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What Is Dropshipping and How Does It Work?

Dropshipping is a retail fulfillment model in which a store owner sells products to customers without ever holding inventory. Instead, when a customer places an order, the store owner forwards the order details to a third-party supplier (such as a manufacturer or wholesaler), who then ships the product directly to the customer. Essentially, the store acts as a middleman, handling the sales and customer experience, while the supplier manages the product storage, packing, and shipping.

This business model has gained popularity in recent years due to its low upfront investment and simplicity, making it accessible to entrepreneurs who want to start an online business without significant capital. Traditional retail businesses, on the other hand, typically require store owners to purchase inventory in bulk, manage warehouses, and handle shipping themselves. With dropshipping, these logistical challenges are outsourced, reducing risk and complexity.

What is a dropshipper?

A drop shipper is a person or business that accepts customer orders and passes them to a supplier for fulfilment.

Dropshippers often run online stores to market and sell products. When a customer buys a product, the drop shipper places a corresponding order with the supplier.

Let’s say a customer buys a cat collar from your online pet store. As a drop shipper, you forward the order to your cat collar supplier, who keeps the product in stock.

How Dropshipping Works

The dropshipping process involves three key players: the store owner (retailer), the customer, and the supplier (wholesaler or manufacturer). Here’s a typical flow:

Customer Places an Order: The customer browses the online store and places an order for a product. The store owner receives the order, along with the payment for the item.
Forward the Order to the Supplier: After receiving payment, the store owner sends the order details (such as the customer’s name, shipping address, and product) to the supplier. This can be done manually or automatically through integrated software.
Supplier Ships the Product: The supplier processes the order, packages the product, and ships it directly to the customer. Importantly, the store owner never handles the physical product, and the shipment often carries the store’s branding or no branding at all, creating the illusion that the store is managing the fulfillment.
Customer Receives the Product: The customer receives the product, typically with minimal interaction with the store owner, apart from customer support inquiries if there are issues.

How Dropshipping is Useful for E-Commerce

Dropshipping has revolutionized the e-commerce industry by offering a low-barrier, flexible business model that allows entrepreneurs to start and scale online stores with minimal upfront investment. Here’s how dropshipping is particularly useful for e-commerce businesses:

1. Low Startup and Operational Costs

One of the most significant advantages of dropshipping for e-commerce is its low startup cost. Traditional retail businesses typically require significant upfront investment in inventory, warehouse space, and logistics. With dropshipping, there’s no need to purchase products in bulk or manage a warehouse, which drastically reduces financial risk.

In a traditional e-commerce model, you’d have to buy stock upfront, store it, and manage all the logistics. With dropshipping, the supplier holds and ships the inventory, meaning the e-commerce store owner doesn’t need to invest heavily in stock. This allows entrepreneurs to enter the market with far lower financial commitment, reducing the risks associated with unsold inventory.

2. No Inventory Management

Inventory management is one of the most challenging aspects of running an e-commerce business. It involves tracking stock levels, managing orders, reordering products, and dealing with stockouts or overstocking issues. With dropshipping, the supplier handles all the inventory management, freeing up the store owner from these time-consuming tasks.

By using dropshipping, e-commerce businesses can focus on other critical areas, such as marketing, customer service, and website optimization, without worrying about the complexities of managing stock. This also eliminates the need for warehousing space, which would otherwise incur additional costs.

3. Wide Product Selection

Dropshipping allows e-commerce store owners to offer a broader range of products compared to traditional retail models. Since the store owner doesn’t need to invest in bulk inventory, they can list hundreds or even thousands of products without having to worry about purchasing them upfront.

This flexibility enables e-commerce businesses to test different product categories or niches without committing large sums of money to stock. If one product or niche doesn’t perform well, it’s easy to pivot to another without the risk of leftover inventory. This adaptability is crucial in a rapidly changing e-commerce environment where trends and consumer preferences shift quickly.

4. Scalability

Dropshipping is inherently scalable, making it an ideal model for growing e-commerce businesses. Since the supplier is responsible for storing, packing, and shipping products, the store owner can focus on scaling the business without getting bogged down by fulfillment processes.

When you start seeing an increase in orders, there’s no need to worry about managing a larger inventory or expanding your warehouse space. The supplier handles the logistics, and the store owner only needs to focus on increasing traffic, optimizing sales, and managing customer service. This means that as your e-commerce business grows, you can scale operations quickly without needing to make significant investments in infrastructure or labor.

5. Location Independence

Another key benefit of dropshipping in e-commerce is that it allows store owners to run their business from anywhere in the world. As long as there’s an internet connection, you can manage your online store, interact with customers, and communicate with suppliers.

This makes dropshipping ideal for digital nomads or those looking to run a business with a flexible lifestyle. The ability to operate without being tied to a physical location is particularly appealing in today’s globalized and remote-friendly economy.

6. Faster Time to Market

Since dropshipping eliminates the need to buy and store inventory, e-commerce businesses can get their stores up and running much faster. Entrepreneurs can focus on building their websites, setting up their payment systems, and marketing their products without worrying about finding suppliers, sourcing products, or managing inventory.

This reduced time to market is a competitive advantage, allowing entrepreneurs to quickly enter profitable niches or capitalize on trending products. By not being bogged down by the time-consuming processes of sourcing and stocking products, store owners can quickly adapt to market changes and launch new products.

7. Risk Reduction

Dropshipping reduces some of the risks typically associated with e-commerce. For one, since you don’t need to buy inventory in advance, you’re not exposed to the financial risks of holding stock. Additionally, because the supplier takes on the responsibility of fulfillment, the store owner can avoid issues like unsold products or overstocking, which can result in lost capital.

However, dropshipping still carries risks such as low profit margins and reliance on third-party suppliers for fulfillment, but overall, it is less risky than traditional retail models.

8. Global Reach

With dropshipping, e-commerce businesses can sell products to customers all around the world without needing to manage international shipping or customs issues. Suppliers often have established shipping processes in place, and they typically offer a range of international shipping options. This enables e-commerce stores to expand their reach globally, broadening their customer base and increasing potential sales without the logistical headache of international fulfillment.

In the e-commerce space, dropshipping has proven to be a game-changer for both aspiring entrepreneurs and established businesses looking to diversify their offerings. The ability to offer a wide range of products, minimize upfront costs, scale quickly, and operate from anywhere makes dropshipping an attractive model for those looking to succeed in e-commerce.

However, it’s important to note that while dropshipping lowers the barriers to entry, it’s not without its challenges—such as thin profit margins, dependency on suppliers, and customer service issues. For those who can navigate these challenges, dropshipping provides a streamlined, scalable, and flexible way to run a modern e-commerce business.

7 Benefits of dropshipping

Here are seven reasons why dropshipping has become a popular e-commerce model for businesses:

1. Low costs

2. Wide selection of products to sell

3. No product development costs

4. Flexible location

5. Easier to start

6. Easier to test

7. Easier to scale

1. Low costs

Because you don’t buy inventory, dropshipping requires minimal upfront investment. Many dropshipping stores are run from home with little more than a laptop, making it an attractive small business idea.

With this benefit, however, comes competition from other dropshipping entrepreneurs. You’ll need to invest your time rather than capital, applying tips from dropshipping experts to make your business work.

2. Wide selection of products to sell

Use dropshipping to offer a wide array of trending products to your customers. With no unsold inventory to worry about, you can change your product catalogue at will. If suppliers stock a new item, you can immediately list it for sale.

3. No product development costs

Dropshippers also don’t need to invest (and risk) capital in research and development to create a new product. Instead, they can source proven sellers that are ready to ship.

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 provide timely customer support, there are few restrictions on where you live and work.

5. Easier to start

Dropshipping removes many retail hurdles. Running an e-commerce business becomes easier when you don’t have to:

Manage or pay for a warehouse
Monitor inventory
Pack and ship orders
Track inventory for accounting
Handle inbound return shipments

That said, successful drop shippers carefully oversee the fulfilment process and are committed to providing a satisfying customer experience.

6. Easier to test

Dropshipping is a useful fulfilment model for testing customer interest in a new product category. Stores can trial sales of a drop shipped product before committing to buying inventory.

7. Easier to scale

Scaling a traditional retail business takes forward planning. If a large number of orders arrive unexpectedly, it can be challenging to accommodate them, and you may quickly sell out.

Dropshipping businesses tend to scale more efficiently. Plus, you can expand your reach by dropshipping on popular marketplaces like Amazon, eBay, and Etsy.

A complete Dropshipping kit

A dropshipping kit includes the essential tools, platforms, and resources needed to run a successful business. While there’s no single “official” kit, the following items are generally part of a comprehensive dropshipping setup: