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Dropshipping and How Does It Work? (2023)

If you're thinking about opening your own online store, you might be wondering how you'll get products or where you'll store them.  Under the old way of doing business, retailers are in charge of order fulfillment from beginning to end. Usually, this means renting warehouse space for the products, taking care of the supply chain and inventory, and keeping track of shipping costs.  But there is another way to fulfill customer orders placed through an online store. This is called dropshipping.  Want to get in on the fun? Here's everything you need to know about the benefits of dropshipping for online store owners and how you can start right away.    

Dropshipping

Dropshipping is a way for a business to fill orders when it doesn't keep the items it sells in stock. Instead, the seller buys what they need to fill orders from a third party, usually a wholesaler or manufacturer.  The main difference between dropshipping and regular retail is that the seller doesn't stock or own the inventory. Instead, they act as a middleman.

Dropshipper

A dropshipper is a person or business that uses the dropshipping model. Instead of storing and shipping the products themselves, dropshippers buy inventory and logistics from a third party.  Because a third-party supplier handles inventory storage and order fulfillment for dropshipping, dozens of employees or just one business owner can run a dropshipping operation.

How does dropshipping work?

Dropshipping is a relationship between a store that sells to customers and a supplier.  There are usually two ways to use dropshipping as a business model. The first is to use a database of wholesale suppliers to find one or more wholesale suppliers in North America (or anywhere else in the world). AliExpress, SaleHoo, and Worldwide Brands are all examples of popular online supplier databases.  If you don't want to find suppliers for all of the products you want to sell, you can use an app that connects you and your store to thousands of suppliers. We suggest DSers, an app for Shopify that helps small business owners find things to sell.  With DSers, you can look at products on AliExpress and import the ones that interest you directly to DSers, which is linked to your Shopify store. When a customer buys a product, you can use the DSers app to fill their order.  Most of the dropshipping process is now automated, thanks to DSers. As the store owner, all you have to do is make sure the information is correct and click the order button. The item is then sent straight from the AliExpress seller to the customer, no matter where they are in the world.     Dropshipping is often seen as an easy way to make money quickly with little work. It's not, though. To get your startup up and running and making money, you have to work hard, just like with any other eCommerce site. When done right, dropshipping companies can help growing e-commerce businesses speed up the order and fulfillment process by being reliable and easy to work with.

Pros of Dropshipping

Here are a few more reasons why dropshipping is a popular way for both big and small businesses to do business online. 

1. Less upfront capital required

The biggest benefit of dropshipping is probably that it lets you start an online store without having to spend a lot of money on inventory. Traditionally, a store that sells things in person or online has to spend a lot of money on stock.  With the dropshipping model, you don't have to buy a product until you've made a sale and the customer has paid you. You can start dropshipping and be successful with very little money because you don't have to buy a lot of inventory upfront.  Also, starting a dropshipping store is less risky than other business models because you don't have to buy inventory upfront. 

2. Easy to start

When you don't have to deal with physical goods, it's much easier to run an eCommerce business. You don't have to worry about: 
  • Taking care of a warehouse or paying for one 
  • Putting together and sending your orders 
  • Keeping track of inventory for accounting
  • Taking care of returns and incoming packages
  • Ordering products over and over and keeping track of stock levels 

3. Low expenses

Your overhead costs are pretty low because you don't have to worry about buying inventory or running fulfillment centers. In fact, many successful dropshipping stores are run from home and don't need much more than a laptop and a few costs that keep coming up.  As your business grows, these costs will probably go up, but they will still be low compared to those of traditional businesses with stores. 

4. Flexible location

Dropshipping makes it possible to run a successful business from almost anywhere with an internet connection. You can run and manage your business as long as you can talk to your suppliers and give your customers prompt service and support that meets their needs.

5. Lots of different products to sell

Since you don't have to buy the items you sell in advance, you can offer your customers a wide range of popular items. Also, you can change or update your list of dropshipping products without worrying about the unsold stock. If your suppliers have an item in stock, you can sell it on your online store at no extra cost.

6. Easier to test

Dropshipping is a good way to get products to customers. It's a good way to start a new store, and it's also a good way for business owners to see if customers want accessories or whole new product lines. The main benefit of dropshipping is, again, that you can list products and see if they sell before you buy a lot of inventory.

7. Easier to scale

In a traditional retail business, if you get three times as many orders, you usually have to do three times as much work. By using dropshipping suppliers, most of the work to process additional orders will be done by the suppliers. This will help you grow your business with less pain and work.  Sales growth always means more work, especially when it comes to customer service, but dropshipping makes it easier for businesses to grow than traditional eCommerce businesses.   
It’s important for people to understand that you’re building a machine. If you don’t pump money into the system, you can’t make it pump more money out. Dropshipping is a money multiplier. Cole Turner, dropshipping expert, in an interview with Oberlo  

Problems of Dropshipping 

With all the benefits we've talked about, dropshipping is a great option for anyone who wants to start an online store or add more products to one they already have. But like any other method, dropshipping also has some problems. Most of the time, convenience and flexibility cost more than other things.  Here are a few things that could go wrong with a dropshipping business that you should think about. 

1. Low-profit margins

In a dropshipping vertical with a lot of competition, the biggest problem is low margins. Because it's so easy to get started and the overhead costs are so low, many businesses that are in the competition will set up a dropshipping store and sell items at rock-bottom prices to try to make more money. Since they haven't put much money into starting the business, they can get by with very small profit margins.  Most of the time, these sellers will have bad websites and little or no customer service, which can help your dropshipping business stand out. But customers will still compare your prices to theirs. This increase in competition will quickly make it harder for a niche to make money.  You can make this problem a lot easier to deal with by choosing the right products and a niche or vertical that works well for dropshipping.

2. Inventory problems

If you sell all of your own products, it's easy to keep track of what's in stock and what's not. But if you get your products from multiple warehouses that also fill orders for other retailers, your stock can change every day.  There are a few apps that let you connect with suppliers these days, which is good news. So, dropshippers can "pass along" customer orders to a dropshipping supplier with one or two clicks and should be able to see in real-time how much inventory the supplier has.  When a supplier's stock runs out, DSers also lets merchants do things automatically. For example, when a product is no longer available, you can automatically unpublish it or keep it published but set the quantity to zero.

3. Difficulties in Shipping

Most dropshippers work with more than one supplier, so the items on your online store will come from a number of different dropshippers. This means you have no say over the chain of supply.  Let's say a customer puts in an order for three items that can only be bought from different places. You'll have to pay three different shipping costs for each item you send to the customer, but it's probably not a good idea to pass this cost on to the customer. Even when it makes sense to include these fees, it can be hard to figure out how to automate these drop shipment calculations.

4. Supplier errors

Have you ever been blamed for something that wasn't your fault but for which you still had to take responsibility?  Even the best dropshipping suppliers make mistakes when they fill orders, and you have to take responsibility for and apologize for those mistakes. Also, mediocre or low-quality suppliers can hurt the customer experience through things like missing items, botched drop shipments, and problems with packing or product quality. This can hurt your business's reputation.   
If you’re getting into the dropshipping model, research different dropshippers. Many overpromise and underdeliver. To run a good business, your customers need to be happy, so you need a good dropshipper.  Jeff Moriarty, owner of Dog Christmas Stockings 
 

5. Few options for personalization and branding

Dropshipping doesn't give you as much control over the product itself as custom-made or print-on-demand does. Most of the time, the supplier designs and brands the product that is drop-shipped.  Some dropshipping suppliers can change their products to fit what your business needs. Even so, the supplier is still in charge of the product itself. Any changes or additions to the product usually need a minimum order quantity for the manufacturer to be able to sell it and make a profit.

Starting a dropshipping business in 2023

Dropshipping could be the answer you're looking for if you're looking for a side job, want to start a new full-time business, or want to change the way your online store works.  Yes, dropshipping has a number of challenges that you'll have to deal with. But if you think ahead and plan carefully, you can anticipate and solve these problems to build a successful dropshipping business.

Dropshipping FAQ

How much do I need to put into dropshipping to get started? 

Even though it's hard to know exactly how much a business will cost, any dropshipping business will need to spend money on a domain name, an eCommerce website, and online advertising to get the word out about the business. Are you ready to begin dropshipping? 

How do dropshippers earn money?

Businesses that drop ship mark up the price of their products to pay for shipping. This is why suppliers don't mind if dropshippers sell their products on their behalf: dropshipping stores bring in extra sales that the supplier would have missed out on otherwise. Want to make some cash? 

Is dropshipping legal? 

Dropshipping is allowed by the law. It's a model for fulfilling online orders that many retailers around the world use. In fact, most stores you shop at do not make the products they sell themselves. Dropshipping is just a way to use this curated method for an online business. Are you ready to begin dropshipping? 

Can you use Amazon for dropshipping?  

Yes, Amazon lets you use dropshipping to start an online business. But the margins are much smaller on Amazon, where fees range from 10% to 15% based on the type of product. 

Can you use eBay to dropship? 

eBay lets you do dropshipping. But you can't put a product up for sale on eBay and then buy it from another store or marketplace that ships the customer's order. 

How is dropshipping different from retail arbitrage? 

Retail arbitrage is different from dropshipping because it involves reselling products that were bought from other retailers. With retail arbitrage for eCommerce, you sell items online for more than they're worth, then buy them at a store and ship them after they've been sold. 

How do I start a dropshipping business? 

  • Make the decision to start a dropshipping business. 
  • Pick an idea for a dropshipping business. 
  • Look into the market. 
  • Pick a dropshipping company. 
  • Set up your online store. 
  • Choose how your business will be set up. 
  • Take care of your money. 
  • Advertise your dropshipping shop. 
  • Analyze your offering and make it better.
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