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An Ultimate Guide to Dropshipping | How Does Drop Shipping Work?

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Reading Time: 6 minutes

Defining dropshipping

Dropshipping is a retail fulfillment process where a shop doesn’t keep the goods it sells in stock. Instead, when a shop sells a commodity utilizing the dropshipping model, it acquires the item from a third party and has it shipped directly to the consumer. As a result, the seller doesn’t have to handle the stock directly.

The biggest difference between dropshipping and the conventional retail model is that the selling wholesaler doesn’t stock or own inventory. Instead, the seller buys inventory as needed from a third party normally a wholesaler or manufacturer to fulfill orders.

dropshipping-explained

How does dropshipping work?

Two of the most common ways for dropshipping are to seek out a supplier established in North America, or anywhere else in the world, using supplier databases. Set up your online store, on any platform. Once a customer purchases a product, you’ll be capable to fulfill their order. As the store owner, all you have to do is verify that the details are accurate and click the “order” button. The product is then shipped directly from the AliExpress dropshipping supplier to the consumer wherever in the world they may be.

Benefits of dropshipping

Advantages-and-Disadvantages-of-Dropshipping

Dropshipping is a great business design for aspiring entrepreneurs, to begin with, because it’s accessible. With dropshipping, you can instantly test different business ideas with a short downside, which lets you learn a lot about how to choose and market in-demand commodities. Here are a few other causes why dropshipping is such a popular model.

1. Less capital is required

Probably the biggest advantage to dropshipping is that it’s conceivable to launch an e-commerce store without having to spend thousands of dollars in inventory upfront. Traditionally, retailers have had to tie up large amounts of capital purchasing stock.

With the dropshipping model, you don’t have to buy a product unless you’ve already made the sale and have been funded by the customer. Without significant up-front inventory purchases, it’s possible to start sourcing goods and start a successful dropshipping business with very little money. And because you’re not allowed to selling-through any inventory bought upfront, like in a conventional retail business, there’s less risk involved in launching a dropshipping store.

2. Easy to get started

Running an e-commerce business is much easier when you don’t have to bargain with physical products. With drop shipping, you don’t have to bother about:

  • Managing or purchasing for a warehouse
  • Packing and sending your orders
  • Tracking stock for accounting reasons
  • Handling returns and inbound cargoes
  • Continually ordering products and maintaining the stock level

3. Low overhead

Because you don’t have to deal with buying inventory or managing a warehouse, your overhead costs are quite low. Many successful dropshipping stores are run as home-based businesses, needing little more than a laptop and a few recurring costs to operate. As you grow, these costs will likely rise but will still be low compared to those of conventional brick-and-mortar businesses.

4. Flexible location

Flexible location

A dropshipping business can be operated from just about anywhere with an internet connection. As long as you can talk with suppliers and customers easily, you can control and manage your business.

5. The wide selection of products to sell

Since you don’t have to pre-purchase the stock you sell, you can offer an array of trending goods to your potential consumers. If suppliers stock an item, you can post it for sale on your online shop at no additional cost.

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6. Easier to test

Dropshipping is a valuable fulfillment process for both starting a new store and for business owners who want to test the desire, consumers have for extra product categories, e.g, accessories, or wholly new product lines. The main benefit of dropshipping is, again, the ability to post and potentially sell goods before committing to buying a large amount of inventory.

You can check it out here: Is Dropshipping Worth It?

7. Easier to scale

With a conventional retail business, if you get three times the number of orders, you’ll normally need to do three times as much work. By leveraging dropshipping suppliers, all of the duties to process additional orders will be done by the suppliers, allowing you to grow with fewer growing pains and less additional work.

Sales growth will always make extra work especially associated with consumer support but businesses that utilize dropshipping scale particularly well relative to traditional e-commerce businesses.

Disadvantages of dropshipping

Internet shopping and e-commerce, package delivery concept
Global freight transportation business, cargo container with cardboard boxes and Earth globe on laptop

All the benefits we mentioned make dropshipping a very engaging model for anyone getting started with an online shop, or for those looking to expand their existing goods offerings. But like all approaches, dropshipping has its drawbacks, too. Generally speaking, comfort and flexibility come at a price. Here are a few shortcomings to examine.

1. Low margins

Low margins are the biggest disadvantage of operating in an extremely competitive dropshipping vertical. Because it’s so simple to get started, and the overhead costs are so smallest, many competing stores will set up shop and sell things at rock-bottom prices in an try to grow revenue. Since they’ve spent so little in getting the business started, they can manage to operate on small margins. If start dropshipping on Amazon beside your Shopify store, your margin on that sales channel will be much smaller.

Typically, these sellers will have low-quality websites and minor (if any) customer service, which you can use to modify your business. But that won’t stop consumers from comparing their prices to yours. This increase in intense competition will quickly hurt the potential profit boundaries in a niche. Fortunately, you can do a lot to mitigate this difficulty by selecting a niche/vertical that’s well adapted for dropshipping.

2. Inventory issues

If you stock all your products, it’s relatively easy to keep track of which items are in and out of stock. But when you’re sourcing from various warehouses, which are also filling orders for other merchants, inventory can change daily. Fortunately, these days, there are a few apps that let you sync with suppliers. So drop shippers can “pass along” orders to a supplier with a click or two and should be able to view in real-time how much stock the supplier has.

3. Shipping complexities

If you work with multiple suppliers as most drop shippers do the products on your online store will be sourced through several different drop shippers. This complicates your shipping costs.

Let’s say a consumer places an order for three products, all of which are available only from different suppliers. You’ll incur three separate freight charges for sending each item to the buyer, but it’s probably not wise to pass this cost along to the customer. And even when it does make sense to include these costs, automating these calculations can be tricky.

4. Supplier errors

Have you ever been accused of something that wasn’t your guilt, but you had to accept responsibility for the error anyway?

Even the best dropshipping suppliers make errors in making orders and these are mistakes for which you have to accept responsibility and apologize. And new, mediocre, and low-quality suppliers will create endless frustration for you with missing items, botched cargoes, and low-quality packing, which can harm your business’s reputation.

5. Limited customization and branding

branding

Unlike custom-made products or prints on request, dropshipping doesn’t give you a lot of power over the product itself. Usually, a product drop shipped is designed and branded by the supplier.

Some Alibaba dropshipping suppliers can improve your business’s product changes, but even then, the supplier has the most authority over the goods themselves. Any changes or additions to the goods themselves usually require a minimum order quantity to make it viable and affordable for the manufacturer.

So, is dropshipping worth it in 2021?

As we’ve mentioned, dropshipping isn’t a precise, stress-free way to build a strong online business hard work is always needed to start a dropshipping business. The model has some distinct advantages but comes with some built-in complexities you’ll need to address.

We’ll be examining these challenges, and how to best approach them, in future chapters. The good news is that with some careful preparation and consideration, most of these hurdles can be fixed and need not prevent you from building a thriving, profitable dropshipping business.

Ameer Hamza
WRITTEN BY

Ameer Hamza

Passionate and motivated digital marketer, Ecommerce Manager - Amazon FBA, PPC Expert - Amazon Strategy & Brand Manager. Completed BBIT Degree Marketing specialization.

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