What is Dropshipping and How Does It Work? (2024)

What is Dropshipping and How Does It Work? (2024)

Dropshipping is a business model where products are purchased from an online store and shipped directly to customers by the supplier or manufacturer.

Dropshipping is a popular and straightforward method to launch an online business. It eliminates typical retail obstacles like purchasing, stocking, and shipping inventory. 

When a dropshipping store generates a sale, it sends the order to a supplier, who manages the shipment to the customer. This enables store owners to concentrate on other responsibilities such as marketing and branding.

Learn about dropshipping, how it works, and how to start as a dropshipper.

What is dropshipping?

Dropshipping is a retail method in which an online store does not keep the products it sells in stock. Instead, when a customer places an order, the store purchases the item from a third-party supplier who then ships it directly to the customer.

Many business owners opt for dropshipping because it allows suppliers to handle the order fulfilment. This means that stores don't have to invest in warehouse space or take the risk of being stuck with unsold inventory. Consequently, businesses can allocate more resources to other retail activities, such as marketing.

It’s estimated that dropshipping generates more than $300 billion in e-commerce sales annually.

What is a dropshipper?

A dropshipper is an individual or business that takes customer orders and forwards them to a supplier for fulfillment.

Dropshippers typically operate online stores to promote and sell products. When a customer makes a purchase, the dropshipper then places an order with the supplier.

When a customer buys a cat collar from your online dropshipping store, you send the order to your supplier, who manages a warehouse of pet products.

(Confusingly, some resources use the term "dropshipper" to refer to the supplier. This article defines dropshippers as sellers of dropshipped products.)

What are dropshipping suppliers?

Dropshipping suppliers fulfill orders on behalf of retailers, storing, packaging, and organizing delivery to the customer address.

You might collaborate with a single supplier or a platform that maintains a directory of suppliers, such as AliExpress. Some manufacturers also function as dropshipping suppliers.

In the pet store example, the company that receives the order, packages the cat collar, and ships it to the customer is the dropshipping supplier.

What about wholesalers?

Wholesale suppliers are not involved in the dropshipping process. Unlike dropshipping suppliers, wholesalers sell bulk quantities of products to retailers, who then sell them to consumers.

If a pet store purchases a large quantity of organic dog treats at a discounted price, stores them, and then sells them individually to customers, it is operating as a traditional retailer working with a wholesaler.

How does dropshipping work?

Here’s a step-by-step breakdown of how the standard dropshipping process works:

1. Partner with a dropshipping supplier

Find a dropshipping supplier that offers the products you want to sell. Once you sign an agreement, they will handle the storage, packaging, and shipping of customer purchases.

You can form a partnership with a business in your niche or utilize a dropshipping app to sell products from various suppliers.

2. Set up an online store

Next, create your online store. Your store lists products from your supplier for the price that you decide.

Add a dropshipping app to your store to keep product listings updated and automatically forward orders to suppliers:

• DSers connects Shopify stores to AliExpress.
• Zendrop has a catalog with more than a million products.
• Spocket includes dropshipping suppliers in the US, Europe, Brazil, and India.

3. Receive a customer order

When a customer visits your store and places an order, the checkout process occurs as usual. The customer pays, receives order confirmation, and awaits delivery.

4. Forward the order to the supplier

Once your customer has paid for the order, send the order details to your dropshipping supplier. If you’re using a dropshipping app, this step is automated.

5. Supplier prepares and ships the product

The supplier prepares and ships the order directly to the customer. Many suppliers offer branded invoices and custom packaging to enhance the shopping experience.

6. Customer receives the product

The store handles all customer service needs while the customer receives the product from the supplier.

Should you start dropshipping?

Trying to decide whether dropshipping is worth it for you? Here are some signs that a dropshipping business model could fit your business:

You’re all about marketing

If you have skills in search engine optimization or social media marketing, dropshipping could be a great match.

The primary goal of dropshippers is to attract traffic to an online store using platforms such as Google, YouTube, TikTok, and Instagram. Dropshippers utilize content marketing skills and an understanding of ranking algorithms to connect potential customers with products.

You’re sales-driven, not brand-focused

If your primary business strategy is to generate a high volume of sales rather than to build a distinctive brand, dropshipping may be suitable for you.

In alternative retail models, sellers incorporate branding into their store, products, packaging, and communications to establish a unified brand experience, fostering customer loyalty.

Dropshipping limits branding opportunities because packaging and delivery allow little room for personalization. Additionally, dropshipped products are rarely exclusive to a single retailer, making it difficult to provide a unique experience that resonates with customers and encourages repeat business.

If you want to sell branded products through dropshipping, consider private label dropshipping or print-on-demand products.

You prioritize having a wide variety of products.

Dropshipping enables merchants to sell a wide variety of products from a global network of suppliers without the need to manage inventory.

However, this comes with a trade-off: you have limited control over product quality and consistency. Besides ordering samples, you may have minimal influence on the manufacturing process.

"You're comfortable with longer shipping times."

In an era of rapid delivery, customers expect quick arrival of their purchases. This poses a challenge for dropshippers working with overseas suppliers.

Products shipped from international locations, such as China with ePacket, may take significantly longer to arrive, increasing the risk of customer dissatisfaction.

If you can find suppliers within the country or set clear delivery expectations with customers, dropshipping could be a feasible choice.

You are ready to address customer service requirements.

Dropshippers do not handle product fulfillment, but they are the main point of contact for customers. This means they frequently have to deal with customer service issues that are not directly under their control, such as shipment delays, delivery problems, product defects, and return requests.

If you're prepared to address these challenges and handle customer inquiries effectively, dropshipping may be a suitable business model.

The text below highlights the 6 benefits of dropshipping:

1. Low startup cost

2. Wide selection of products

3. Reduced risk

4. Location flexibility

5. Easy to test new products

6. Scalability

Here are six reasons why dropshipping has become a popular ecommerce model for businesses:

1. Low costs

Dropshipping requires minimal upfront investment since you don’t need to buy inventory. Many dropshipping businesses operate from home with little more than a laptop, making it an attractive small business idea.

With this benefit, however, comes competition from other dropshipping entrepreneurs. You will need to invest your time rather than capital, and apply tips from dropshipping experts to make your business work.

2. Wide selection of products to sell

Consider utilizing dropshipping to provide your customers with a diverse range of popular products. Since you won't have any unsold inventory to manage, you'll have the freedom to update your product catalog as needed. If your suppliers have a new item in stock, you can promptly add it to your list of available products.

3. Flexible location

A dropshipping business can be operated from virtually anywhere with an internet connection. As long as you can connect with suppliers and offer prompt customer support, there are minimal constraints on your location for running this business.

4. Easier to start

Dropshipping eliminates many retail obstacles. Running an ecommerce business becomes simpler when you don't have to:

• 
  
• - Manage or pay for a warehouse
• - Monitor inventory
• - Pack and ship orders
• - Track inventory for accounting
• - Handle returns and inbound shipments

However, successful dropshippers carefully manage the fulfillment process and are dedicated to providing a satisfactory customer experience.

5. Easier to test

Dropshipping is a convenient method for testing customer interest in a new product category. Stores can trial sales of a dropshipped product before committing to purchasing inventory.

6. Easier to scale

Expanding a traditional retail business requires careful planning. Handling a sudden influx of orders can be difficult and may lead to selling out of stock. Dropshipping businesses typically scale more efficiently and offer the opportunity to reach a wider audience by selling on popular marketplaces such as Amazon, eBay, and Etsy.

Dropshipping drawbacks

Like all retail models, dropshipping also has its downsides. Here are four drawbacks to consider:

1. - Decreased profit margins
2. - Unpredictable inventory levels
3. - Unpredictable inventory levels
4. - Errors from suppliers

1. Decreased profit margins

 

"The accessibility of dropshipping can lead to intense competition, resulting in lower profit margins as businesses undercut each other. The more you reduce prices, the harder it becomes to calculate profit margins that work for your store. Mitigate this problem by choosing the right products and selecting a dropshipping niche that’s not over-saturated."

2. Unpredictable inventory levels

 

One of the advantages of using dropshipping for inventory management is that it allows retailers to easily manage their stock. However, it also exposes them to the risk of sudden changes in product availability.

 

Since suppliers fulfill orders for multiple retailers, inventory levels can fluctuate unexpectedly. This is less of an issue when retailers stock their own products.

 

Thankfully, dropshipping apps like DSers provide merchants with options when a supplier's stock runs out. For instance, you can automatically unpublish a sold-out product or set a "Sold Out" label.

3.Unpredictable inventory levels

Dealing with multiple suppliers can make order fulfillment more complex. If a customer orders three items from three different suppliers, you’ll have to pay separate shipping costs for each item. Additionally, the items may arrive at different times. One potential solution is to pass on the shipping costs to customers. However, this could make your pricing less competitive.

4. Errors from suppliers

The best suppliers can still make fulfillment errors, and it's up to the dropshipper to fix these mistakes. Therefore, choosing a reliable supplier is essential to minimize missing items, packing errors, and product quality issues that could damage your business's reputation.

Dropshipping in 2024

In 2024, dropshipping remains a popular choice for online store owners, side hustlers, and people looking to start a retail business.

Dropshipping with Shopify is easy. Integrate a dropshipping app or use Shopify Collective to dropship products from US-based Shopify brands. Here’s how:

1. Sign up for a free trial with some basic information about your business.
2. Personalize your store with a logo, helpful content, and a free theme that fits your brand.
3. Set up the Dsers app to connect with your Shopify store with your AliExpress account, or choose another dropshipping supplier.
4. Import products to your store and set prices that ensure a profit margin.
5. Start selling and marketing your products.

Dropshipping FAQ

How much do I need to invest to start dropshipping?

Starting a dropshipping business requires investing in an online store, including a domain name and an ecommerce website. You may also need to budget for online advertising to reach potential customers.

How do dropshippers make money?

Dropshipping businesses earn money by ensuring a profit margin exists on the products they buy from suppliers and sell to consumers.

Is dropshipping legal?

Dropshipping is a legal and widely used ecommerce fulfillment model that’s become a popular option for ecommerce businesses around the world.

How profitable is dropshipping?

Typical profit margins for dropshipping businesses range between 10% and 15%. By finding the right products to sell and fostering strong supplier relationships, you can build a profitable dropshipping business.

What’s the difference between dropshipping and retail arbitrage?

Unlike dropshipping, retail arbitrage involves buying products from other retailers and reselling them at a higher price.