What is dropshipping?

Dropshipping is an online business model retailers use to avoid maintaining inventory of the items they sell. If you love selling but don’t want to pay for or keep a storefront, warehouse, or other overheads, dropshipping may be your best bet. Simply list your products on your business website, and after receiving an order, you purchase the requested products from third-party suppliers who ship them directly to your customer. You’re essentially the intermediary between your supplier and buyer. This business model works well for entrepreneurs who excel at selling since they don’t need to worry about handling shipping or maintaining stock. Instead, they can focus on:

• creating a unique online store that stands out from the competition
• finding popular products to list
• driving increased traffic to the store
• converting browsers into customers and then repeat customers
• nurturing customer relationships

What is a dropshipper?

Dropshipper refers to any person or business using the dropshipping model for order fulfillment rather than using a warehouse and shipping products themselves. Since dropshipping relies on third-party suppliers to handle inventory, fulfill orders, and store stock, a dropshipping operation can have numerous employees or just one business owner.

How does dropshipping work?

The exact logistics of dropshipping largely depend on your arrangement, but the following steps walk you through how to start dropshipping.

• As the seller, you sign agreements with third-party suppliers and choose products to list on your website or platform.
• Customers place online orders via your website or platform.
• You process the order and forward it to your supplier.
• You send an order confirmation to your customer.
• Your supplier fulfills and ships the order to your customer.
• Your customer receives their order.

Benefits of dropshipping

Dropshipping has become a popular e-commerce business strategy for small and large businesses. Here’s why.

Fewer upfront capital costs

Having fewer upfront capital costs is likely the most significant advantage for dropshippers. With a traditional brick-and-mortar store, business owners require thousands of dollars in inventory to start their venture, not to mention leasing their store and paying employees. The dropshipping model eliminates this need, allowing you to hold on to your capital until you’ve made a sale. All you need is an online storefront where you can direct customers to buy your products. Your online shop could be your own website or through a popular e-commerce platform like Shopify, Amazon, or Squarespace.

You can start a dropshipping business and become successful with little starting capital by not having upfront inventory costs. Also, since you’re not committed to selling pre-purchased inventory, there’s less risk involved with a dropshipping store.

Simple to start

Running an e-commerce business is easier when you don’t deal with procuring, maintaining, or supplying physical products. With dropshipping, you can create your online store in as little as 15 minutes and forget about:

• managing and paying for a warehouse
• tracking inventory for accounting purposes
• packing and shipping orders
• worrying that pre-purchased products won’t sell
• dealing with returns and inbound shipments
• continuously ordering products
• managing stock

Instead, you can focus on your marketing, products, and customers. Setting up your background processes, such as accepting and processing orders, forwarding orders to the supplier, and accepting and making payments, will take a little longer. However, a dropshipping operation is much easier to start compared to a physical retail store.

Low overhead expenses

You can enjoy low overhead expenses since you don’t have the hassle of buying inventory or managing a warehouse. Many successful dropshipping e-commerce stores run as home-based businesses, requiring nothing more than a laptop, internet connection, and a few recurring operating expenses. As your business grows, your costs will likely increase, but they’ll still be low compared to running a traditional brick-and-mortar business.

Flexibility

You can run a successful business from just about anywhere as long as you have a reliable internet connection. Promptly communicating with customers and suppliers and providing support that meets your customers’ expectations is key to a lucrative business, regardless of where you are in the world.

Wide product selection

Not having to pre-purchase inventory means offering various trending products at any given time and changing or rotating your product list without worrying about unsold inventory. You can generally list any item your supplier stocks without any additional costs.

Test product sales without commitment

Dropshipping is a strategic fulfillment model for launching a new e-commerce store and for business owners wanting to test product interest without committing to large stock quantities, like new product lines or accessories.

Easier to scale

In a traditional retail setting, you usually have four times the work to do when you receive four times the number of orders. Leveraging dropshipping suppliers means most of the work processing additional orders will be taken care of by the suppliers, enabling you to expand with less incremental work. Sales growth always comes with extra work, especially regarding customer support. Still, businesses using dropshipping scale particularly well compared to traditional e-commerce businesses—all you need is a solid platform that can accept orders and handle consumer traffic.

Drawbacks of dropshipping

Dropshipping appeals to many entrepreneurs wanting to sell generic products, but this business model doesn’t come without its limitations, such as building a brand and differentiating products. Also, businesses using dropshipping typically compete on pricing, leading to lower margins. Here’s a list of dropshipping drawbacks to consider.

Lower profit margins

The convenience and flexibility of dropshipping can come at a higher price. The most significant drawback of this business model is the low profit margins associated with increased competition. Because dropshipping makes it so simple to start e-commerce, many new businesses sell their items at rock-bottom prices to gain a competitive edge. They can easily afford to operate on lower margins because they’ve invested little to start the company. Increasing competition can hurt the profit margin potential in your niche. Generally, the sellers who lowball their prices have low-quality websites and lack customer service. Mitigate this problem by:

• choosing higher-quality products
• selecting a niche well-suited for dropshipping, such as health and personal care, kitchen and grocery, home decor and bedroom, or wardrobe and accessories
• focusing on providing an unmatched customer experience to help you stand out when product competition is fierce

Inventory issues

When you stock your own products, keeping track of items going in and out of stock is easier. With dropshipping, you’re sourcing from multiple vendors who also fulfill orders for other sellers, meaning inventory can change frequently. Fortunately, you can avoid an issue by using apps that sync with your supplier’s stock, allowing you to send customer orders with just a few clicks and see real-time information on their inventory. Some apps take automated action when a product’s inventory becomes unavailable by unpublishing the product or changing the available quantity to zero.

Shipping problems

Since most dropshippers partner with various suppliers, they have no control over product supply, quality, or availability. For example, a customer places an order from your site for three items, all from different suppliers. You now incur three separate shipping costs, which isn’t a wise business move. Even when you can include the charges and pass them on to your customers, automating them in your drop shipment calculations can be challenging.

Supplier errors

Sometimes, your suppliers will make mistakes, and you must take the blame. Errors can include missing items, packing or product quality issues, or botched drop shipments, especially from low-quality suppliers who don’t care about your customer experience or your business’s reputation.

Limited branding and customization

Unlike print-on-demand or custom-made products, dropshipping doesn’t give you much control over your products’ appearance. Typically, your supplier designs and brands the products. Some suppliers allow customizations; however, any product changes or additions generally require a minimum order quantity to be affordable and viable for the manufacturer.

Dropshipping can help you start, run, and grow your business, especially when looking for low-cost small business ideas. Successful dropshipping relies on outstanding customer service, maintaining profit margins, finding popular products, choosing the right suppliers, and avoiding anything damaging your business’s reputation.