Dropshipping is a model of online selling by which you manage your own online store without any inventory, then ship products you sell directly from a third-party supplier to the customer.
The idea is that you don’t have to invest in warehouse space or worry about purchasing inventory ahead of sales. A dropshipping store owner usually only needs to pay a dropshipping supplier once you’ve made a sale, and customer orders are shipped directly to the customer from the supplier.
This is in opposition to regular retail arbitrage, in which retailers buy in bulk from suppliers, and then go on to sell products at a markup.
This eCommerce business model has been popular and growing for a number of years, and it was estimated that dropshipping stores pulled in a record $128 billion in 2020.
In this post, we answer the question “what is dropshipping?”, explore exactly how to run a successful dropshipping store, and help you understand whether the dropshipping model is right for your eCommerce business.
How does dropshipping work?
So, let’s get into the details of what a dropshipping business looks like, and break down the steps in the process.
Note – We’ll continue discussing this process from the point of view of a drop shipper, rather than a dropshipping supplier or any other parties. This is on the assumption that most of our readers are interested in this angle of the dropshipping business model.
1. Add product to your online store
The first stage, as with any eCommerce business, is of course to set up your online store and populate it with products. So first you need to decide what to sell.
There are dropshipping suppliers for pretty much anything you can think of, so it’s just about doing your market research and identifying what you can sell online for the biggest profit margin.
If you can’t find the entire product range you want to offer at one wholesaler, you can always work with multiple suppliers.
Now that you have your online storefront, it’s time to market your store and get ready to sell items.
2. Customer place orders
If all goes well, the next stage is that a customer places an order. Prior to shipping, you need to entice customers to buy and process their orders.
It’s important to remember that most customers don’t really know what dropshipping is, and won’t realize they’re shopping on a dropshipping storefront. This is how dropshippers are still able to build a brand around their business.
3. Customer pays
Once they’ve their products, customers are ready to pay. When they’re ready to purchase, they’ll head through the checkout with the retailer.
Store owners are responsible for processing customer purchases, which means that, at least initially, the revenue comes into the retailer’s pocket. They need to later pay the supplier who is responsible for the shipping.
Remember, the wholesale price of the goods you sell will determine the profit margins you’re able to pocket. You also need to factor in shipping costs before you start selling, and shipping costs are usually dictated by the supplier.
4. Forward order to the supplier
This is where dropshipping deviates from the regular eCommerce shopping experience. Instead of the retailer sending the order to their own warehouse for fulfillment, they forward it to their dropshipping supplier.
Traditionally, the retailer would have purchased a certain amount of a product, and would only reorder when they run low and need to restock. With dropshipping, on the other hand, each and every order made by customers goes back through to the supplier.
This is also why dropshipping suppliers are specialized, and not just regular wholesalers. They need to be set up to receive and handle dropshipping orders, instead of bulk supply orders.
5. Supplier ships product
The final stage of dropshipping is order fulfillment. Order fulfillment simply means the shipping of the purchased products from the third-party suppliers to the customer.
Although the supply chain is not your responsibility, if your suppliers fail in their order fulfillment, you’re the one who will be in the firing line if customers complain.
Key players in dropshipping’s supply chain
In the section above, we mentioned a few different parties involved in the process of dropshipping. Here, we’ll introduce you to them in more detail, and explain what role they play and what their main responsibilities are.
This is, of course, the party that creates the products, to begin with. It may be that they specialize in one specific product, or else have many factories creating many different kinds of products.
Thinking about the dropshipping supply chain, the manufacturer will sell in bulk to the wholesaler. The wholesaler will use their experience and knowledge to decide which products will sell, and will purchase as many as they think their retailers will sell.
This is when the products being sold are at their lowest unit cost. Since there needs to be a markup between the wholesaler and retailer, and between the retailer and the customer, it’s important that the initial price isn’t too high.
In terms of the finances of dropshipping, manufacturers get paid by the wholesaler. Unless the manufacturer also happens to be the wholesaler, the retailer and their customers tend to have no dealings with the manufacturer.
Based on what sells best, the manufacturer may open up new product lines.
The wholesaler is the glue that holds the entire dropshipping process together.
The wholesaler buys in bulk from the manufacturer and uses their warehousing space to store their products. They’ll then tell retailers which products are available for sale for them to market on their websites.
Dropshipping wholesalers differ from regular wholesalers because, instead of shipping in bulk to retailers, they’re set up to receive individual customer orders and ship directly to them. This means that any day they may be shipping to anywhere in the world.
If you’re considering becoming a dropshipping seller, this is you.
Retailers create the storefronts through which products are sold, market the products, and handle all customer communications and requests. Once they receive orders from customers, the retailer forwards them to the wholesaler for fulfillment.
As far as customers are concerned, the retailer represents the whole of the buying process. The main risks associated with being a retailer are the initial (albeit low) startup costs as well as product quality.
Because of the minimal time and effort required from the retailer, some budding drop shippers will ask the question: is dropshipping legal? Let us assure you now that dropshipping is entirely legal, provided you work with legitimate suppliers and do your best to fulfill customer orders.
Benefits and challenges of dropshipping
While you have probably sussed out some of the key benefits of dropshipping earlier in this post, it’s worth laying them all out formally in one place.
It’s also worth pointing out that, as with all other business models, dropshipping isn’t necessarily all plain sailing. There are definitely some compelling reasons it’s not right for all eCommerce businesses.
Benefits of dropshipping 👍
- No inventory management. Many small businesses prefer not to manage inventory on their own. With dropshipping, the supply chain is not your responsibility, only running your dropshipping store and selling products.
- Lower startup costs. Because you’re not investing in your own inventory upfront, or paying for rent as in brick and mortar retail stores, the cost of setup is low. You just need to worry about funding your own website and marketing your business.
- Greater flexibility. In the dropshipping business model, you don’t own your inventory, meaning you’re not tied to a single product range. If your customer expectations change quickly, you’re able to adapt your store to offer new products.
- Remote work option. Even compared to your traditional eCommerce retailer, the dropshipping business offers a lot of freedom. You can work and sell online from anywhere.
- Focus on customer service. Because you’re not wasting your time on fulfillment, you’re freed up to create a better customer experience and drive customer loyalty.
Challenges of dropshipping 👎
- Low rates of success. It’s no secret that dropshipping is highly competitive. Given the relative ease and low cost of the dropshipping process, lots of businesses try to sell products with this method, and a disproportionately high number fail.
- Less control. Remember that, if you get into dropshipping, you’re not in control of your own supply chain. If suppliers are slow to ship goods or face shipping complexities, there’s nothing you can do to speed up the process.
- Lower profit margins. Since you’re not buying inventory in bulk and relying on someone else’s warehouse, you end up paying more for each product. You might even be faced with a minimum order quantity to contend with.
- Product quality issues. In a traditional online business, where you’re shipping products yourself, the quality control of the physical products is pretty straightforward. However, with dropshipping, you don’t see the products yourself.
- Unbranded products. Dropshipping makes it difficult to sell branded and unique products. In fact, there’s a good chance you’ll end up offering the exact same products as every other online business out there.
Who is dropshipping best for?
Given the many drawbacks you might face in the dropshipping process, it’s worth wondering whether the cons of dropshipping outweigh the advantages. Honestly, whether this business model is right for you probably depends on who you are, and where you are in your business career.
If you know you’d like to start selling online, but you’re not sure whether you’ll enjoy it (or be successful), then dropshipping offers you the perfect opportunity to dip your toe in before you commit.
Launching a product online which you’ve created or developed yourself might be the dream, but you might want to get some experience running an e-commerce business.
Perhaps, as your business grows, you’ll decide to introduce your own unique products, and start grappling with inventory issues on your own. Until then, though, you can practice selling without worrying about handling inventory or shipping products yourself.
You can even dabble on your evenings and weekends before you take the plunge into working full time on your own business.
Aspiring entrepreneurs don’t always have access to tons of financial resources, but may still want to get involved with online selling as soon as possible.
Maybe you have a great branding idea, extensive experience in marketing, or simple a promising network to sell to, but not the money to make it a reality.
All you really need is an internet connection, a domain, an eCommerce platform, and the will to be successful. Ok, dropshipping isn’t know for low prices overall, but
What is dropshipping if not the perfect side hustle? It offers you the opportunity to sell online and open up revenue streams not only on a budget but also with the minimum of time investment.
If you already have a job, are raising kids, or even just want to work part-time, dropshipping offers you the chance to run an online business on the side, without investing too much time and energy into it.
There are some side hustlers who have a number of different online stores running at any given time, with products shipping out all over the world every day. All this with just a few hours’ admin each week.
It has to be said, if you plan to run a dropshipping business as a side hustle, you really need to know what you’re doing. It’s a legitimate business, but there are pitfalls that can catch you out if you’re unfamiliar with eCommerce and digital marketing.
If you have a following online, there are a number of ways you can pivot that into profit.
Say you have a few tens of thousands of followers on TikTok, Instagram, or YouTube, sure you could rely on the measly ad revenue the platforms offer, or you could funnel your following to your dropshipping store.
Just as with side-hustlers, this is all about saving time and resources. If your main job is making content, then you don’t want to waste too much time running an online store. Equally, you don’t want to miss out on the perfect opportunity to sell online.
Remember, that if you already have a following, then marketing your store is as simple as dropping a URL when you publish content. If you don’t have to think about shipping, the whole process can theoretically just run itself with minimal input from you.
The other advantage you have as a content creator is that you already have a good idea of who your audience is and what they might be interested in. The numerous dropshipping options available to you mean that you can import products that are highly relevant to your audience into your store.
Can you make money dropshipping?
After all this talk about how dropshipping works, it’s worth actually answering the most important question before you start a dropshipping business: is dropshipping profitable?
While this is an increasingly competitive space, with more companies shipping out goods than ever before, it’s still a space worth hundreds of billions of dollars. You can absolutely still get your slice of the pie if you play your cards right.
With that in mind, let’s introduce you to some of the tactics you can use to optimize your earning potential from shipping goods.
Tips on how to earn more money from dropshipping 💰
- Choose your inventory carefully. You won’t be shipping your own products. Do you research to uncover what are the best things to sell online right now.
- Do your research on suppliers. Since this is such a lucrative industry, there are plenty of suppliers ready to rip you off. Get onto drop shipping forums, and read reviews before you commit to a new supplier.
- Choose a dependable and affordable eCommerce platform. It’s not all about who is shipping your products, it’s also about where you’re selling them. Using a platform like Zyro helps you sell with the highest impact and lowest effort and cost.
- Design a really attractive site. Your storefront is everything. It’s how you can best present your brand, and it’s important that you pay attention to every detail. Make sure the user experience is phenomenal.
- Plan your marketing carefully. Exactly how you market your business will be determined by what your products are and who you’re selling to. However, before you think about selling and shipping, you need to know how you’ll attract customers.
- Don’t forget about your customers. Just because you’re not fulfilling their orders, that doesn’t mean you can just ignore your customers once you’ve made a sale. Remember to follow up and offer unforgettable customer service.
For more tips and information on making money with dropshipping, check out our blog post dedicated to how to make money through dropshipping. It’s possible, you’ve just got to have a clear plan of how you’re going to do it.
How much does dropshipping cost?
We’ve talked a lot about the relatively low startup cost of dropshipping, but we’ve not yet gone into specifics. Below you can find an outline of the significant costs you’ll face as a seller, and where possible, an estimate of what those costs will be.
- An eCommerce plan. One of your most important purchases will be a plan on an eCommerce website platform to host your online store. If you opt for a reliable but low-cost option like Zyro, this can be a relatively small expense. Get a quote on Zyro’s pricing page.
- Marketing. Depending on the channels you’re using and who you’re marketing to, your costs here could be free (to your followers on TikTok, YouTube, or Instagram), cheap (SEO), or more expensive (Facebook, Google, and YouTube ads). For most online advertising, you can expect to spend up to $170 for every $250 you earn).
- Test orders. This will depend on what you’re selling, but you should buy some of your own products from time to time to ensure the quality remains high and that customers receive what they’re expecting.
So, should you invest in dropshipping in 2021?
Is dropshipping worth it in 2021? This is a highly competitive industry where it can be a challenge to differentiate yourself from the competition, so might not be right for established sellers, or those who can invest in creating their own product line.
However, for those who are new to or inexperienced in eCommerce, it can be an excellent option for experimenting with online selling. It’s no secret that there are low costs associated with dropshipping, and on top of that the risks to the seller are relatively low.
Your most significant costs will be your website, advertising costs, and test orders. Keep this in mind before you commit, as although the costs can be low, they’ll increase for more competitive or high-ticket markets.
We recommend that you consider dropshipping if you’re on the hunt for a side hustle or your first experience in online selling. This is a model that is seeing more and more growth, and as online shopping continues to grow, there’s no reason that you can’t take your share of shipping products to folks who need them.