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What is a Dropshipping Business?

By Julija
23 Feb, 2021
9 min read

Are you looking for a way to enter the world of e-commerce and leave your 9-5 job in the dust?

Dropshipping is one of the safest and easiest ways to do that!

Dropshipping is a low-risk online business model that can help you get from 0 to hero with a few hours of work per day and it doesn’t require a big investment. 

Intrigued? You should be! Keep reading to learn more about this exciting way to make money in the thriving e-commerce world.

In this article, we:

  • Define dropshipping
  • Talk about its profitability
  • Discuss its pros and cons
  • Explain how the supply chain works
  • Answer frequently asked questions

All in a way that you can understand!

let's dive in gif

Definition of dropshipping

Dropshipping is a type of order fulfillment where store owners don’t manage inventory themselves. Instead, dropshippers buy the items from a third-party supplier who fulfills customers’ orders for them. 

An example of dropshipping

man grey tshirt looks phone laptop

Let’s imagine you have an online store where you sell dog products.

As a dropshipper, you don’t need to buy hundreds or thousands of collars or leashes in advance and store them in a rented warehouse (or your garage) until you make a sale. Instead, you find a third-party vendor who has the warehouse space to stock your items.

Once a customer purchases from you, your supplier (or suppliers, there can be many of them), takes over the process and ships the product directly to your customer. You never need to deal with logistics!

Pretty neat, right?

Your main task as a seller is to get the customers to your online store - do marketing for your dropshipping store. You can do that from anywhere as long as you have a laptop and internet connection! 

In 2019, the global dropshipping market was valued at $162.44 billion. It’s projected that the industry’s value will reach a whopping $591.77 billion by 2027. How did we get here?

Technically, dropshipping goes back to the 60s when you could order things from a mail catalog. You chose a product you liked, made a call, and you’d have it delivered from a warehouse straight to your door. 

But let’s talk about what has happened since the internet came into play.

  • Amazon and eBay

In the 2000s, Amazon and eBay made it possible for people like you to sell online. Both Amazon and eBay allow dropshipping. They take dropshipping fees, though. For example, Amazon takes between 10% to 15% of your profits. However, Amazon allows you to get in front of over 300 million active users with high purchase intent.

  • AliExpress 

Fast-forward 10 more years, AliExpress happened and enabled anyone in the world to buy products directly from Chinese manufacturers. 

The launch of AliExpress massively influenced the dropshipping industry because:

  • The language barrier was gone.
  • The buying process became easier and cheaper.
  • Shopify

With the rise of Shopify, people were able to create online stores in just a few steps. Other marketing automation apps in the Shopify App Store allowed merchants to make their lives even easier. For example, SEO apps for Shopify can help you rank on a search engine like Google. 

Dropshipping really kicked off with Shopify!

Are dropshipping companies profitable?

woman looks at coins

Today, dropshipping is a legit business model that can help you earn $10k in two months or more once you get the hang of it! The sky is your limit. Dropshipping works so well that more than 33% of online stores use it to fulfill their product demand.

Like we discussed before, dropshipping is projected to be a $591.77 billion industry by 2027. How do you get a piece of that? Let’s go back to your imaginary dog product store. 

Let’s imagine that one of the products in your store is this orthopedic dog bed.

dog lying bed
Image source: AliExpress.com

You can buy this bed on AliExpress for as low as $8.45. You sell it for $39 in your online store and shipping and advertising costs you $9 per product (most customers expect free shipping, so we advise included the shipping costs in the price of the product).

Let’s count your profit:

$39 - $8.45 - $9 = $21.55 per product

If you want to make over $10,000 per month, you need to sell about 464 of these dog beds. 

When you think about it, 464 is not that many when you can target potential customers from all over the world. With the right advertising tactics, you can make thousands of dollars per month!

So, yes, dropshipping can be a highly profitable business model. You just need to find winning products and install a few Shopify apps that will help you get sales. Many of those apps offer a free trial to make it easier for you to choose the best one.

The pros and cons of a dropshipping business

old school scale

Dropshipping offers a pretty easy way for aspiring entrepreneurs to enter the e-commerce world. You don’t need a fancy degree from a business school or large sums of money to enter the market. The trend of shoppers choosing e-commerce over brick and mortar stores also gives you a leg up. 

However, there are some shortcomings that accompany dropshipping’s great flexibility. Take a look at the pros and cons of dropshipping to see if this business model is right for you!

Benefits of dropshipping

Here are the reasons why you will enjoy being a dropshipper.

1. It’s very easy to get started with dropshipping

Once you’ve found quality products, you can launch your first dropshipping store in a couple of hours. Shopify makes the process very straightforward. Sure, you’ll need to keep improving your store once you see how your visitors behave on it, but it’s very easy to get things going. 

Since you don’t have to pre-purchase inventory, you can conveniently test new product ideas!

2. You don’t need big investments to start selling

With dropshipping, you don’t have to dip deep into your savings to launch your online store. The business model doesn’t require you to buy products upfront and you don’t need to invest in inventory or rent a space to store your products. The dropshipping model eliminates many of the usual costs that traditional retailers need to cover.

You can launch your first dropshipping store with as little as $290 in your pocket! Read our article on the costs of starting a dropshipping business to see how to be smart with a small initial investment in 2021.

3. Someone else takes care of shipping for you

One of the key benefits of dropshipping is that you don’t have to worry about storing and shipping your inventory. You can be in a retail business without ever touching the items you’re selling! Your third-party supplier takes care of the order the moment your customer buys a product from you. 

That being said, we still recommend you to check the quality of each product that you’re planning to sell and order product samples.

With dropshipping, you don’t need to: 

  • Pack and ship your products
  • Rent a warehouse
  • Manage your inventory
  • Handle returns

With all the extra free time on your hands, you can focus on polishing your store and bringing in new customers! Speaking of which, here are some tips on how to drive traffic to your Shopify store.

4. It’s easy to scale your dropshipping business

Since it’s a hands-off business, you don’t have to worry about having more work to do if you start selling more – it’s not you packing and shipping the products! As your business grows, you may want to invest more into your marketing to get even more sales, but the nature of your daily tasks won’t change much in general.

5. You can sell anywhere you like

Once you get into e-commerce, your location won’t limit you. As a dropshipper, you can sell your products anywhere in the world as long as the shipping costs are worth it.  Read our guide on setting up an international store to learn the best practices of going global.

6. You can delegate most of your work to apps

man relaxing balcony

You don’t have to assemble a team of marketing professionals or be a jack of all trades to start an e-commerce business. There are plenty of apps on Shopify that can help you automate your marketing process.

For example, you can run Facebook ads on autopilot instead of spending weeks trying to figure out the best practices of dynamic Facebook advertising. You can let the apps do the work while you take care of the rest of your dropshipping business. Check this list of advertising alternatives to Facebook Ads for more options.

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7. Dropshipping lets you be your own boss

Most importantly, dropshipping can give you freedom. It’s accessible from anywhere and there’s no one telling you what to do. Sure, success won’t happen overnight. But everything’s up to you! Instead of working in the typical hierarchical structure, you get to make the rules. 

Your online store can be a side-hustle or you can turn it into a full-blown business. You also get to reap all the rewards of your work! Every hour you spend making sales means more money in your account.

Cons of dropshipping

As with all business models, there are some disadvantages that come with shipping products from third-party suppliers.

1. Shipping can get a little complicated

If you’re sourcing your products from one supplier, then calculating the shipping costs is easy. However, usually, dropshippers use more than one supplier for different products.

In this case, it will get a tad more complicated to calculate the shipping costs when a single order contains items with different shipping charges. Also, multiple suppliers may have different systems of billing.

The workaround

Start with one supplier at first and build up later.

2. Little control over branding

When you dropship products, you can’t do much about their customization. Sure, you can have a nicely laid-out website with quality product descriptions. You can even arrange a high-quality photoshoot of your products if you want to go the extra mile with branding. 

However, like most dropshippers, you can’t do much about the packaging or the instructions that come with the products you sell.

The workaround

If you have some extra time on your hands, you can choose to dropship your products from Alibaba. It’s a website that allows product shipping directly from manufacturers. This way, you can make some changes to the product.

For example, some manufacturers will agree to add your brand name (if you want to have one) or customize your product packaging. 

Keep in mind that you’ll have to be willing to pay more upfront because changes usually require the minimum order quantity (MOQ), too. 

You can always try your negotiation skills, though! 

Alibaba platform allows you to contact suppliers and chat with them. Briefly explain the ways how better branding will improve your sales which would mean even more orders for the manufacturer, too.

3. Customer support can be a hassle

It’s great that you don’t have to deal with the inventory management yourself until you get a complaint from an angry customer. When the suppliers fail with your orders, you’re the one who has to take the blame. Be ready to apologize deeply and provide excellent customer service to avoid getting negative reviews. 

The workaround

Use customer support Shopify apps to be more efficient.

4. Your profit margins can be pretty low

Because of a low entry threshold, you’ll likely face a lot of competition. Until you have a solid customer base, you may need to keep your prices pretty low to stay afloat (you may want to sell those orthopedic dog beds at a lower price).

The workaround

However,  many merchants who keep their margins extremely low don’t pay much attention to the way their store looks. If you want to win over your potential customers, you need to do a better job with marketing than your competitors.

Make your store look like a legit brand, and people will trust you enough to buy at a slightly higher price.

The supply chain: how dropshipping works

shopify dropshipping chain
Image source: Shopify

Now that you know what dropshipping is and are familiar with its pros and cons, let’s look at the process itself.

In dropshipping, a supply chain is the process of a product moving from a manufacturer to a customer. 

Technically, the chain goes as far as the mining of the materials used. However, to understand the dropshipping business model, it’s enough to focus on the key players: manufacturers, suppliers and wholesalers, and retailers.

The supply chain consists of three parties:

  1. Manufacturer: the creator of the products you dropship; sells those items in large quantities to suppliers and wholesalers.

If you want to, you can get your products shipped directly from manufacturers. For example, instead of going to AliExpress to look for suppliers, you can contact manufacturers at Alibaba.

This way, you will pay less for your products because you skip the supplier. You’ll also be able to customize your branding a little too. 

But here’s the catch: manufacturers usually have minimum order requirements you’ll have to meet. This means you’ll have to invest large sums of money upfront, which can be risky when you’re still just starting a dropshipping business.

  1. Supplier/wholesaler: the person who buys products from manufacturers and sells them to retailers (dropshippers).

Suppliers usually specialize in a particular niche, making it easy for you to find the items you want to sell. They mark up the products a little. However, their purchasing minimums (if they have such) are usually much lower than those set by manufacturers, making it much more convenient for you.

  1. Retailer: the person selling products directly to the customer – you! This is the point of sale for your customers.

Once the product goes through the supply chain and is marked up several times, your task is to make sure your profit margins are high enough for you to earn money, yet not too high that your potential customers would choose your competitors instead.

FAQ

What does it mean to dropship?

Dropshipping is a type of business agreement in which a manufacturer or a supplier sends products directly to the customer at the request of a retailer who advertises and sells the items but doesn’t stock them.

Who is a dropshipper?

A dropshipper is a retailer that runs a business based on a product fulfillment method that doesn’t require keeping items in stock.

How do I start a dropshipping business?

mobile phone screen shopify

There are three main steps you need to take to start selling:

  1. Set up your online store (we recommend using Shopify).
  2. Find winning products. 
  3. Install Shopify apps to increase sales in 2021. Many of them offer a free trial!

How to dropship on Shopify?

Shopify owns a marketplace called Oberlo that you can use to find products to sell. With Oberlo, you can import products from AliExpress to your Shopify store with the click of a button. Your inventory is tracked automatically, so you don’t need to worry about a thing. 

The buying process is completely automated. Once your customer makes an order in your store, you simply need to verify that the details are correct. Then, the product is sent from the AliExpress supplier to your customer.

Is dropshipping worth it?

Whether you see dropshipping as a side hustle or you want to turn it into a full-time job, it’s definitely worth your attention. However, you should look at dropshipping as a proper online business if you want to make bank. You need to think long-term. One way to get started is to define your mission and vision of entrepreneurship.

Yes, it is. However, you need to find legitimate suppliers because you can run into people who illegally use other companys’ intellectual property, such as trademarked logos.

What does bulk dropshipping mean?

Bulk dropshipping is the process of ordering the products in large quantities and storing them in your home or a warehouse until you ship them out to your customers. This method is great because you have more control of packaging and shipping, but it goes against the usual purposes of dropshipping because you have to take care of the inventory yourself.

Why is dropshipping bad?

Some people look at dropshipping as an easy way to get-rich-quick and have unrealistic expectations. The truth is, you may have to deal with low margins, and it can take a lot of time to find the best products to sell.

However, if you work on your marketing strategy and your online store looks trustworthy, you can turn dropshipping into a full-time business. Merchants who are dedicated and determined to find the best advertising strategies can make a $1k per day with dropshipping.

Take a dropshipping course for Shopify to get started!

Excited to start your dropshipping business? Take a dropshipping course to get your Shopify store up and running. Courses can help you understand how to pick suppliers, find the best products, and much more. Check our list of 5 of the best dropshipping courses! This list also provides tips on how to establish your dropshipping business. Give it a go!

Julija

Julija Televičiūtė is a freelance content marketer. Specialized in copywriting, social media, and dog memes, she helps businesses get their message across and create content that sells.