What is Dropshipping: How It Works, Benefits, Drawbacks, and Alternatives

18 Jun 2024 | 17 min read
What is Dropshipping: How It Works, Benefits, Drawbacks, and Alternatives

Dropshipping is a way to sell products online without keeping them in stock. Instead of buying products in bulk and storing them, you work with suppliers who ship them directly to your customers. This means you don’t have to handle the products yourself.

Understanding dropshipping is important for anyone who wants to start an online store. It’s a simple and cost-effective way to enter the world of e-commerce. By learning how dropshipping works, you can decide if it’s the right business model for you. Plus, knowing the basics will help you avoid common pitfalls and make better decisions for your business.

For aspiring e-commerce entrepreneurs, dropshipping offers a chance to start a business with lower risks and fewer upfront costs. It’s a flexible and scalable way to test the waters of online selling without needing a big investment.

What is Dropshipping?

Dropshipping is a way of selling products online without keeping them in stock. When a customer buys a product from your online store, you purchase the item from a third party, like a wholesaler or manufacturer, who then ships it directly to the customer. You don’t need to store, pack, or ship the products.

Dropshipping Business Model

In the dropshipping business model, you are the customer and supplier middleman. Here’s how it works:

  1. Customer Places an Order: A customer visits your online store and buys a product.
  2. You Forward the Order Supplier: You send the order details to your supplier, who has the product in stock.
  3. Supplier Ships the Product: The supplier packages and ships the product directly to the customer.

You profit by selling the product at a higher price than what you pay the supplier. For example, if a customer buys a product for $50, and your supplier charges you $30, your profit is $20.

Dropshipping is popular because it has low startup costs and reduces the risks of holding inventory. It allows you to focus on marketing and customer service while the supplier handles the logistics.

Who is a Dropshipper?

A drop shipper is someone who sells products online without keeping them in stock. Instead, the drop shipper partners with suppliers who handle the inventory and shipping.

The drop shipper plays a crucial role in connecting customers with suppliers. Here are the main responsibilities of a drop shipper:

  1. Selecting Products: Choose the products to sell in the online store. This involves researching trends and customer needs.
  2. Setting Up an Online Store: Create and manage an e-commerce website where customers can browse and purchase products.
  3. Marketing and Promotion: Attract customers to the online store using various marketing strategies like social media, SEO, and advertising.
  4. Managing Orders: Forward customer orders to suppliers and ensure accurate and timely processing.
  5. Customer Service: Handle customer inquiries, complaints, and returns to ensure a positive shopping experience.
  6. Monitoring Performance: Track sales, manage finances, and analyze data to improve business operations and profitability.

In the e-commerce ecosystem, the dropshipper bridges the gap between the customer and the supplier, ensuring a smooth and efficient shopping experience.

What are Dropshipping Suppliers?

Dropshipping suppliers are companies or individuals who provide the products you sell in your online store. They handle these products’ storage, packaging, and shipping directly to your customers.

Suppliers are the backbone of the dropshipping model. They allow you to offer a wide range of products without keeping inventory. A reliable supplier ensures that products are available, orders are processed quickly, and customers receive their purchases on time.

Characteristics of a Good Dropshipping Supplier

  1. Reliability: Consistently fulfills orders accurately and on time.
  2. Quality Products: Provides high-quality products that meet customer expectations.
  3. Good Communication: Responds promptly to inquiries and informs you about stock levels and order statuses.
  4. Competitive Pricing: Offers products at prices that allow you to make a profit while staying competitive.
  5. Flexible Shipping Options: Provides various shipping methods to meet different customer needs.
  6. Strong Reputation: Has positive reviews and a solid track record in the industry.

Choosing a good dropshipping supplier is crucial for the success of your business. A reliable supplier helps ensure that your customers are happy and that your business runs smoothly.

What About Wholesalers?

Wholesalers are businesses that buy products in bulk directly from manufacturers and sell them in smaller quantities to retailers or other businesses. They act as intermediaries between the manufacturer and the retailer.

Difference Between Wholesalers and Dropshipping Suppliers

FeatureWholesalersDropshipping Suppliers
InventoryBuy and store products in bulkDo not hold inventory; ship directly
Order QuantitySell large quantities to retailersFulfill individual customer orders
StorageMaintain warehouses to store productsNo need for storage facilities
ShippingRetailer handles shipping to customersHandle shipping directly to customers
Business ModelTraditional retail supply chainE-commerce fulfillment model

Role of Wholesalers in Traditional Retail vs. Dropshipping

In traditional retail, wholesalers play a vital role by providing retailers with the products they need in bulk at lower prices. Retailers then store these products and sell them to customers. This requires retailers to invest in inventory and manage storage.

In dropshipping, the role of wholesalers shifts. They can act as dropshipping suppliers, directly fulfilling customer orders for the retailer without the need for the retailer to hold inventory. This reduces the retailer’s upfront costs and storage needs, making it easier to manage an online store.

Wholesalers and dropshipping suppliers both play essential roles in the supply chain. Still, their functions differ based on the business model. Understanding these differences helps businesses choose the right approach for their needs.

How Does Dropshipping Work?

Dropshipping is a straightforward and efficient way to run an online store. It involves partnering with suppliers who handle the inventory and shipping for you. This lets you focus on marketing and selling products without worrying about storage or logistics. Here’s a step-by-step look at how dropshipping works, from setting up your online store to delivering products to your customers.

Partner with a Dropshipping Supplier

How to Find and Choose Reliable Dropshipping Suppliers

Finding the right dropshipping supplier is crucial for your business success. Here are some steps to help you find and choose a reliable supplier:

  1. Research Online: Use online directories like AliExpress, Oberlo, and SaleHoo to find potential suppliers. These platforms have a wide range of suppliers and products.
  2. Read Reviews: Look for reviews and testimonials from other drop shippers. This can give you insights into the supplier’s reliability and product quality.
  3. Contact Suppliers: Reach out to suppliers directly. Ask about their products, shipping times, and policies. Good communication is a sign of a reliable supplier.
  4. Order Samples: Before committing, order samples of the products you plan to sell. This allows you to check the quality and shipping times firsthand.
  5. Check Business Information: Verify the supplier’s business credentials. Ensure they are legitimate and have a good track record.

Key Factors to Consider When Partnering with a Supplier

  1. Product Quality: Ensure the supplier offers high-quality products. Quality can lead to returns and happy customers.
  2. Shipping Times: Choose suppliers with fast and reliable shipping. Long shipping times can deter customers from buying.
  3. Pricing: Compare prices from different suppliers. Make sure the prices allow you to make a profit while remaining competitive.
  4. Communication: Good communication is vital. Choose suppliers who are responsive and easy to work with.
  5. Return Policy: Understand the supplier’s return policy. A good return policy can help you handle customer returns smoothly.
  6. Reputation: Partner with suppliers who have a good reputation in the industry. Check for reviews and ratings from other businesses.

Set Up an Online Store

Steps to Create an E-commerce Website

  1. Choose a Niche: Decide what products you want to sell. Focus on a specific market to attract targeted customers.
  2. Pick a Domain Name: Select a catchy and relevant domain name for your online store. This will be your website’s address.
  3. Select an E-commerce Platform: Choose a platform that suits your needs. Popular options include Shopify, WooCommerce, and BigCommerce.
  4. Design Your Store: Use templates and themes to design your store. Make sure it looks professional and is easy to navigate.
  5. Add Products: List the products you plan to sell. Include high-quality images and detailed descriptions.
  6. Set Up Payment Methods: Enable payment options like credit cards, PayPal, and other popular methods to make it easy for customers to buy from you.
  7. Configure Shipping Options: Set up shipping methods and rates. Ensure they are clear and reasonable for your customers.
  8. Test Your Website: Before going live, test your website to ensure everything works smoothly. Check for broken links and make sure the checkout process is seamless.
  9. Launch Your Store: Once everything is set up and tested, launch and promote your store to attract customers.

Overview of Popular E-commerce Platforms

  1. Shopify
    • Ease of Use: User-friendly and easy to set up, even for beginners.
    • Features: Offers many features, including templates, payment gateways, and marketing tools.
    • Support: 24/7 customer support to help with any issues.
  2. WooCommerce
    • Integration: Built for WordPress, making it a great choice if you already use WordPress.
    • Customization: Highly customizable with many plugins and themes available.
    • Cost: Free to start, but you may need to pay for additional features and plugins.
  3. BigCommerce
    • Scalability: Good for businesses looking to grow, with robust features and tools.
    • SEO: Strong SEO features to help your store rank higher in search engines.
    • Support: Offers excellent customer support and a range of resources to help you succeed.

Choosing the right platform and setting up your store correctly will help you create a successful online business.

Receive a Customer Order

Process of Receiving Orders Through the Online Store

  1. Customer Places an Order: A customer visits your online store, selects products, and proceeds to checkout.
  2. Order Confirmation: The customer receives an email confirmation with the order details once the order is placed.
  3. Order Notification: You receive a notification about the new order through your e-commerce platform or order management system.
  4. Payment Processing: The payment is processed through the payment gateway you have set up (like PayPal or credit card).
  5. Order Review: Check the order details to ensure everything is correct, including product, Quantity, and shipping information.

Importance of Order Management Systems

An order management system (OMS) is crucial for running a smooth dropshipping business. Here’s why:

  1. Efficiency: An OMS automates the order process, reducing manual work and minimizing errors.
  2. Organization: It helps you keep track of all orders in one place, making it easier to manage and fulfill them.
  3. Customer Satisfaction: An OMS allows you to quickly process orders and inform customers about their order status, leading to higher satisfaction.
  4. Inventory Management: It helps you monitor stock levels and avoid overselling products that are out of stock.
  5. Reporting: An OMS provides insights and reports on sales, helping you make informed business decisions.

An order management system ensures that receiving and handling orders is seamless, efficient, and error-free, leading to a better experience for you and your customers.

Forward the Order to the Supplier

How to Automate Order Forwarding

Automating order forwarding helps streamline your dropshipping business. Here’s how you can do it:

  1. Integrate Your E-commerce Platform: Connect your online store to your supplier’s system. Many e-commerce platforms offer integrations with popular dropshipping suppliers.
  2. Use Automation Tools: Utilize tools that automatically forward order details to your supplier as soon as a customer purchases. This reduces manual work and speeds up the process.
  3. Set Up Email Notifications: Configure your system to send automatic emails to your supplier with the order details. This ensures the supplier gets the information quickly.
  4. API Integration: If your supplier offers an API, use it to directly connect your store to their system. This allows for seamless and instant order forwarding.

Tools and Software for Order Processing

  1. Oberlo: Integrates with Shopify to automatically forward orders to suppliers on AliExpress.
  2. DSers: Works with Shopify and WooCommerce, offering bulk order processing and direct supplier integration.
  3. Spocket: Connects your store to suppliers in the US and EU, providing real-time order forwarding.
  4. AutoDS: Supports multiple e-commerce platforms and automates order processing from various suppliers.
  5. Inventory Source: You can integrate with multiple suppliers and automate order processing and inventory management.

Using these tools and software ensures that your orders are forwarded to suppliers quickly and accurately, improving efficiency and customer satisfaction.

Supplier Prepares and Ships the Product

Supplier’s Role in Packaging and Shipping

Once an order is forwarded to the supplier, their role includes:

  1. Packaging the Product: The supplier picks the product from their inventory and packs it according to your specifications. Good packaging ensures the product arrives in perfect condition.
  2. Shipping the Product: The supplier ships the product directly to the customer. They handle all logistics, including selecting the best shipping method and carrier.

Ensuring Quality Control and Timely Shipping

  1. Quality Control:
    • Regular Inspections: Ensure the supplier conducts regular product quality checks before shipping. This helps maintain high product standards.
    • Feedback Loop: Provide feedback on any issues customers report. This helps the supplier address problems and improve quality.
  2. Timely Shipping:
    • Clear Expectations: Set clear shipping time expectations with your supplier. Ensure they understand the importance of meeting these deadlines.
    • Tracking: Use suppliers that provide tracking information. This allows you and your customers to monitor the shipment’s progress.
    • Performance Reviews: Regularly review the supplier’s shipping performance. Address any delays or issues promptly to maintain customer satisfaction.

By ensuring your supplier handles packaging and shipping effectively, you can provide a smooth and reliable shopping experience for your customers.

Customer Receives the Product

Customer Experience and the Importance of Delivery Time

When customers receive their products, their experience should be smooth and satisfying. Delivery time plays a crucial role in this. Here’s why:

  1. Expectation Management: Clear communication about delivery times sets the right expectations for customers. They appreciate knowing when to expect their order.
  2. Customer Satisfaction: Fast and reliable delivery enhances customer satisfaction. When products arrive on time, customers are more likely to be happy and leave positive reviews.
  3. Trust Building: Consistently meeting delivery times builds trust with your customers. They will feel confident ordering from your store again.

Handling Customer Feedback and Returns

  1. Listen to Feedback:
    • Encourage Reviews: Ask customers for reviews and feedback after they receive their products. This helps you understand their experience.
    • Address Issues Promptly: Respond quickly to any negative feedback. Show customers that you care about resolving their issues.
  2. Managing Returns:
    • Clear Return Policy: Have a straightforward return policy that is easy for customers to understand. Make sure it’s accessible on your website.
    • Efficient Process: Make the return process simple. Provide return labels and clear instructions to ensure it’s hassle-free for customers.
    • Quality Checks: Inspect returned products to understand the reasons for returns. Use this information to improve product quality and customer satisfaction.

Focusing on timely delivery and effective handling of feedback and returns can create a positive shopping experience that encourages repeat business and builds customer loyalty.

Benefits of Dropshipping

Dropshipping offers several advantages for aspiring entrepreneurs and small business owners. It provides a low-risk way to start an online store without significant upfront investment. In this section, we’ll explore the key benefits of dropshipping and how it can help you succeed in the competitive world of e-commerce.

Low Costs

One of the biggest benefits of dropshipping is its low cost. You don’t need to buy or store products, eliminating warehouse and storage costs. With minimal upfront investment, you only purchase products when a customer orders, reducing financial risk. Operating costs are lower since you don’t handle inventory, packing, or shipping. This allows you to run your business from anywhere, even from home. Additionally, your costs scale with sales, making dropshipping a flexible and low-risk business model.

Wide Selection of Products to Sell

Dropshipping allows you to offer a wide range of products without holding any inventory. Since you don’t need to buy and store products upfront, you can list many items in your online store. This flexibility lets you quickly adapt to market trends and customer preferences. If a product isn’t selling well, you can easily remove it from your store and add new items without financial loss. By offering various products, you can attract a broader audience and meet different customer needs, all while keeping your business agile and cost-effective.

Flexible Location

One of the key benefits of dropshipping is the ability to run your business from anywhere with an internet connection. Since you don’t need to manage physical inventory or a warehouse, you can operate your store from home, a coffee shop, or even while traveling. This flexibility allows you to work on your own schedule and from any location, giving you the freedom to balance work and personal life more effectively. As long as you have access to the internet, you can manage your orders, communicate with suppliers, and handle customer service, making dropshipping an ideal business model for those seeking location independence.

Easier to Start

Dropshipping makes it easier to start an online business compared to traditional retail. The setup process is simplified because you don’t need to purchase inventory or manage a warehouse. You can quickly create an online store using e-commerce platforms like Shopify or WooCommerce. These platforms provide templates and tools to help you design your store, list products, and set up payment options. You can focus on marketing and customer service with dropshipping, while your suppliers handle inventory and shipping. This streamlined approach lets you get your business up and running quickly and efficiently.

Easier to Test

Dropshipping allows you to test new products with minimal financial risk. Since you don’t need to buy inventory upfront, you can easily add new items to your online store and see how they perform. If a product doesn’t sell well, you can simply remove it without losing money on unsold stock. This flexibility enables you to experiment with different products and quickly adapt to market trends. By testing new products with dropshipping, you can find what works best for your customers without a significant financial investment.

Easier to Scale

Dropshipping makes it easier to scale your business without needing significant additional investment. As your sales grow, you don’t have to worry about increasing warehouse space or hiring more staff to handle inventory. Your suppliers manage the stock and shipping, allowing you to focus on expanding your marketing efforts and customer base. This means you can add more products and handle more orders without a huge financial outlay. Dropshipping lets you grow your business smoothly and efficiently, adapting to increased demand without major costs.

Dropshipping Drawbacks

While dropshipping offers many benefits, it is important to know its potential drawbacks. Understanding these challenges can help you better prepare and manage your dropshipping business effectively. This section will explore the common issues that dropshippers face and how they might impact your business.

Lower Profit Margins

One of the main drawbacks of dropshipping is lower profit margins. Since starting a dropshipping business is easy, there is a lot of competition. Many sellers might offer the same products, leading to price wars. You might have to lower your prices to attract customers, reducing your profit margin. Additionally, you still have costs like marketing and transaction fees, which can further eat into your profits. Because of this, finding a niche where you can stand out and possibly charge a bit more for your unique offerings or exceptional service is essential.

Inventory Volatility

Inventory volatility is a common challenge in dropshipping. Since you rely on suppliers to manage stock, you might face issues with product availability. A product that’s in stock today could be out of stock tomorrow, making it hard to fulfill customer orders promptly. This can lead to customer dissatisfaction and potential loss of sales. Additionally, you have limited control over inventory management, which can complicate tracking and forecasting. To mitigate this, maintain good communication with your suppliers and use tools that help monitor stock levels in real-time. This can help you manage inventory more effectively and keep your customers happy.

Shipping Complexities

Shipping complexities are a common issue in dropshipping, especially with multiple suppliers. Different suppliers have varying shipping times and costs, leading to inconsistent customer delivery times. Managing multiple shipping schedules can also increase costs, especially if customers order products from different suppliers. These challenges can cause customer dissatisfaction due to long delivery times or high shipping costs. To manage this, clearly communicate delivery times on your site, consolidate suppliers where possible, and use software to streamline shipping processes.

Supplier Errors

Supplier errors, like shipping wrong or damaged items, can hurt customer satisfaction and your reputation. These mistakes are out of your control but affect your business. To reduce issues, choose reliable suppliers, communicate regularly, and address problems quickly. Keeping customers informed helps maintain trust even when errors happen.

Dropshipping Alternatives

While dropshipping offers many benefits, other options exist for starting an online business. Several alternatives might better suit your needs and goals. This section will explore different business models, such as print-on-demand, affiliate marketing, and private labeling. Understanding these alternatives can help you choose the best approach for your e-commerce venture.

Print on Demand

Print on demand is a business model where you sell custom-designed products, like t-shirts, mugs, or posters, without holding any inventory. When a customer orders, the product is printed and shipped by a third-party provider.

Benefits of Print-on-Demand

  1. Low Startup Costs: You don’t need to invest in inventory upfront. You only pay for the product once you’ve made a sale.
  2. Customization: Easily create unique designs catering to specific niches or trends.
  3. No Inventory Management: Since products are printed and shipped on demand, there’s no need to store or manage inventory.
  4. Flexibility: You can quickly add or change designs and products based on customer preferences and market trends.
  5. Scalability: As your business grows, you can expand your product range without additional costs or logistics concerns.

Print-on-demand is an excellent option for entrepreneurs who want to focus on creativity and marketing without the hassles of inventory management.

Affiliate Marketing

Affiliate marketing is a business model that promotes other companies’ products on your website or social media platforms. When a customer clicks on your affiliate link and makes a purchase, you earn a commission.

Benefits of Affiliate Marketing

  1. Low Startup Costs: You don’t need to invest in products or inventory. You simply promote products and earn commissions on sales.
  2. No Inventory Management: Since you’re promoting other companies’ products, you don’t have to worry about storage, packing, or shipping.
  3. Flexibility: You can choose products and services that align with your interests and audience, making it easier to create engaging content.
  4. Passive Income: Once you’ve set up your affiliate links and content, you can earn money passively as visitors to your site make purchases.
  5. Wide Range of Products: You can access a vast array of products and services to promote, allowing you to cater to diverse interests and niches.

Affiliate marketing is an excellent option for those who want to monetize their online presence without dealing with the complexities of product management and fulfillment.

Private Labeling

Private labeling is a business model where you sell products manufactured by another company but branded with your label. This allows you to create a unique brand without developing and manufacturing products yourself.

Advantages of Private Labeling

  1. Brand Control: You can create and grow your own brand, setting yourself apart from competitors with unique branding and packaging.
  2. Higher Profit Margins: By branding products under your own label, you can often charge higher prices than generic or non-branded items.
  3. Product Customization: You can work with manufacturers to tweak and improve products to better meet your customers’ needs.
  4. Customer Loyalty: Strong branding can help build customer loyalty, as customers associate quality and reliability with your brand.
  5. Market Differentiation: With your brand, you can stand out in the market, making attracting and retaining customers easier.

Private labeling is ideal for entrepreneurs who want to build a distinct brand and offer unique products. It provides more control over product quality and customer experience.

In this blog, we explored dropshipping, its benefits, and drawbacks. We compared it with alternatives like print-on-demand, affiliate marketing, and private labeling. Dropshipping offers low startup costs, a wide product selection, and easy scalability, making it an attractive option for new entrepreneurs. However, challenges like lower profit margins, inventory volatility, and supplier errors must be considered. Whether dropshipping is the right choice depends on your goals and resources. It’s a flexible and low-risk way to start an online business, but understanding its limitations is crucial. Aspiring entrepreneurs should explore dropshipping, weighing its pros and cons to make informed decisions.

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