How Does The Dropshipping Business Work?
Dropshipping is a retail fulfillment method that doesn’t require the dropshipping retailer to keep the products they’re selling in stock. Instead, the retailer buys the product from a third party (wholesaler or manufacturer) that ships the product directly to the customer.
Of course, this is easier said than done, so before you start investing your time, money and energy in a dropshipping model, let’s see how it actually works, who is involved, and whether it pays off.
The Process and the Parties
Here’s how the process flows and who is involved:
- The shopper places an order with you, the retailer via your website, or a marketplace like Amazon or Etsy.
- You don’t actually keep these products in stock, so you alert the supplier (wholesaler or manufacturer) who ships the product to the customer under the dropshipper’s name. For example, if you are dropshipping coffee, instead of having to buy inventory, store it, and then ship it yourself, all of that will be handled by the supplier.
- The supplier charges you, and you charge the customer for the service.
Pros and cons of running a dropshipping business
If you’re planning to start a dropshipping business, it’s wise to take the time to weigh up the advantages and drawbacks of the dropshipping model.
Easy to start. Unlike traditional eCommerce stores, dropshipping doesn’t require a big capital or warehouse space. All you need to do is find a reliable supplier and build a site or choose a marketplace.
Flexible. You can run and manage a dropshipping business alongside your existing job from any location, so long as you can communicate with your customers and suppliers.
Offers a wide variety of products. Since you don’t have to store the products you’re selling and you don’t need to worry about the upfront cost, you can offer a wide variety of products, ranging from makeup to tech equipment.
Highly competitive. Because dropshipping is a viable business model due to its low barriers to entry, the competition is quite fierce, making it harder to stand out from the rest.
Inventory problems. When you don’t own inventory but get products from suppliers, it’s harder to ensure that the products you need are readily available.
Less competitive prices. While dropshipping means that you don’t need to purchase products in a bulk (which is great for your storage solution), it also means no bulk pricing. Chances are you will probably pay more for each product, i.e. your prices will be less competitive.
Lower profit margin. The long supply chain in dropshipping also means reduced profits. The fierce competition, fees, and percentages taken out by middlemen can make the whole idea of starting a dropshipping business less than appealing.
Issues with suppliers. Suppliers are at the core of your dropshipping business, so choosing reliable suppliers and building solid relationships with them is of the utmost importance.
No control over CX. By relying on suppliers to send products to your customers, you have no control over when the products will arrive or in what condition. If they deliver broken items, later than promised, or fail to deliver them altogether, it will result in negative reviews and damaged trust for your business.
How to find the right products
Choosing the products you will sell is crucial to the success of your dropshipping business. Luckily, there’s a wide variety of options to pick from. All you need to do is figure out what the best one for you is. Here’s how to do it:
- Find gaps in the market. Do some research to figure out which products are in demand but are not being catered by many other merchants on the marketplace, or maybe are being sold at a high price.
- Find out what is trending. Another option is to sell products that are popular at the moment. Such products are easy to identify and the marketing costs for them should be low.
- Niche products. When catering to a specific niche, you have a more targeted approach intended for a smaller, loyal and potentially more profitable audience. This strategy will be less competitive and your marketing efforts will be much cheaper.
How to select a drop-shipping supplier
It’s safe to say that the third party you select as a dropshipping supplier will determine the success of your business. Ask potential suppliers the following questions in order to ensure you make the right choice:
- How do they ship? Look for a supplier who ships products via a service that provides tracking numbers, so that you can provide customers with accurate information. You should also ask about the warranty and return policies.
- How much do they charge? Go through the numbers and if the wholesale price isn’t enough for you to make a decent profit, continue looking.
- What’s the billing process? Be sure to choose a supplier whose billing process fits your cash flow.
As mentioned before, dropshipping is far from a perfect, stress-free way to start an online business as it requires hard work and comes with a number of complexities you will need to take into consideration. However, it also has a number of advantages and if done properly, dropshipping can be a highly successful business.
Dave is a serial entrepreneur who co-founded Shortlist in 2018, a marketing un-agency that serves as an outsourced dedicated marketing team. He has also co-founded Less.churn, a churn reduction app, prior to selling it in 2018. In 2012, he quit his job to travel the world, and has visited over 65 countries.