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What Is Dropshipping and How Does It Work? (2022)


If you’ve thought about starting your own ecommerce store, you may be wondering how you’ll get access to an inventory of products, or where you’ll store them.

Under the traditional business model, retailers are responsible for the order fulfillment process from start to finish. That often means leasing warehouse space for products, handling supply chain and inventory management, and managing shipping costs.

However, there’s an alternative business model for fulfilling customer orders placed through an online store: dropshipping.

Want in on the action? Here’s everything you need to know about the benefits of dropshipping for online store owners, and how you can start today.

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What is dropshipping?

Dropshipping is an order fulfillment method where a business doesn’t keep the products it sells in stock. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.

The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory—they act as the middleman. 

What is a dropshipper?

A dropshipper is a person or business that uses the dropshipping model of buying inventory and fulfillment logistics from a third party, instead of warehousing and shipping the products themselves.

Because dropshipping relies on a third-party supplier to handle inventory warehousing and order fulfillment, a dropshipping operation may be managed by dozens of employees or a single business owner.

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How does dropshipping work?

The dropshipping process is essentially a relationship between a customer-facing store and a supplier.

There are two common approaches to adopting a dropshipping business model. The first is to seek out one or more wholesale suppliers located in North America (or anywhere else in the world) on your own using a supplier database. Examples of popular online supplier databases include AliExpress, SaleHoo, and Worldwide Brands.

If you’re not interested in finding suppliers for all of the products you plan to sell, you can use an app that connects you and your store to thousands of suppliers. For this, we recommend DSers, a Shopify app that helps independent business owners find products to sell.

With DSers, you can browse AliExpress and import the products that pique your interest directly to DSers—which is connected to your Shopify store—with the click of a button. Once a customer buys a product, you’ll be able to fulfill their order in the DSers app.

Fortunately, DSers automates most of the dropshipping process. As the store owner, all you have to do is check that the details are correct and click the order button. The product is then shipped directly from the AliExpress supplier to the customer—wherever in the world they may be.

how dropshipping works

Dropshipping is often seen as a no-hassle, get-rich-quick scheme. But it’s not. Just like any other ecommerce website, it takes dedication to get your startup running and successful. Done well, dropshipping companies can become reliable and convenient partners to growing ecommerce businesses to expedite order and fulfillment processing.

Benefits of dropshipping

Here are a few other reasons why dropshipping is such a popular ecommerce business model for both large and small businesses.

1. Less upfront capital required

Probably the biggest advantage to dropshipping is that it’s possible to launch an ecommerce store without having to invest thousands of dollars in inventory. Traditionally, a brick-and-mortar or ecommerce retailer has to tie up huge amounts of capital purchasing inventory.

With the dropshipping model, you don’t have to purchase a product unless you’ve already made the sale and have been paid by the customer. Without significant upfront inventory investments, it’s possible to start dropshipping and become successful with very little money.

Additionally, because you’re not committed to selling through any inventory purchased upfront, like in other business models, there’s less risk involved in starting a dropshipping store.

2. Easy to start

Running an ecommerce business is much easier when you don’t have to deal with physical products. With dropshipping, you don’t have to worry about:

  • Managing or paying for a warehouse
  • Packing and shipping your orders
  • Tracking inventory for accounting reasons
  • Handling returns and inbound shipments
  • Continually ordering products and managing stock level

3. Low overhead

Because you don’t have to deal with purchasing inventory or managing fulfillment centers, your overhead expenses are quite low. In fact, many successful dropshipping stores are run as home-based businesses, requiring little more than a laptop and a few recurring expenses to operate.

As you grow, these costs will likely increase, but will still be low compared to those of traditional brick-and-mortar businesses.

4. Flexible location

With dropshipping, a successful business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and provide timely service and support that meets customer expectations, you can run and manage your business.

5. Wide selection of products to sell

Since you don’t have to pre-purchase the items you sell, you can offer an array of trending products to your potential customers. Plus, you can rotate or change your dropshipping products list without having to worry about unsold inventory. If suppliers stock an item, you can list it for sale on your online store at no additional cost.

6. Easier to test

Dropshipping is a useful fulfillment model for both launching a new store and for business owners looking to test the appetite customers have for additional product categories, e.g., accessories or wholly new product lines. The main benefit of dropshipping is, again, the ability to list and potentially sell products before committing to buying a large amount of inventory.

7. Easier to scale

With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be done by the suppliers, allowing you to expand with fewer growing pains and less incremental work. 

Sales growth will always bring additional work—especially related to customer support—but businesses that utilize dropshipping scale particularly well relative to traditional ecommerce businesses.

It’s important for people to understand that you’re building a machine. If you don’t pump money into the system, you can’t make it pump more money out. Dropshipping is a money multiplier.

Cole Turner, dropshipping expert, in an interview with Oberlo

Drawbacks of dropshipping

All the benefits we mentioned make dropshipping a very attractive model for anyone getting started with an online store, or for those looking to expand their existing product offerings. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a higher price.

Here are a few shortcomings to think about when considering a dropshipping business.

1. Low profit margins

Low margins are the biggest disadvantage to operating in a highly competitive dropshipping vertical. Because it’s so easy to get started, and because the overhead costs are so minimal, many competing businesses will set up a dropshipping store and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins.

Typically, these sellers will have low-quality websites and poor (if any) customer service, which can help you differentiate your dropshipping business. But that won’t stop customers from comparing their prices to yours. This increase in competition will quickly hurt the potential profit margin in a niche.

Fortunately, you can do a lot to mitigate this problem by choosing the right products and selecting a niche/vertical that’s well suited for dropshipping.

2. Inventory issues

If you stock all your own products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change on a daily basis.

Fortunately, these days, there are a handful of apps that let you sync with suppliers. So dropshippers can “pass along” customer orders to a dropshipping supplier with a click or two and should be able to see in real time how much inventory the supplier has.

DSers also lets merchants take automated actions when a supplier’s stock hits zero. For example, when a product is no longer available, you can automatically unpublish the product, or keep it published but automatically set the quantity to zero.

3. Shipping complexities

If you work with multiple suppliers—as most dropshippers do—the products on your online store will be sourced through a number of different dropshippers. This means you have no control over the supply chain.

Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these drop shipment calculations can be difficult.

4. Supplier errors

Have you ever been blamed for something that wasn’t your fault but had to accept responsibility for anyway?

Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologize. In addition, mediocre and low-quality suppliers will harm the customer experience via missing items, botched drop shipments, and packing or product quality issues, which can damage your business’s reputation.

If you’re getting into the dropshipping model, research different dropshippers. Many overpromise and underdeliver. To run a good business, your customers need to be happy, so you need a good dropshipper.

5. Limited customization and branding

Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, the product dropshipped is designed and branded by the supplier.

Some dropshipping suppliers can accommodate your business’s product changes. Even then, however, the supplier has the most control over the product itself. Any changes or additions to the product usually require a minimum order quantity to make it viable and affordable for the manufacturer.

Start your dropshipping business in 2022

Whether you’re interested in finding a side hustle, starting a new full-time enterprise, or changing the business model behind your existing online store, dropshipping may be the answer you’re looking for.

Yes, dropshipping comes with a number of built-in complexities you’ll need to address. But with careful planning and consideration, you can anticipate and resolve those issues to create a thriving, profitable dropshipping business


Dropshipping FAQ

How much do I need to invest to start dropshipping?

Though it’s hard to predict the exact costs for an individual business, any dropshipping business will need to invest in creating an online presence with a domain name and ecommerce website, as well as marketing the business via online advertising.

How do dropshippers make money?

Dropshipping businesses mark up the price of their products in exchange for distribution. This is why suppliers are OK having dropshippers market their products for them—dropshipping stores drive additional sales that the supplier would have otherwise missed out on.

Is dropshipping legal?

Yes, dropshipping is legal. It’s an ecommerce fulfillment model used by many global retailers. In fact, most retail stores you shop in are not selling products they personally manufacture. Dropshipping simply takes this curated approach and adapts it for an online business.

Can you do dropshipping on Amazon?

Yes, Amazon allows you to create an ecommerce business based on dropshipping. However, margins are much slimmer on Amazon, with fees ranging between 10% and 15%, depending on the product type.

Can you dropship on eBay?

Dropshipping is permitted on eBay. However, listing a product on eBay and then purchasing it from another retail or marketplace that ships the customer’s order is not allowed.

What’s the difference between dropshipping and retail arbitrage?

Unlike dropshipping, retail arbitrage consists of reselling products bought from other retailers. With retail arbitrage for ecommerce, you simply sell items online at a premium price, then purchase the item at a retail store and ship it after it’s bought.

How do I start a dropshipping business?

  • Commit to starting a dropshipping business.
  • Choose a dropshipping business idea.
  • Do market research.
  • Choose a dropshipping supplier.
  • Build your ecommerce store.
  • Decide on a business structure.
  • Get your finances in order.
  • Market your dropshipping store.
  • Analyze and improve your offering.



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