Dropshipping, a very popular online business model: How it works

Dropshipping, a very popular online business model
April 19, 2021

Dropshipping is an online business model where a manufacturer or wholesaler lets you list their products on your online store.

  • When someone places an order on your dropshipping store, you place that same order directly with your dropshipping supplier.  There are many apps out there that help you with automating this part of the order fulfilment.
  • Then your dropshipping supplier will handle the rest. This includes preparing the packaging and sending the order straight to your customer.
  • Now your customer will receive the package straight from your dropshipping supplier.

The dropshipping business owner does not store their own inventory or ship items directly. Instead, they focus mostly on marketing, advertising, and managing their online presence.

The biggest difference between a dropshipping business and the standard (e)commerce business is that the dropshipping business owner doesn’t have to deal with physical products. With dropshipping, you don’t have to worry about:

  • Buying ordering products and managing the stock
  • Packing and shipping your orders
  • Handling returns and inbound shipments

In this post, we’ll go through how dropshipping works, how to start a dropshipping business and review the advantages and drawbacks of dropshipping.

Dropshipping Market Revenue Share (%) by Region (2014-2027)
“Many times in life, we are held back from achieving our goals because we do not commit ourselves wholeheartedly. With an escape route in mind, we hold ourselves back from giving our all.”
― idowu koyenikan, All You Need Is a Ball: What Soccer Teaches Us about Success in Life and Business

    How does dropshipping work?

    There are three parties involved in the process:

    The seller: A product manufacturer or a wholesaler with a product to market. The seller allows the dropshipping business owner to list their product(s) on the dropshipping business owner’s online store.

    The dropshipping business owner or retailer or dropshipper: Either a company or an individual that markets the seller’s product to potential consumers. When a consumer buys a product, the order is sent to the supplier who ships the item to the customer.

    The consumer: The dropshipping business owner markets seller’s products to consumers on websites, blogs and social media.

    The customer buys the products directly from the retailer. If questions or issues arise, they contact the retailer they bought the product from.

    How does dropshipping online business work

    Here is an example of the entire ordering process:

      1. Your customer places an order from your online store

      Annemie places an order for a new coffee machine she saw on your online store,  called Mediasys. Once the order is approved,

      • Annemie receives an e-mail confirming the new order, which is automatically generated by the software in the Mediasys store.
      • Annemie’s payment is captured during the checkout process and automatically deposited into Mediasys’s bank account.

      2. Mediasys places the order with the supplier

      This step usually consists of forwarding the email order confirmation to the supplier, KaliStream. KaliStream has Medisays’s credit card details and will bill it for the wholesale price of the goods, including any shipping or processing fees.

      Some sophisticated dropshippers will fully automate the order uploading, where others will offer the ability to place the order manually online.

        3. The supplier prepares the order

        KaliStream will check whether the order is in stock or has to be manufactured or ordered from a manufacturer.

        KaliStream will then box up the order for shipment to the customer.

          4. The supplier ships the order to the customer

          Once the item is packed and the payment collected from Medisasys’s card, the supplier ships the order directly to the customer.

          Even though the shipment comes from the supplier, KaliStream, Mediasys’s name and address will appear on the invoice and also, in most cases, on the return address label and packing slip.

          Once the shipment has been finalized, the supplier will email an invoice and a tracking number to Mediasys.

          The turnaround time on dropshipped orders can be very fast. Most quality suppliers will be able to get an order out the door in a few hours, allowing merchants to advertise same-day shipping even when they are using a dropshipping supplier.

            5. Mediasys alerts the customer of shipment

            Once the tracking number is received, Mediasys sends the tracking information to the customer, likely using an email interface built into the online store interface.

            With the order shipped, the payment collected and the customer notified, the order and fulfilment process is complete, assuming that Annemie receives the coffee machine on time and is satisfied with the purchase.

            Mediasys’s profit (or loss) is the difference between the amount paid by Annemie and the amount paid to the supplier.

              How to start a dropshipping business?

              Starting a dropshipping business requires the same diligence as starting any regular online business.

              Our article “How to start an online business from home – The ultimate guide” gives an ad-hoc comprehensive guide on starting an online business from scratch.

              However here below a summary of the main steps:

                Step 1. Identify your niche

                Identify the niche with products or services that are well suited for dropshipping, for your audience and your ethic.

                Find typical problems or needs for which your target customers are looking for a solution. Then identify products or services that can actually solve them or not.

                Once you’ve spotted your niche, here are some tools and hints to help to confirm your business idea will help you make money:

                 

                • Google Trends is great for knowing whether a niche is on an upward or downward trend. You might want to read my post on Google Trends that will show you in more details how to use this tool to evaluate your business idea: Is Your Online Business Niche Trending?
                • Browse popular website within your niche. This helps you understand what trends you should add to your store right. You can also browse a store’s best-selling products to help you find the best products to sell.
                Worldwide Dropshipping Market Revenue Share by product - 2018 (%)

                Step 2. Research your products

                Research what products would fit well with your strategy, market, and customer base.

                Make sure to choose products or services that will serve your brand and reputation. The products you sell should not put at risk the credibility you built with your audience. Remember that your customers buy from you because they trust you.

                Step 3. Research your competition

                Research how your competitors are selling the product, mainly pricing. But also dig further around other selling conditions like after-sale services, refund policies, etc.

                Search engines are a good starting point. Type the name of one of the products you want to sell into Google or any other search engine and do a quick search to see who shows up on top. The top ten results on Google will give you a good indication of your competition in a certain location.

                Remember, you will be competing with other dropshippers and retail giants such as Amazon and eBay.

                Don’t go for a product with no competition. There are many reasons why a product might not have a lot of competition, including high shipping costs, supplier and manufacturing issues or poor profit margins. Look for products with competition, as it’s a sign that there is a high demand and the business model is sustainable.

                Further reading:

                Research your competition

                Step 4. Find your suppliers

                Starting a dropshipping business means entering a business partnership with the supplier since you’re selling a supplier(s products, and the latter will ship them on your behalf.

                As a vendor, the dropshipping business owner is often at the mercy of the dropshipper for product quality, timely shipping, and even legal compliance.

                This means that you must choose your supplier with the utmost care.

                Hereafter a checklist of questions to help you evaluate a supplier offer: 

                • Can you find reviews or references online?
                • Do the products and the shipping meet the advertised specifications?
                • How long does it take them to fulfill an order, from sale to delivery?
                • How do they handle returns or damaged products?
                • Are their orders insured?
                • Do they offer fraud protection?
                • How is their customer support? Don’t hesitate to test it.

                Step 5. Master your fulfilment

                Finalize a fulfillment process that works for both of you and incorporate it into your system. Depending on your sales management software, this could be easy or require ironing out some wrinkles.

                Step 6. Start marketing your products

                Once the products or services are listed on your website, it’s time to start marketing. Ensure to have a marketing plan that works for your target shoppers.

                Keep in mind the following:

                Branding: Use consistent design features to develop your brand identity. These include your name, logo, colour scheme, typography and font, visual elements like graphics, etc.

                Write in a language that’s personal and makes sense to your customers.

                Read more on my article about “Define the brand identity of your online business

                Social Media: Run marketing campaigns on social. Post tips, product photos, promotional videos, and customer testimonials to engage your audience.

                Email Marketing: Incentivize your subscribers with exclusive discounts.  Make sure to deliver value to your customer base and not being too salesy.

                If you’re interested in this topic, I’ve written the following article: How To Build An Email List For Small Businesses: 7 Proven Steps.

                Paid and Free organic traffic: Strong SEO makes it easier for shoppers to find you on Google. Use relevant keywords for your business. Incorporate key phrases into your site pages and blog content.

                If your marketing plan includes paid advertising, reach new customers by using paid ads on Facebook, Youtube, Google, Instagram, etc.

                For more on Paid and Free organic traffic, you may want to read my following post: Paid Traffic vs. Organic Traffic: How to make the right choice?

                Advantages of Dropshipping

                1. Low startup cost

                Probably the most significant advantage to dropshipping is that it’s possible to launch such an ecommerce store without having to invest a lot of money in inventory upfront. Traditionally, retailers have had to tie up vast amounts of capital purchasing inventory.

                With the dropshipping model, you don’t have to purchase a product before you’ve sold it and you’ve been paid for it. 

                Without significant upfront inventory investments, it’s possible to start sourcing products and launch a successful dropshipping business 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.

                Because you don’t have to deal with purchasing inventory or managing a warehouse, your overhead expenses are relatively 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 traditional brick-and-mortar businesses.

                2. A broad product offering

                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.

                3. Highly scalable

                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, mostly related to customer support, but businesses that utilize dropshipping scale particularly well relative to traditional ecommerce businesses

                4. Flexibility

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

                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. Highly competitive

                Since little capital is required to start a dropshipping business, that low barrier to entry means a lot of competition.

                In addition, if you are just starting out, you probably won’t have an exclusive deal with your suppliers.

                That means any number of competitors could be selling your exact same products. Without forgetting that your rivals with years of experience have the resources you don’t to undercut your prices.

                That means customers can buy the exact same thing from someone else for cheaper.

                To remain in the market, you need to give to the customers why they would buy from you.

                2. Low profit margins

                Low margins, driven by the high competition, are the most significant disadvantage of operating in a highly competitive dropshipping niche.

                Because it’s so easy to get started, and the overhead costs are so minimal, many competing stores will set up online shops 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.

                This increase in fierce competition will quickly hurt the potential profit margins.

                Fortunately, you can do a lot to mitigate this problem by selecting a niche that’s well suited for dropshipping and your audience.

                3. No control over the supply chain

                1. Inventory issues

                For a business that keeps the stock of their products, it’s relatively simple to keep track of which items are in and out of stock. But when you, as dropshipping business owner, are sourcing from multiple suppliers which are also fulfilling orders for other merchants, inventory can change daily, putting the delivery to your customers at risk.

                Fortunately, these days, there are a handful of apps that let you sync with suppliers’s stock. So dropshippers can “pass along” orders to a supplier automatically or with a click or two. This way you should be able to see in real-time how much inventory the supplier has, assuming that the supplier keeps their application database up to date.

                2. Shipping complexities

                If you work with multiple suppliers, as most dropshippers do, the products on your online store will be sourced through several different dropshippers. This may increase your shipping costs.

                Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three different shipping charges for sending each item to the customer. Still, it’s probably not wise to pass this extra cost along to the customer.

                3. 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 apologize. And 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.

                4. Difficult to build your brand

                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.

                Even if you’re selling a high-quality product, your customers are going to focus mostly on the product’s brand and forget about the shopping experience entirely.

                Some suppliers, like Alibaba, may accommodate some products changes requested by the dropshippers. However,  to do so, the suppliers will come up with additional constraints like minimum order quantity to make it viable and affordable for the manufacturer.

                Frequent questions asked about dropshipping

                Whar are the costs to start/run a dropshipping business?

                Even though the cost of any business will vary from person to person, there is a minimum of expenses you cannot avoid to get started. Here’s a quick summary of the essential costs.

                Domain name: 10-20$ per year

                Your domain name matters, especially if building a long-term brand.

                While there are many extensions options, we recommend looking for a .com, which is more popular for businesses websites.

                E-commerce platform: $30+ per month.

                You’ll need to find an ecommerce platform in order to create and host your online store.

                Online advertising. If your marketing plan includes paid advertising, consider a starting budget of $400 per month. You’ll scale when your business grows.

                Is a dropshipping online business profitable?

                Yes, dropshipping can be profitable , like many of our successful merchants continue to do. Dropshipping is a low-risk business model that allows you to sell products to your customers without incurring huge running costs like a wholesaler would have. Because of these lower costs, it is easier to become profitable with dropshipping a lot faster than other business models. When you are motivated to sell products you are more likely to invest more time into promotion and marketing, leading to more profits

                How do you make money with dropshipping?

                As we explained in our example above, the dropshipper’s profit from a sale is the difference between, on the one hand, the amount paid by the customer and, on the other hand, the amount paid to the supplier plus other costs (averaged per item sold)  incurred by the dropshipper. Remember those costs include all expenses for running the business. See our estimate in the previous section.

                The bottom line

                As we’ve mentioned, dropshipping isn’t a perfect, stress-free way to build a successful online business. Hard work is always required to start a dropshipping business like any other business.

                The model has some definite advantages but comes with a number of built-in complexities you’ll need to address.

                To start and run your dropshipping store, you need good preparation and build a solid plan. Once you’ve chosen your niche, know your audience, identify products or services you want to sell and find your dropship suppliers, you can start building your dropshipping business.

                However, dropshipping is not as easy as it sounds. That’s why you need a mentor to teach you all the technics and knowledge required to run a business online successfully.

                Here comes into play The Six Figure Mentors, a company that taught me and other thousands of people and me to start their online business from scratch. You’ll enjoy the community and learn how to grow your business.

                Ready to start and scale an online business? 

                Sign up for our FREE masterclass today!

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