What Is Dropshipping?

Working from home

Dropshipping is a business model where retailers don’t have to carry inventory. Instead, they purchase products from wholesalers or manufacturers at standard wholesale prices and then sell them on the internet without managing any lists of their own. 

The retailer sells goods by dropshipping directly through their supplier’s e-commerce platform and gets paid for each item sold as soon as it ships out – saving the time involved in managing orders which would otherwise be required if the merchant held stocks locally. In this setup, the merchant’s primary responsibility is to handle the front-end of the business. That includes advertising one’s products online and focusing on how to gain more customers over time. 

One thing to note when considering dropshipping is that you will be adding more overhead, such as purchasing inventory and shipping them out yourself. However, dropshipping can be highly profitable for most business models, and it is certainly worth considering. Here’s everything you need to know about dropshipping.

How does dropshipping work?

The process of dropshipping is very straightforward and easy to understand. Dropshipping is a form of retail fulfilment where a seller doesn’t store the inventory. It sells in stock. Instead, when a merchant sells a product using dropshipping features, he buys the item from a wholesale provider at a lower cost. He automates it to be shipped directly to the customer. In dropshipping, the merchant does not go through the pain of handling the inventory now. Here are the steps – 

  1. Receiving an order – The first step is to create an online presence that a user can engage with on a selling platform. It requires you to put up products for purchase online and focus on marketing them and advertising them to improve online interactions.
  2. Forwarding the order – Once you receive the order, you have to forward the order details to the third-party provider and pay them for the product and shipment, wherein they handle everything directly. You charge a certain amount from your customer and buy the product at a discounted rate from the retailer, and that margin is your profit.
  3. Preparation – Your dropshipping supplier starts to prepare the order after receiving it from your end. It includes packaging the product and preparing it to be shipped.
  4. Shipping – Once the order is ready to be shipped, it is then sent off to be delivered to the customer. 

The main distinction between dropshipping and a regular retail model is that the selling merchant doesn’t stock or own inventory. The seller purchases inventory whenever required from a third party to fulfil orders. This third party can either be a wholesale dealer or the manufacturer itself. 

Advantages of Dropshipping

Dropshipping is a great way to test business ideas and learn about marketing. Dropshippers can quickly start selling their products without investing in inventory, which lets them avoid the risk of carrying unsold items that could lose money over time.
The benefits of dropshipping are plenty: it’s simple; you don’t have any upfront costs or need for storage space like other models require; as long as your customers pay on time and buy an item with every order, there’s very little chance you’ll ever be stuck holding unusable stock. Here are all the benefits you can get receive from dropshipping –

  1. Decreased Capital Investment
    Dropshipping is one of the simplest and most affordable ways for small-time entrepreneurs to make their mark. You don’t have to invest thousands into inventory upfront, which can be a big bonus for those who are just starting in business or want flexibility with cash flow.
    Dropshipping gives the owner an option only to purchase the product once the customer has already bought it. It allows you to drastically reduce your investment in inventory before putting the product online for sale. Essentially, it is possible to start a fully operational dropshipping business with very little capital investment. Moreover, the reduced capital pressure reduces the risk factor of the operation by a long shot.
  2. Ease of Setting Up
    There are many nuances and difficulties while managing an online retail business. The biggest one of them all is the supervision of on-ground operations. Some of them are –
    Managing and setting up a lease for a warehouse – The first step to becoming a retailer is having access to storage space. Acquiring the storage space is a long and complicated process. It includes hours of inspection and going through multiple options. After finalising a space, one has to deal with negotiations and get into a long-term lease. Such leases are usually not flexible.
    Packaging and logistics operations – After securing the inventory and space, one has to hire a crew who can receive shipments, orders and package them for last-mile deliveries.
    Inventory tracking – Inventory management is another task that includes having an account of all the incoming and outgoing inventory. It also comprises ordering stock ahead of time for future orders.
    Handling returns – There has to be a management system for dealing with returns, customer complaints and ensuring that returned inventory is documented.
    Dropshipping outsources all of these tasks and frees up a significant part of your time. Hence, dropshipping can be a viable option to generate passive income because it is easy to set up and even easier to manage in the long run. Once you have established an efficient system in place, most of your work will include supervising the operation and checking in a couple of times per week.
    You can start your online business with dropshipping within a matter of hours after you’ve learnt the basics and have decided on the product catalogue you would like to sell.
  3. Ease of Growing
    As you establish an online business, the basics of your business model stay the same. Then, your tasks mainly include marketing and sales. If you market your products efficiently enough, you will generate massive demand for your products and cater to a more significant number of consumers who would start to associate your brand with quality and reliability.
    In such a scenario, dropshipping makes it easy for the business owner to scale and multiply the scope of its operations in no time. Traditionally, upscaling a business used to require a lot of capital and time to get all the parts right. Dropshipping disrupts the traditional market practice and makes way for modern online retailers who want to automate their business operations to focus more on the things that matter.
  4. Work flexibility
    Being an entrepreneur does not have to be unnecessarily complicated. There is a common trope of long hours of work associated with that of an entrepreneur. However, it does not have to be that way. In today’s day and age, anyone can start their business and then run it on autopilot.
    Managing an online business is one of the most accessible sources of income. It does not require long hours of intensive work to earn a paycheck. On the other hand, you can manage your online business from anywhere in the world. All you need is your computer and login at any time to check how everything is going. Essentially, you can work whenever you want from any location since it does not require you to come into an office.
    Because online retailing mostly requires a person to work from home, more and more people are beginning to start their own online business since the beginning of the COVID-19 pandemic. The pandemic has generated a demand for online availability of products, and dropshipping can help you tap into the market of immense earning potential.
Dropshipping and suppliers

Disadvantages of Dropshipping

While dropshipping is an attractive business model for today’s entrepreneur, it comes with its payoffs. The ease of dropshipping can be costly in some cases, and a business owner must consider all the shortcomings to make an informed decision about the same.

  1. Thin Margins
    The most significant advantage in dropshipping is the low margins for your product. Dropshipping is beginning to get competitive because of its ease in setting up. Many people have entered the online retail business because one has to undercut prices to stay ahead of competitors. However, since the overhead of dropshipping is low, it is financially feasible in most cases to begin and sustain oneself with low-profit margins at the start.
  2. Supplier Issues
    In online retailing, your brand is the face of your business. However, most of the processes at the backend are not under your control or supervision. It allows room for error because of the absence of direct hands-on inventory control. Consequently, you will be held accountable for mistakes you did not commit in the first place.
  3. High Competition
    If you are looking to start a dropshipping business, you should begin as soon as possible because of the high competition in the online marketplace. The ease of dropshipping means that anyone can do it and that’s why more and more online retailers have popped up ever since the beginning of the pandemic. 

Can your business benefit from dropshipping?

Everything considered, dropshipping is simply a way for companies to outsource logistics in exchange for regular fees. Like any other addition to your company, you need to do a cost-benefit analysis of dropshipping before fully integrating it into your model. In case you’re a beginner looking towards online retailing as a source of passive income, dropshipping is the best way to go about it because there’s essentially no risk, and you can stop or expand any time you want based on your experience. 

One of the major factors in dropshipping is your supplier. It is crucial to have a trustworthy supplier to manage quality and minimise customer criticism. A dropshipping supplier is primarily responsible for the delivery time, packaging, and proper handling of the package. All these things affect customer experience to a great extent. As a business owner, it is your responsibility to focus on improving customer experience as you go along to ensure growth. 

Everything said, dropshipping is for independent merchants and B2B companies looking to expand to specific regions on a trial basis. Dropshipping would be a much cheaper bridge to fulfil customers while keeping investments low. Hence, dropshipping can benefit your business if your fulfilment partner is competent and offers your company the value it deserves.

Frequently Asked Questions (FAQs)

The earning potential from dropshipping majorly depends on the type of product you are offering. Your first goal should be to do a market analysis and look for a product in high demand. After that, you can operate at 30-80% profit depending on the price you put up. 

There’s a lot of ambiguity regarding the nature of dropshipping. It is a perfectly legal activity and a form of retail business just like any other.

One of the main charms of dropshipping is that it only requires a computer and an internet connection. You need to know the basics of marketing and setting up your business initially. Once you’ve completed the initial setup, the process is quite simple and consistent. 

While you do not need to worry about registering in the beginning, you will be required to register your business after you hit a certain threshold in terms of income. This threshold varies from country to country.

Your End-to-End Supply Chain Partner

Stockarea offers end-to-end supply chain services such as Warehousing, Freight Forwarding, Customs Clearance, and Transportation, acting as your logistics backbone. Let us take care of your complex supply chain so that you can focus on your core business.