How Does Dropshipping Work? Pros & Cons + Tips To Get Started
Over the next year, the ecommerce dropshipping industry is set to grow by an enormous 23.7% and continue that rate of growth for the next five years. This makes dropshipping one of the fastest-growing sectors. One of the reasons for this is that it has a much lower barrier to entry than traditional ecommerce.
Managing inventory is one of the biggest headaches for an ecommerce business owner or entrepreneur. However, with dropshipping, the inventory is not held by the business but by a third party, such as the manufacturer or wholesaler. This makes the supply chain more straightforward and with less hassle. This allows the store owner to concentrate on other business areas, such as SEO, marketing, and growing their brand.
In this guide, we will go through the dropshipping business model, how dropshipping works, the pros and cons, and some tips for incorporating dropshipping into your ecommerce business.
What Is Dropshipping in Ecommerce?
Dropshipping is a type of order fulfillment where the owner of the business doesn’t own or hold the stock. When an order is placed, the product is fulfilled by a third party, such as a wholesaler, manufacturer, partner brand, or retailer.
The dropshipper will typically keep a portion of the sale as a commission. The portion of the sale the dropshipper keeps is not usually as profitable as paying the wholesale price, but the seller doesn’t have the risk of buying a large amount of wholesale stock.
In regular ecommerce order fulfillment, the brand is responsible for owning and managing all the stock, which can sometimes be an expensive and complicated process.
With dropshipping, the dropshipper essentially acts as the middleman. The dropshipper is responsible for marketing and selling the products, and the third party is responsible for the fulfillment.
How Does Ecommerce Dropshipping Work?
As a non-dropshipping ecommerce business owner, you are responsible for every part of your business. In contrast, a dropshipper is solely responsible for sourcing products and making sales.
Finding products and creating relationships with brands is the most important aspect of a dropshipping business. Most commonly, dropshipping businesses use Alibaba or Ali Express dropshipping to find products and manufacturers in China, India, or other countries. This method has a very low barrier to entry, as it is relatively easy to find a manufacturer, set up an ecommerce platform such as a Shopify store, start running social media ads on Facebook or PPC ads, and start selling products. Online course creators often sell this method as a get-rich-quick scheme (or scam), but it can be very competitive.
In recent years, dropshippers have become more professional and have started sourcing products from up-and-coming brands in their own country. You can now find large dropshipping brands which almost act like marketplaces, selling a highly curated selection of products. By being highly selective about the products they sell, these dropshipping businesses become respected brands in their own right. A great example of this is Sephora, the U.S. beauty brand.
Some brands use a hybrid model combining dropshipping and in-house fulfillment. In so doing, a business can piggyback off the reputation of the brands it dropships to grow its own internally fulfilled product range.
Marketplaces like Amazon, eBay, Etsy, and Walmart are sometimes seen as dropshipping sites because the model is similar. However, we can’t consider them as true dropshipping sites, as usually the stock is held in a warehouse, such as an Amazon FBA warehouse. In fact, Amazon bans dropshipping from its platform.
Pros of Ecommerce Dropshipping
Doesn’t dropshipping sound great so far? It can certainly be a great business model for ecommerce brands, and it’s clear to see the benefits of dropshipping. Here are a few reasons why it is such an attractive model.
Cost savings
Inventory is usually the most significant expense for an online store. You have far fewer upfront costs with dropshipping, as you don’t own and manage the stock. This means you can use all your capital to grow the business and bring in more customers through marketing and advertising.
Managing inventory also comes with various risks, such as the stock going out of date or out of fashion. There is also no guarantee that a product will sell well. You can drop poor-performing products quickly without losing any money on the stock with dropshipping.
In theory, you could start a dropshipping business with almost no upfront investment apart from building the website and hosting it.
Easy setup
Managing an ecommerce store is complicated as there are many moving parts. With dropshipping, inventory management is one less issue you need to think about. This means you just need to set up your storefront, and you can start making sales. That isn’t to say that making sales is easy, but it is a lot less complicated when you don’t need to worry about stock levels, warehousing costs, inventory tracking, and even picking and packaging your products. That is why many beginners look to dropshipping for their first startup.
Less overhead
As you don’t purchase inventory, you don’t have the cost of buying the stock or the additional costs of storing or insuring it. This means you can start your business with little expenditure, and the ongoing running costs are lower.
Depending on the size of your business, you will probably be able to start the business by yourself at home. This means you can scale your business sustainably without hiring much staff or renting premises. It is a lower risk than buying a lot of stock and storing it in a warehouse.
Flexible location
As you can run a dropshipping business entirely from your laptop and phone, you can work wherever you like. This is why dropshipping is an attractive online business model for any digital nomad with an internet connection. You still need to be available to contact customers and suppliers, but generally, this can be done by phone and email.
Wider selection of products to sell
It is much easier to sell a broader range of products when you don’t need to worry about storage and purchase costs. Using ecommerce platforms for dropshipping allows you to sell an extensive range of products, and it is easy to add and remove products quickly. Building a great relationship with a supplier might allow you to stock their new products first ahead of other retailers, allowing your range to be up to date with the latest trending products.
Easy to test
As we discussed, adding and removing products from your store with the dropshipping model is easy. You can quickly test new items to see if they sell well with your customer base. If you have a hybrid ecommerce business of dropshipping and a standard fulfillment method, you could test products by dropshipping them, then make a large order to store in your warehouse.
It could also be a great way to test if a style of product will sell well with your customer base before creating your line of private-label products.
Easy to scale
As a dropshipper, you don’t need to worry about spending time managing stock. This leaves you more time to concentrate on business-critical activities, such as expanding into new markets, marketing, and building supplier relationships.
You can also grow your business quickly by adding new products to your range. Working with suppliers with a wide range of products means you can scale your business quickly. The best dropshipping businesses grow by creating a brand that customers identify with and return to make repeat purchases.
Cons of Ecommerce Dropshipping
All these pros make dropshipping sound like the perfect way to run an ecommerce business. But as with every business model, there are downsides. Here are the cons of dropshipping.
Low margins
The biggest disadvantage of dropshipping is the low profit margin. When you create your products, you have more control over the profit margin as your costs are lower and you are creating products in bulk.
While dropshipping does have low overhead costs, dropshipping is often competitive, meaning you might have to lower your prices to get sales. However, this shouldn’t necessarily put you off, as the low running costs mean you can be successful with smaller profit margins. But it is vitally important that you carefully assess profitability and the competition level before starting a new product line.
Inventory management issues
When you manage your inventory, you are entirely in control of how much stock you have. Inventory management is a big part of an ecommerce business, but with dropshipping you might not have as much control over how much stock your suppliers will have.
However, the customer will expect you to know how much stock you have, and they will be disappointed if they place an order and later find out it’s out of stock.
Working with supplier difficulties
Once your brand expands and you start selling products from multiple suppliers, you might find that different products from different suppliers have varying shipping times and costs. This could be very confusing for a customer who is used to placing an order and all the items arriving together.
Most reputable dropshippers will not charge customers multiple shipping fees for their orders. But you still need to cover the shipping charges, so you might have to take a further hit to your profit margin.
All businesses make mistakes from time to time. For example, you could send the order to the wrong address, pack the wrong size, or not pack the product securely, resulting in breakages. When you own the fulfillment process, you can own the mistake and put measures in place to prevent it from happening again.
When you are dropshipping, your partner is responsible for the shipping, making mistakes harder to fix. This is why it is important to work with great suppliers and build a fantastic working relationship with them.
Creating great supplier relationships is one of the best ways to make your business difficult to copy and help you build a brand with an excellent reputation.
A less customized service
When you own your own branded products, you have complete control over all aspects, such as packaging, customer support options, and personalization. Dropshipping businesses often don’t have access to as many options, as the supplier is responsible for the product and its presentation.
When you build good relationships, you can start incorporating personalized and sustainable packaging or product inserts into orders from your site. However, you will usually need to get to a certain level of customer orders before partners tailor products for you.
Where Does Dropshipping Fit In Your Order Fulfillment Process?
Dropshipping can either be your entire order fulfillment process or a part of your overall fulfillment strategy. However, if you plan to add dropshipping to your business, choosing the right suppliers to work with is your most important decision.
When speaking to suppliers, you should ensure that the products they sell fit in with your overall strategy as an ecommerce business. I like to order samples as a customer to see the product quality and inspect the packaging. But there are also some important fulfillment processes you need to understand so you can choose the best third-party suppliers.
The supplier will have a return policy that might not fit your expectations. So it is crucial to understand what the return policy will be as you will be handling customer service, which greatly impacts the customer experience.
The products might be sent from a different country, such as China. Are you comfortable with your customers having a two-week shipping time in this scenario? Does the supplier have other shipping costs for various shipping speeds?
When negotiating with the supplier, it is important to ensure all your requirements are agreed upon. A dropshipping agreement contract could be an excellent way to protect both of you from mistakes and reassure you that you are building a professional relationship.
How to Find Dropshipping Suppliers?
Finding a niche
Before you start finding suppliers for products, you need to know what sort of products you want to sell. If you are starting out and don’t have a website yet, you should consider what niche you want to sell products in. When you start dropshipping, conduct in-depth market research to make sure your products are a good fit for your customers.
Large niches such as sports, toys, or fashion have the advantage of a lot of potential products for you to source. However, broad dropshipping stores are far less likely to appeal to potential customers.
Picking a much smaller sub-niche within a larger niche—such as tennis clothing, wooden educational toys, or wet weather fashion—can be much more effective. This is because a niche website is more likely to be seen as trustworthy if it’s seen as an expert in a particular area.
Selling products in a smaller niche makes it much easier to choose products and do marketing, as you are very focused on one particular type of customer.
Tools for finding dropshipping suppliers
There are a lot of sites for finding products, some of which are in specific niches. For example, if you are looking to find piercing jewelry, you could use Piercebody, or if you are looking to dropship coffee, you could use Dripshipper.
Using a niche site like this is perfect if you want to grow your current range. But if you are starting from scratch, you might want to use a more general dropshipping site that can also provide product inspiration.
Below are four of the best ”general” dropshipping solutions for finding and managing suppliers.
1. Spocket
Spocket has connections with thousands of suppliers worldwide and has handy plugins for website builders like Wix, Woocommerce, and Shopify. If you are just starting to look for dropshipping products, this is probably the best place to start if you are just looking for dropshipping products.
2. Oberlo
Oberlo is a Shopify-specific site that lists thousands of suppliers. It also has a connection with Alibaba and AliExpress, so you can easily compare prices.
3. AliExpress
AliExpress is the largest dropshipping site by some distance. They are part of the same group as Alibaba, so they have access to thousands of Chinese and Indian manufacturers. The benefit of AliExpress is you can usually get very competitive prices. On the downside, the platform isn’t easy to use. You must do all your negotiation and make your contracts and agreements. This is a great option for more experienced business owners or new sellers who are very confident.
4. Modalyst
Modalyst is a fantastic option if you are selling in the U.S., as all their suppliers are based there. Locally produced products are very on trend, so if you want to tap into this market, then Modalyst is an excellent place to start.
Is Dropshipping the Right Strategy For Your Business?
Dropshipping can be a profitable way to start or grow your ecommerce business. If you already have a range of products you sell online, dropshipping can be a relatively easy way to add new products to your range, test a new set of products, or grow the range of products and give your customers a better experience.
However, there are risks to a small business. Unless you create great relationships with your suppliers, your business can look unprofessional, and you rely on third-party suppliers to deliver products to your customers.
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