What Is dropshipping and how does It work?

Want to start selling online without any upfront investment, or stock to warehouse and ship? Perhaps you’re looking for an easy-to-scale business venture you can get up and running in minutes. As e-commerce continues to grow, it’s no wonder merchants are drawn to the fulfillment model known as ‘dropshipping’.

With high profit margins and low overhead costs, this popular method of online selling is often described as a passive income stream. But that doesn’t mean dropshipping businesses can be thought of as get-rich-quick schemes. To be successful with this business model, you must be focused on delivering reliable sales, long-term strategies, and excellent customer service standards.

Although success with dropshipping can come quickly, if you’re not aware of some of the pitfalls the problems can grow just as fast. So whether you plan to make dropshipping your full-time job or just want to sell online on the side, here’s everything you need to know about the dropshipping process.

What is dropshipping?

Dropshipping is a relatively new fulfillment model where a business commissions manufacturers or wholesalers to ‘drop’ shipments directly to customers on their behalf. This means that the business who is selling the goods does not hold inventory, doesn’t require a large warehouse to store products, or does not need to deal with delivery.

Dropshipping is therefore contrary to traditional ecommerce, where you as the seller are responsible for sourcing, storing, and shipping products out to your customers. As all this is eliminated, dropshipping is a low-risk way to start a business without upfront investment as you don’t need to purchase a single product until you have a customer order.

How does dropshipping work?

It may sound like a breeze, but dropshipping does come with responsibilities. You’ll need to create an online store, choose reliable suppliers, market your products, build a strong customer base, and offer excellent customer service.

To illustrate exactly what is involved, let's run through the dropshipping process step by step. First, you choose the product you want to sell, then enter into a sales agreement with your chosen third-party supplier, manufacturer or wholesaler. You market the product by advertising it on your own website, or via other digital channels such as social media.

Once you receive an order, you put it into your supplier’s ordering system, then notify the customer to confirm. Your supplier picks, packs, and ships the product to the customer. Once your customer has received it, you might send them a follow-up email to find out if they’re satisfied or ask them to place a review. If the customer is not happy with their order, it’s up to you to resolve any complaints and manage returns.

With so few set-up costs, it’s easy to see what makes dropshipping such a seductive business model for retailers who want to sell online. But, like any business, there are pros and cons, so let's look at the advantages and disadvantages of dropshipping as a business model.

Benefits of dropshipping

You don’t have to store stock, worry about inventory, or manage shipment of your product. But the benefits of dropshipping don’t end there.

• With no need to buy stock upfront or lease warehouse space, dropshipping has low start-up costs and low overheads.
• Because it’s so low-risk and you don’t need capital to get started, dropshipping can be a good introduction to ecommerce.
• You can work from anywhere and only need a laptop, an internet connection, an online store, and a domain name. Once your website is ready you can start selling immediately.
• Your dropshipping business can be agile. This fulfillment model lets you tap into trends in an instant, or abandon any products that are no longer performing. If a product proves unpopular, no money is lost.
• Dropshipping has an unlimited income potential with potentially high profit margins if you find a niche with high demand.

Drawbacks of dropshipping

One of the biggest disadvantages of dropshipping? Low margins. Competing with other dropshippers on price can quickly become a race to the bottom. And, if you rely on paid advertising channels to drive traffic to your website, your profit will be lower still. But there are other pitfalls to be aware of too.

• Dropshipping is a highly competitive market, so it can be difficult to build an audience and get your products noticed.
• Growing a dropshipping business takes time and effort.
• Dropshippers have limited control over the quality of their products, supply chains, and logistics.
• If a product is not of good quality, not only will there be bad reviews and no repeat sales, but you’ll also spend time fielding complaints.
• Although you don’t store or deliver the product yourself, you may still have to pay your third-party supplier to do this for you.
• There could be long shipping times that you have no control over.

Tips for Succeeding in Dropshipping

By sharing the dropshipping process and explaining the upsides and downsides, you now have the information you need to decide whether the dropshipping business model is right for you. If you do decide to take the plunge, here are some tips for dropshipping success.

• Choose your product wisely – With low margins, it’s best to pick a product that is less likely to be returned, either because it’s low in price or because it’s unlikely to break. This will save time in dealing with customer complaints.
• Find a niche by narrowing a product category to its smallest component – For example, within the beauty category, maybe you want to focus not just on hair care, but on all-natural shampoo for people with allergies. And, since you aren’t buying inventory, it won’t cost you anything to test if this niche works.
• Find the right dropshipping channel – Work with an ecommerce selling channel that also offers business solutions – for example, product research and customer service handling.
• Offer excellent customer service – Complaints and disputes can damage your reputation and lead to losing you customers. It’s important to deal with them quickly, so make it easy for customers to contact you. Put contact details on your website and make them easy to find or offer live chat support if possible.
• Build a strong brand – Encourage reviews, gather customer feedback, and turn the good ones into testimonials. Find out who your customer is and target your brand specifically to them.
• Use social media – Alongside organic posting, putting some of your advertising budget into social channels can help you reach a wide and engaged audience, and gives you the data to analyze performance.
• Have a marketing plan – With so much competition out there, you need strong marketing strategies. Having an existing online presence will put you ahead, but otherwise you’ll need a plan to create content and grow your following.

Now you should have a rather good understanding of what dropshipping is, how it works, and what the pros and cons of this business model are. Regardless of whether or not you feel dropshipping is the way to go for your business, you might want to read more about shipping best practices, so that you can ensure the success of your ecommerce business.