What Is Dropshipping? How Does Dropshipping Work?
In the past, if you wanted to open an online store, your capital would be spent on purchasing inventory and paying for storage. These days, you can launch a store with a minimal investment without tying up cash in inventory. All thanks to dropshipping. This ecommerce business model started gaining traction when Alibaba introduced AliExpress back in 2010. Through AliExpress, international stores could buy products from Chinese suppliers, some of whom offered to deliver items directly to their customers. But it was not until the introduction of Shopify dropshipping that ecommerce entrepreneurs began taking more interest in this business. Still, only a handful of them can give a satisfactory answer when confronted with the question: what is dropshipping?
That is why we came up with the idea of writing this article. We want to educate you on all the key elements of dropshipping to help you get from point A, aspiring entrepreneur, to point B, ecommerce business owner. So, here’s a comprehensive breakdown of the dropshipping business model and what you need to get started.
What is Dropshipping?
Dropshipping is a retail fulfillment method where you purchase items from third-party suppliers who then ship them directly to your customers.
Dropshipping suppliers take care of the storage, packaging, and logistics, which saves a lot of hassle for the store owner. You don’t have to purchase inventory or manage shipping in any way. Instead, your suppliers handle this part of the business for you. Dropshipping can be a hands-off process once you build an online store and set up marketing. And the best news of all? With dropshipping, you can start and manage a business venture right from your laptop.
How Does Dropshipping Work?
Dropshipping works when a supplier ships directly to customers for you. Essentially, you’ll do all the marketing and customer service for the supplier but you can set your own prices like any other store owner.
Here’s a visual from our friends over at Oberlo.
As you can see, dropshipping is a simple way to run an ecommerce store. Once a customer places an order through your store and makes a payment, you forward the order to the supplier and pay the quoted wholesale price + shipping fee. The supplier then ships the products directly from their warehouse to your customer’s doorstep. That’s essentially how the dropshipping business model works.
The key players in dropshipping are the retailer (you), the supplier (who could be a manufacturer or wholesaler), and the customer. The model allows you (the retailer) to display the supplier’s products on your online store under your own brand. The supplier’s role in a dropshipping business includes fulfilling orders, storing, and restocking inventory, delivering goods to customers, and replacing defective items. Customers order products directly from you, so you’re also in charge of customer service besides sales and marketing.
What is Shopify Dropshipping?
Shopify dropshipping is the method of using the ecommerce platform Shopify to dropship products. Essentially, you set up a Shopify store and then connect it with a dropshipping app like Oberlo to run the business. Shopify has reasonably priced subscriptions while Oberlo is free to install and use, which is why many entrepreneurs use this platform+app combination to start a dropshipping business. Plus, Shopify has many other functions that support the launch and expansion of such businesses. For example, it allows you to accept various forms of payments, set shipping rates based on customers’ location, and increase search engine visibility via SEO.
Pros and Cons of Dropshipping
Now that you know the answer to what is dropshipping, let’s discuss the benefits and drawbacks of using this business model.
Benefits of Dropshipping
1. Dropshipping is for everyone
You don’t need any prior business experience to start a dropshipping store. If you invest some time in learning the basics, you can launch a store quickly, and learn as you go. Setting up a dropshipping business requires very little management on your part. There’s no warehouse or stocking team to supervise. And you don’t even have to spend a certain number of hours every day managing your store. The business will run itself, especially once you lay a strong foundation. Plus, if you hire a VA to handle marketing and order management, it becomes surprisingly hands-off. All of this means you can start a business today, regardless of your educational background and previous experience.
2. Dropshipping is flexible
Dropshipping is flexible in that it gives you plenty of room to make decisions that fit your preferences. You can easily accept more orders whenever you like, and you can display the “out of stock” message when supplier inventory levels are low. Also, you can choose to sell in one or multiple dropshipping niches depending on your goals. You get to set your own rules and be your own boss. If you’re on vacation, you can automate processes like marketing and order forwarding while you’re away. You won’t have to bend backwards to keep the business running. These perks make dropshipping by far one of the most flexible business models that you can pursue.
3. Dropshipping is easy to scale
When your dropshipping business grows, you won’t have to make a lot of changes. Sure, you’ll need to put more effort into marketing and supplier relationships as you scale, but your day-to-day schedule will remain more or less the same. You can continue doing everything by yourself unless you want to build a small team at some point. In addition, dropshipping gives you more opportunities to accept larger orders as compared to other ecommerce business models. Because you can partner with dropshipping companies that have the capability and resources to handle a large influx of orders, you don’t have to turn customers down or keep them waiting until inventories are restocked.
Disadvantages of dropshipping
1. Dropshipping doesn’t offer a lot of control
The main drawback of opening up a dropshipping business is the lack of control over things like order fulfillment, product shipping, and stocking. You have to rely on your suppliers to manage these things and work seamlessly. That’s why it’s important to find reliable dropshipping suppliers who’re professional in their approach to business. In other words, the suppliers you work with should be proactive in resolving order-related issues. Although supplier problems can sometimes reduce the customer retention rate, you can keep churn to a minimum by building the right supplier relationships.
2. Dropshipping can make customer support more complex
This is another issue that store owners face. Because you’re just managing the online store and don’t have control over inventory, it can be challenging to keep quality in check and handle customer service. An unfortunate situation is when you have to take the blame for poor-quality items or late shipping. You could be doing everything right and still receive negative feedback if your suppliers have problems. The key to building your brand image is to work with suppliers who realize the importance of delivering high-quality products within the quoted shipping time.
Popular Dropshipping FAQs
In this section, we provide answers to some of the popular questions around dropshipping. Here are the queries aspiring entrepreneurs often post about the dropshipping business.
Is dropshipping profitable?
In a word, yes. Dropshipping is a low-risk business that allows you to sell products internationally without incurring a lot of expenses. Since you don’t have to buy excess inventory, it is easier to make profits with this business than with other business ventures. Also, dropshipping gives you the freedom to include shipping costs in the final price of your products. For example, if a product costs $5 and the supplier charges $4 for shipping it to your customer, you can price it at $10 to cover your expenses while still making a profit.
Is dropshipping safe?
Dropshipping is 100% safe as long as you’re working with legitimate dropshipping companies and suppliers. Unfortunately, some of these entities aren’t as legitimate as they claim, so you have to spend some time validating their businesses. Counterfeit goods are a big issue in the world of dropshipping, which you should try your best to avoid. The best way to avoid counterfeits is to evaluate the product’s branding. Many counterfeit goods have inconsistencies between the slogan and the logo, and the trademarks on them often are usually misspelled. Look for these red flags in the product images your suppliers provide to ensure the items are original and authentic.
Can I pursue dropshipping as a side hustle?
Many entrepreneurs choose to run this business as a side hustle while they have a main job that covers their monthly expenses. In most cases, it just requires some time management and scheduling. You don’t need to skip lunch or sacrifice your sleep to make it work. You just need to figure out a schedule that suits you and stick to it. However, it’s worth mentioning that dropshipping is also a viable career path. If you want to do this business full-time, you can. Once you generate enough sales and build a base of loyal customers, you can consider moving from dropshipping part-time to full-time.
How to Dropship
To start dropshipping, you’ll first need to set up an ecommerce store that’s capable of supporting this fulfillment model. Below are a few components to building a store the right way.
Register a domain
Your domain name matters, especially if you’re planning to build a long-term brand. If you start a dropshipping store and don’t have a custom domain, some potential customers may not trust you as much as the store that does. So consider registering a domain name to make it easier for customers to remember you. It will also help boost your search engine ranking. You can use Shopify’s domain registration platform to see a list of available .com domains. Can’t think of a good domain name? Use the integrated domain name generator to come up with cool, relevant domain ideas for your upcoming store.
Create a Shopify account
Shopify is the ideal platform for dropshipping. That’s because it’s equipped with the tools, features, and apps that make it easy to run a dropshipping business. Plus, there are various Shopify themes to help you create an elegant storefront. We recommend starting with a free theme like Minimal Vintage if this is your first experience with ecommerce. Once you start making some sales, you can reinvest some funds into purchasing a new theme for a better-looking storefront.
Oberlo is a dropshipping app built specifically for Shopify users. It allows you to find products online that you can start selling right away. You’ll be able to find products that you can sell in various niche markets. When starting out, aim to add 15-20 products as it can be overwhelming to create product pages for more than this number. On the Oberlo platform, you can search for products and pick suppliers based on reviews, ratings, and how long they’ve been on the platform.
These are just a few elements of starting a dropshipping business. You’ll also need to create your store’s policies, set shipping rates, and more before launch.
How to Buy a Dropshipping Business
If you don’t want to set up a dropshipping business from scratch, you can easily purchase an established business via Exchange. Exchange is a marketplace where people buy and sell Shopify stores, including ones selling products via dropshipping. The platform has a great collection of dropshipping stores, including Oberlo stores, in varying niches and prices that you can buy depending on your budget and interests.
When choosing to buy a dropshipping store through Exchange, take into account:
Age of store: On Exchange, you can buy a dropshipping store based on its age. A store that was established two to three years ago will typically be more established than a newer one.
The cost: Do you have enough capital to not only pay for a starter store but also invest funds into scaling it? If so, you need to work out the price that you are willing to pay for business acquisition. There’s also the option to pay more for a growing store, provided it’s optimized enough to keep generating sales without requiring the injection of cash flow.
Niche popularity: You probably want to own a store that deals in a popular dropshipping niche and has trending products within it. Stores dealing in fashion, beauty, and electronics items are more likely to make you a profit.
Profit: Exchange also displays the average profit per month and the profit margin for every store listing. A higher margin typically means your net proceeds (take-home pay) will be higher but ensure the store is making enough sales to give you a healthy overall profit. Sometimes, stores with a lower profit margin can turn out to be more profitable because of the revenue they generate each month.
To evaluate dropshipping businesses on the platform, select the “dropshipping” and “Oberlo stores” filters under Business Type on Exchange’s website. Other filters may present you with regular ecommerce stores that require you to handle inventory and shipping. So stick with these two filters, and you should be able to see a list of dropshipping businesses for sale.
There you have it – the answers to what is dropshipping and all other questions people ask about this business model. Now it’s your turn to gear up and turn your entrepreneurial dream into reality. You can start small at the beginning by creating a simple store or purchasing a starter store. Then, after you gain some hands-on experience with Shopify and start generating profits, you can move onto bigger things like purchasing a profitable business and scaling it further. Be strategic, evaluate your options, and try your hand at ecommerce with a low starting capital.