Dropshipping has become an increasingly popular retail business model for aspiring online entrepreneurs. But what exactly is dropshipping and how does it work?
Dropshipping is a streamlined ecommerce fulfillment method where online store owners do not actually keep goods in stock. Instead, when a store sells a product, it purchases the item from a third party supplier and has it shipped directly to the customer. The store owner never sees or handles the physical product.
This retail model appeals to entrepreneurs because it does not require large amounts of startup capital or inventory costs like traditional brick-and-mortar shops. Dropshipping allows online retailers to offer a wide variety of product lines without having to invest in stocking inventory upfront. It also enables scalable growth not limited by physical warehouse space or staffing.
In this beginner’s guide, we will explore key topics like:
- How the dropshipping order process flows between suppliers, sellers, and buyers.
- Pros and cons of running a dropshipping ecommerce business.
- Differences between dropshipping and traditional online retail models.
- Tips for selecting the best niche dropshipping products and suppliers.
- Common mistakes to avoid when starting out with dropshipping.
By the end of this article, you’ll have a solid understanding of the dropshipping retail model and be able to evaluate if it’s the right ecommerce approach for your business idea. Let’s get started!
How Does the Dropshipping Order Process Work?
The dropshipping order fulfillment process is facilitated between three main parties – the dropshipping retailer (store owner), the manufacturer or wholesaler (supplier), and the customer. Here is how dropshipping works step-by-step:
- The store owner sets up an online storefront and lists products from suppliers, without having to stock any inventory. Popular ecommerce platforms like Shopify and WooCommerce make setting up a dropshipping store relatively easy.
- When a customer places an order and pays on the retailer’s website, the store owner receives the order notification and payment.
- The retailer then purchases the product from the supplier and provides the customer’s shipping details. They place the order as if the product is being shipped to themselves.
- The supplier packages and ships the product directly to the customer. Many suppliers can even customize packaging to include the retailer’s branding.
- The customer receives the product a few days later as if it came directly from the retailer’s warehouse.
This behind-the-scenes supplier order and shipping process is essentially invisible to the customer. As far as they know, the product is coming directly from the retailer they purchased it from.
The main benefits of this streamlined fulfillment model is retailers don’t have to deal with storing inventory, packaging orders, or shipping products themselves. The suppliers handle it all. This allows online businesses to scale faster with minimal operational costs.
In the next section, we’ll cover the key requirements for starting your own dropshipping business online.
Requirements for Starting a Dropshipping Business
While dropshipping reduces some of the traditional inventory and operational costs of running an online retail store, there are still some key requirements for starting a successful dropshipping business:
- Ecommerce platform – To launch your dropshipping store, you’ll need an ecommerce platform such as Shopify, WooCommerce, or BigCommerce. These provide templates, hosting, payment processing, and support to get your store up and running quickly.
- Suppliers and manufacturers – Reaching out to potential suppliers and getting them to agree to fulfill orders on your behalf is crucial. AliExpress, SaleHoo, and Worldwide Brands are directories to help source reliable suppliers.
- Product research – Finding high demand and profitable niche products to sell through your store is important. Use tools like Google Trends, Amazon best sellers, and Ebay pulse to spot trends.
- Marketing – Just like any business, marketing and promotion will be vital to attract customers and increase sales. Email, SEO, social media, and paid ads are common marketing channels for dropshipping stores.
- Customer support – Providing excellent customer service such as quick shipping, responsive communication, and easy returns helps minimize issues and chargebacks.
- Accounting – Keeping bookkeeping and accounting practices organized will be necessary as your business grows. Inventory management is easier with dropshipping but financial tracking is still essential.
While dropshipping removes some major burdens of traditional ecommerce, marketplace research, branding, marketing, and customer experience are still integral for success. We’ll explore the pros and cons more next.
Pros and Cons of Starting a Dropshipping Business
Like any business model, dropshipping comes with both advantages and disadvantages. Evaluating these pros and cons will help you decide if dropshipping is the right ecommerce approach for you.
Pros:
- Low startup costs – Because you don’t have to buy and store inventory upfront, launching a dropshipping store can cost under $100 for the platform and tools. This makes it extremely accessible for aspiring entrepreneurs.
- Easy scalability – You can add new products and grow revenue without logistics limitations. Your suppliers scale fulfillment for you. This makes growth easier to manage.
- Wider product selection – Having suppliers stock products allows you to list a greater variety of inventory to test demand before fully committing.
- Low overhead – With fewer handling and storage costs, overhead expenses are minimized with dropshipping.
Cons:
- Low profit margins – Supplier pricing and middleman fees can cut into potential profits. Profit per item may only be 10-20% depending on product.
- Limited quality control – Relying on third party fulfillment leaves less oversight over product quality and packaging.
- Shipping complications – Customers may become frustrated by slow shipping times coming directly from suppliers.
- Supplier errors – Mistakes in order fulfillment, mislabeled products, or damaged goods reflect poorly on retailers.
The flexibility and ease of starting with dropshipping makes it attractive for first-time entrepreneurs. But lowering overhead costs also lowers the profit potential and control over customer experience.
Next we’ll compare dropshipping to traditional online retail models.
Dropshipping vs Traditional Ecommerce Business Models
Dropshipping differs from traditional online retail in a few key ways:
Inventory – Traditional ecommerce businesses purchase inventory upfront and store it in a warehouse or fulfillment center. They handle picking, packing, and shipping products themselves. With dropshipping, the supplier holds the inventory until an order is placed.
Upfront Costs – For traditional retail, buying inventory and setting up fulfillment capabilities requires substantial upfront capital. Dropshipping has significantly lower startup costs since you can start selling without owning any products.
Risk – Keeping large amounts of unsold inventory comes with financial risk and storage costs. Dropshipping essentially eliminates leftover inventory risk, making it lower risk operationally.
Logistics – In traditional retail, shipping rates and warehouse space constrain order volumes. Dropshipping removes these logistical hurdles and offloads fulfillment responsibility onto suppliers.
Profit Margins – Traditional retailers typically enjoy 50-70% profit margins. Dropshipping margins tend to be lower in the 15-30% range due to supplier and middleman fees.
In summary, dropshipping is easier to start, requires less capital, reduces operational risks, and provides more product flexibility. But it also relinquishes control over inventory, fulfillment, and profit potential.
We’ll wrap up with key takeaways in the conclusion next. Let me know if you would like me to expand on any part of this section comparing retail models.
Conclusion
Key Takeaways on the Dropshipping Business Model.
In this beginner’s guide, we covered the core basics around dropshipping and how it works as an alternative ecommerce business model. Here are some key takeaways:
- Dropshipping eliminates the need to purchase and hold product inventory. Suppliers store and ship products directly to customers after orders are placed.
- Starting a dropshipping business has lower startup costs and overhead than traditional online retail, making it an attractive option for first-time entrepreneurs.
- However, profit margins per item are lower due to supplier and middleman fees. Lack of inventory control also limits quality oversight.
- Choosing reliable suppliers and manufacturers to fulfill orders is crucial to providing a seamless customer experience. Poor supplier performance reflects negatively on retailers.
- Dropshipping allows greater product selection flexibility since retailers don’t have to commit to specific inventory purchases upfront.
- Marketing, branding, and customer service are just as vital for dropshipping businesses as traditional ecommerce stores.
Overall, dropshipping can be a smart entry point into ecommerce for those with limited capital. But finding the right suppliers and products to maximize profit margins is key to succeeding long-term.
I hope this overview has provided a better understanding of how dropshipping works as a retail business model.