happens more than average.

This potential problem can be rectified with a solid Dropshipping Agreement Contract, but not every dropshipping upstart knows that.

It’s something you’ll want to keep in mind when choosing suppliers.

Dropshipping 101: A Comprehensive Beginners Guide

What does a dropshipping company do?

With dropshipping, you sell products on your website, your brand or items produced by other companies, and a dropship company will handle the rest for you. The dropshipping company stores the inventory, packs the products, and ships the items to customers once they’re sold.

What is dropshipping e-commerce & how does it work?

Dropshipping is an e-commerce business in which the online seller acts as an intermediary between a product supplier and an end customer. Dropshipping companies don’t keep inventory in stock themselves. Instead, when a customer buys something, the dropshipper passes the order along to a third-party supplier, who ships it directly to the buyer.

How to start a dropshipping business?

Lower startup costs. As a dropshipping business, you do not need to invest much in leasing a store, stocking inventory or paying staff. All you need is an online shop front where you can direct the customers and sell your products. This online shop could be your own website or on popular e-commerce platforms such as Amazon, Shopify or Squarespace.

What is a dropshipped product?

Dropshipping is a useful fulfillment model for testing customer interest in a new product category. Stores can trial sales of a dropshipped product before committing to buying inventory. 6. Easier to scale