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What Is Dropshipping and How Does It Work? (2022)

What is dropshipping? How the dropshipping model works.

What is dropshipping?

Dropshipping is an order fulfillment method where a business doesn’t keep the products it sells in stock. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.

The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory—they act as the middleman. 

Want in on the action? Here’s everything you need to know about dropshipping for ecommerce stores, and how you can start today. 

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How does dropshipping work?

Two of the most common approaches for dropshipping are to seek out a supplier located in North America (or anywhere else in the world) using supplier databases, or to seek out an app that connects you and your store to thousands of suppliers.

For the latter, we recommend DSers, a Shopify app that helps independent business owners find products to sell. With DSers, you can browse AliExpress and import the products that pique your interest directly to DSers—which is connected to your Shopify store—with the click of a button.

Once a customer buys a product, you’ll be able to fulfill their order in the DSers app. Fortunately, DSers automates this process. As the store owner, all you have to do is check that the details are correct and click the Order button. The product is then sent directly from the AliExpress supplier to the customer—wherever in the world they may be.

how dropshipping works

Drop shipping is often seen as a no-hassle, get-rich-quick scheme. But it’s not. Just like any other ecommerce website, it takes dedication to get your startup running and successful. Done well, drop shipping companies can become reliable and convenient partners to growing ecommerce businesses to expedite order and fulfillment processing.

What is a dropshipper?

A dropshipper is a person or business that uses the dropshipping model of buying inventory and fulfillment logistics from a third party instead of warehousing and shipping the products themselves.

Benefits of dropshipping

A $15 billion industry, dropshipping is a great business model for aspiring entrepreneurs to start with because it’s accessible. With drop shipping, you can quickly test different business ideas with limited downside, which lets you learn a lot about how to choose and market in-demand products. 

Here are a few other reasons why drop shipping is such a popular model for both large and small businesses.

1. Less upfront capital is required

Probably the biggest advantage to dropshipping is that it’s possible to launch an ecommerce store without having to invest thousands of dollars in inventory upfront. Traditionally, retailers have had to tie up huge amounts of capital purchasing inventory.

With the drop shipping model, you don’t have to purchase a product unless you’ve already made the sale and have been paid by the customer. Without significant upfront inventory investments, it’s possible to start sourcing products and become a successful dropshipper with very little money. And because you’re not committed to selling through any inventory purchased upfront, like in a traditional retail business, there’s less risk involved in starting a dropshipping store.

2. Easy to start

Running an ecommerce business is much easier when you don’t have to deal with physical products. With drop shipping, you don’t have to worry about:

  • Managing or paying for a warehouse
  • Packing and shipping your orders
  • Tracking inventory for accounting reasons
  • Handling returns and inbound shipments
  • Continually ordering products and managing stock level

3. Low overhead

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

4. Flexible location

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

5. Wide selection of products to sell

Since you don’t have to pre-purchase the items you sell, you can offer an array of trending products to your potential customers. If suppliers stock an item, you can list it for sale on your online store at no additional cost.

6. Easier to test

Dropshipping is a useful fulfillment method for both launching a new store and for business owners looking to test the appetite customers have for additional product categories, e.g., accessories or wholly new product lines. The main benefit of drop shipping is, again, the ability to list and potentially sell products before committing to buying a large amount of inventory.

7. Easier to scale

With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be done by the suppliers, allowing you to expand with fewer growing pains and less incremental work. 

Sales growth will always bring additional work—especially related to customer support—but businesses that utilize drop shipping scale particularly well relative to 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

Cons of dropshipping

All the benefits we mentioned make dropshipping a very attractive model for anyone getting started with an online store, or for those looking to expand their existing product offerings. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a price. 

Here are a few shortcomings to consider.

1. Low margins

Low margins are the biggest disadvantage to operating in a highly competitive dropshipping vertical. Because it’s so easy to get started, and because the overhead costs are so minimal, many competing stores will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins.

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

2. Inventory issues

If you stock all your own products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change on a daily basis.

Fortunately, these days, there are a handful of apps that let you sync with suppliers. So dropshippers can “pass along” customer orders to a supplier with a click or two and should be able to see in real time how much inventory the supplier has.

DSers also lets merchants take automated actions when a supplier’s stock hits zero. For example, when a product is no longer available, you can automatically unpublish the product or keep it published but automatically set the quantity to zero.

3. Shipping complexities

If you work with multiple suppliers—as most dropshippers do—the products on your online store will be sourced through a number of different dropshippers. This means you have no control over the supply chain.

Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these drop shipment calculations can be difficult.

4. Supplier errors

Have you ever been blamed for something that wasn’t your fault but had to accept responsibility for anyway?

Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched drop shipments, and low-quality packing, which can damage 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.

5. Limited customization and branding

Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, the product dropshipped is designed and branded by the supplier.

Some suppliers can accommodate your business’ product changes, but even then, the supplier has the most control over the product itself. Any changes or additions to the product usually require a minimum order quantity to make it viable and affordable for the manufacturer.

Dropshipping for beginners: Your questions, answered

Let’s answer a few common questions about what dropshipping is and how it works.

How much do I need to invest to start dropshipping?

Though it’s hard to predict the exact costs for any individual business, there are a few items every dropshipping business will need to spend money on to get started. Here’s a quick summary of the essential costs.

Online store

Estimated cost: $29/month

You’ll need to find an ecommerce platform or website builder to create and host your online store. We obviously recommend starting a Shopify store. You’ll be able to effortlessly sync with the DSers marketplace to source dropshippingproducts, and you’ll get access to our full selection of themes and free branding tools so you can get your business up and running quickly.

Domain name

Estimated cost: $5–$20/year

It’s hard to build trust with customers without your own domain name. While there are a number of top-level domains available (e.g., example.shop, example.co), we recommend looking for a .com that fits your brand, if one is available. Use our domain name generator to get started, or learn more about how to come up with a catchy business name.

Test orders

Estimated cost: Varies

Although dropshipping lets you have minimal involvement with handling your overall product catalog, you should set aside money, as well as a little bit of time, to test out the products you plan to sell. If you don’t, you risk listing a product with too many shortcomings or defects, which will result in unhappy customers and a lot of time spent dealing with returns.

Online advertising

Estimated cost: Scales with your business; we recommend budgeting at least $500 to get started

Every ecommerce business should look for ways to reduce their average cost to acquire a customer through organic channels like content marketing, SEO, and word of mouth. But to get started, advertising is usually an essential channel for most product-based businesses. The most common channels include search engine marketing (SEM), display ads, social media ads, and mobile ads.

How do dropshippers make money?

Dropshipping businesses act as product curators, selecting the right mix of products to market to customers. Remember, marketing is a cost you incur, in both time and money, helping potential customers find, evaluate, and buy the right product.

You’ll also have to include the cost of providing customer support whenever there’s a product or shipping issue. Last, but certainly not least, is the original price that your supplier sells the product for.

With all of these costs to account for, dropshipping businesses mark up individual products in exchange for distribution. This is why suppliers are OK having dropshippers market their products for them—dropshipping stores drive additional sales that the supplier would have otherwise missed out on.

To make a profit with your dropshipping business, it’s a good idea to find out how much it costs for you to “acquire” a customer and price your products with that in mind.

Is dropshipping legal?

Yes, dropshipping is legal. It's an ecommerce fulfillment model used by many global retailers. This question usually comes up due to a misunderstanding of how dropshipping works.

Like with any business, satisfying customer expectations and building a brand that resonates with the right audience is still key to long-term success.

Most retail stores you shop in are likely not selling products they personally manufacture. Dropshipping takes this curated approach and turns it into a fulfillment model fit for an online business.

There are, of course, the more fundamental things you need to do to run your business legally. Consult a lawyer who specializes in these matters to ensure you’re conducting business legally in your region..

Can you do dropshipping on Amazon?

Yes, the Amazon dropshipping business model is one way to operate an ecommerce business. Dropshipping fees range between 10% and 15%, depending on the product type. Margins are much slimmer on Amazon. There are also few housekeeping rules you need to follow, which you can find on Amazon’s policy page for dropshipping.

Can you dropship on eBay?

Dropshipping is allowed on eBay. However, listing a product on eBay and then purchasing it from another retail or marketplace that ships the customer’s order is not allowed.

What’s the difference between dropshipping and retail arbitrage?

Retail arbitrage refers to any scenario where you resell products bought from other retailers at a profit. For example, you go to a retail store (like Walmart or Target) to buy a t-shirt, then sell it at a higher price online through your own website or Amazon. The same applies to online retail arbitrage where you sell items online at a premium price, then purchase the item at a retail store and ship it after it’s bought. 

How do I start a dropshipping business?

  • Commit to starting a dropshipping business.
  • Choose a dropshipping business idea.
  • Do competitive research.
  • Choose a dropshipping supplier.
  • Build your ecommerce store.
  • Decide on a business structure.
  • Get your finances in order.
  • Market your dropshipping store.
  • Analyze and improve your offering.

For a more in-depth look at starting your own, read our guideHow to Start a Dropshipping Business: A Complete Playbook.

Is dropshipping worth it in 2022?

Yes, the model has some definite advantages, but comes with a number of built-in complexities you’ll need to address. The good news is that with some careful planning and consideration, most of these hurdles can be resolved and need not prevent you from building a thriving, profitable dropshipping business.