What is dropshipping?
Dropshipping is a business model where you sell products without having to maintain inventory. When a customer places an order on your website, you simply forward the order to your supplier, who then ships the product directly to the customer. That means you don’t have to worry about storing products, packing orders, or shipping products.
How does dropshipping work? Step by Step Guide
The dropshipping process is relatively simple. Here are the basic steps involved:
Step 1: A customer places an order on your website.
Customers Place Orders on Your Website As a dropshipping retailer, you operate an online store where customers can conveniently browse and purchase products. When they find something they like, they add it to their cart and proceed to the secure checkout process. At this point, customers provide their shipping information and payment details to complete their purchase smoothly.
Step 2: You receive the order and forward it to your supplier.
Order Forwarding to Your Supplier Once your customers complete their orders, you promptly receive all the necessary order details, such as the specific products purchased and the shipping address. Here’s where the dropshipping advantage comes into play – unlike traditional retailers, you don’t maintain physical inventory.
You’ve established partnerships with reliable suppliers, including manufacturers and wholesalers. When you receive an order, you forward the customer’s information to the appropriate supplier who has the product in stock.
Step 3: Your supplier ships the product directly to the customer.
Direct Shipping by Your Supplier With the order information in hand, your supplier takes charge of the fulfillment process. They pick, pack, and ship the product directly to your customer, using their own warehouse and logistics. The package is sent under their branding, ensuring a smooth and seamless delivery experience for your customers.
One of the key benefits of dropshipping is that you don’t have to handle the hassles of inventory management and shipping logistics. Your supplier takes care of these aspects for you, allowing you to concentrate on building your brand and business.
Step 4: You receive a commission from the supplier for the sale.
Earning Commissions from Sales Once the supplier successfully ships the product to the customer, the transaction is completed. As the retailer who facilitated the sale, you’re entitled to a commission or profit margin. Your earnings come from the difference between the price at which the customer purchased the product on your website and the wholesale price at which you acquired it from your supplier.
Pros and Cons of Dropshipping
Pros
| Aspect | Description |
|---|---|
| Low Start-up Cost | Dropshipping offers a significant advantage when it comes to the initial investment required to start a business. In dropshipping, you don’t have to invest in inventory. This low start-up cost makes it an attractive option for aspiring entrepreneurs, especially those with limited capital. |
| Low Risk | In dropshipping, this risk of financial loss if products don’t sell as expected is significantly reduced because you only purchase products from suppliers after customers have placed orders and made payments on your website. This mitigates the risk of losing money on unsold products and makes dropshipping a less risky venture. |
| Easy to Scale | Dropshipping provides an easily scalable business model. As your business grows and gains momentum, you can effortlessly expand your product offerings by partnering with more suppliers or introducing new items from your existing suppliers. |
Cons
| Aspect | Description |
|---|---|
| Low Profit Margins | Since you do not manufacture or store the products yourself, your profit margins are lower than if you were to sell products from your own inventory. |
| Customer Service Challenges | Since you are not the one shipping the products, problems with an order can cause customer service difficulties. |
| Competition | There is a lot of competition in the dropshipping market, so you need to find a way to differentiate your business from the competition. |
Key players in the dropshipping process
There are three main players in the dropshipping process: the retailer, the manufacturer, and the wholesaler.
- The Retailer
The retailer is the core player in the dropshipping process. This individual or company markets and sells the products to the end customer. With dropshipping, the retailer does not own the products they sell; instead, they act as a middleman, forwarding orders to the supplier. Once a sale is made, the retailer receives a commission for facilitating the transaction. While dropshipping reduces the need for inventory management and warehousing, retailers must focus on marketing, customer acquisition, and providing a positive buying experience.
- The Manufacturer
The manufacturer is the entity responsible for producing the products offered in the dropshipping model. Typically, manufacturers collaborate with wholesalers to distribute their products to retailers. They focus on production, quality control, and ensuring a steady supply of inventory. Manufacturers benefit from the extended reach that dropshipping provides, allowing their products to reach a wider audience without directly managing sales and distribution.
- The Wholesaler
The wholesaler acts as an intermediary between the manufacturer and the retailer. They purchase products in bulk from the manufacturer and then sell them to retailers, often at a slightly higher price than the wholesale cost. Wholesalers play a crucial role in dropshipping as they offer services to retailers, such as inventory management, order processing, and shipment handling. By partnering with wholesalers, dropshippers can access a diverse range of products without the burden of stocking inventory.
FAQs on What is Dropshipping? Step by Step Guide
Dropshipping is an e-commerce business model where the retailer doesn’t stock or own inventory. Instead, when an order is made, the product is purchased from a third party and shipped directly to the customer.
Begin by researching a niche, finding reliable suppliers, setting up an online store, listing products, and marketing to potential customers.
No, one of the benefits of dropshipping is that it requires minimal upfront investment since you don’t need to buy inventory in bulk.
Platforms like AliExpress, Oberlo, and SaleHoo are popular sources for finding dropshipping suppliers. Ensure to vet suppliers for reliability and quality.
Yes, dropshipping can be profitable if managed correctly. However, it’s essential to consider factors like product selection, marketing strategies, and maintaining customer service standards to ensure success.