What Is Dropshipping?

what is dropshipping

Want to start a dropshipping business? Here's everything you need to know to get started.

  1. Defining dropshipping
  2. Benefits of dropshipping
  3. Disadvantages of dropshipping
  4. Common questions about dropshipping
  5. Is dropshipping worth the effort?

Defining dropshipping

How does dropshipping works

So what is dropshipping? Dropshipping is a retail fulfilment method where a store doesn’t keep the products it sells in stock. Instead, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly..

The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfil orders.

Want to learn more about dropshipping? Join our free hands-on training session and know how to set up an online store, step-by-step, using dropshipping to fulfil orders. You’ll learn how to find profitable products you can quickly import and begin selling. Can’t make it today? Register to get the recording after the event goes live.

What is Shopify Dropshipping?

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

    For the latter, we recommend Oberlo, a marketplace developed by Shopify that helps independent business owners find products to sell. With Oberlo, you can find and add products directly into your Shopify store that you can start selling right away. Simply browse stores like AliExpress and import the products that pique your interest directly to Oberlo—which is connected to your Shopify store—with the click of a button.

    Once a customer buys a product, you’ll be able to fulfil their order in the Oberlo app. Fortunately, Oberlo 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 supplier to the customer—wherever in the world they may be.

    What are the benefits of dropshipping?

    Dropshipping is a great business model for aspiring entrepreneurs to start with because it’s accessible. With dropshipping, 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 dropshipping is such a popular model.

    1. Dropshipping requires less capital

    Without significant up-front inventory investments, it’s possible to start sourcing products and launch a successful dropshipping business with very little money.

    • Launch an e-commerce store without investing thousands of dollars in inventory up-front.
    • No need to purchase a product unless you’ve already made the sale and have been paid by the customer.
    • Unlike in a traditional retail business, there’s less risk involved in starting a dropshipping store.

    2. Dropshipping makes it easy to get started

    Running an ecommerce business is much easier when you don’t have to deal with physical products. With dropshipping, 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. Dropshipping means low overhead

    Because you don’t have to deal with purchasing inventory or managing a warehouse:

    • Your overhead expenses become 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. Dropshipping is flexible on 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. This is what makes dropshipping easily accessible for retailers!

    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 fulfilment 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.

    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 borne 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 utilise dropshipping scale particularly well relative to traditional e-commerce businesses.
    • The major benefit again is the ability to list and potentially sell products before committing to buying a large amount of inventory.
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    Disadvantages 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 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. With dropshipping, there are no barriers to entry.
    • 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. We’ll discuss how to do exactly that here.

    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” orders to a supplier with a click or two and should be able to see in real-time how much inventory the supplier has.

    Oberlo 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 complicates your shipping costs.

    Understand this example step-by-step:

    • 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.
    • Even when it does make sense to include these charges, automating these calculations can be difficult.

    4. Supplier errors

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

    • Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologise.
    • Mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments, and low-quality packing, which can damage your business’s reputation.

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

    Common questions about dropshipping

    Throughout the rest of this post, we’ll cover the necessary steps to start a profitable dropshipping business. But before we continue, it’s worth answering a few common questions we receive about what dropshipping is and how it works.

    What is dropshipping and how do you make money?

    When a customer purchases a product from a dropshipping store, a third-party supplier ships it directly to them. The customer pays the retail price you set, you pay the suppliers' wholesale price, and the rest is profit. You never have to handle products or invest in inventory.

    Is dropshipping a good idea?

    Yes, dropshipping is definitely a smart business model. Dropshipping businesses carry low risk as it requires minimum funds to start. Here, a seller can sell products to the customers without much inventory costs.

    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 in order to get started. Here’s a quick summary of the essential costs.

    1. Online store
      Estimated cost:
      ~$29/month

      You’ll need to find an ecommerce platform or website builder in order to create and host your online store. We obviously recommend starting a Shopify store. You’ll be able to effortlessly sync with the Oberlo marketplace to source products, 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.

    2. 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.

    3. Test orders
      Estimated cost:
      Varies

      Although dropshipping lets you have minimal involvement with handling your overall product catalogue, 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.

    4. Online advertising
      Estimated cost:
      Scales with your business; we recommend budgeting at least $500 a month to get started.

      Every e-commerce 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.

    Is dropshipping a legitimate business?

    Absolutely. Dropshipping is a popular fulfilment model used by many global retailers. Like with any business, satisfying customer expectations and building a brand that resonates with the right audience is still key to long-term success.

    How much do dropshippers make on an average? 

    The average monthly income is based on the niche and the target market. There are a number of factors like seasonal changes, market trends, your marketing strategy, etc., that factor in as well. Typically, dropshippers are able to make 10-40% profit per sale, making around $1000 - $50,000 a month. A dropshipper must aim to earn a profit margin of higher than 20% with every dropshipping product sale.

    How much do Shopify dropshippers make?

    How much can you make as a dropshipper? There are many dropshippers who make up to $100,000 per year with a successful dropshipping store. So, if your idea of being a successful dropshipper is to make $100,000 per year, you'll need to choose the right suppliers and build a brand.

    How many hours do dropshippers work?

    Dropshipping being a highly competitive field takes significant effort. In the initial phase, many dropshippers put in a minimum of 70–80 hours a week to make their dropshipping business a success.

    Who are some successful dropshippers?

    • Tze Hing Chan
    • Cole Turner
    • Andreas Koenig and Alexander Pecka
    • Sarah and Audrey

    Know more about Dropshipping success stories

    Is dropshipping a full-time job?

    It definitely takes a long time and hard work but with consistency, you can make a full-time job for yourself.

    How do I start a dropshipping business?

    1. Choose a niche.
    2. Perform competitor product research.
    3. Find a reputable dropshipping supplier.
    4. Build your online store.
    5. Market your dropshipping business.
    6. Analyse and improve your store.

    Can dropshipping be a career?

    Absolutely. In the dropshipping business, the seller doesn't have to invest in inventory. This is what makes dropping start-up costs minimum.

    To add, dropshipping can be done from anywhere, as a side-hustle or a full-time business.

    What is branded dropshipping?

    Branded dropshipping defines selling non-branded products purchased from their suppliers without storing any inventory. Herein, dropshippers can privately label the products and set up a product-themed online store by establishing their own brand.

    What is the difference between dropshipping and e-commerce?

    The biggest difference between dropshipping and the standard e-commerce retail model is that the selling merchant doesn't stock or own inventory—they act as the middleman. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfil orders.

    So, is dropshipping worth it in 2022?

    As we’ve mentioned, dropshipping has several benefits. However, hard work is always required to start a business. The model has some definite advantages, complexities while operating at scale.

    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. We hope this post has cleared what is dropshipping and you are now in a position to start your dropshipping business.

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