Dropshipping is a popular way for ecommerce businesses to fulfill orders without having to hold inventory or pack and ship any orders. Learn more about what dropshipping is, how it works, and the pros and cons of this order fulfillment method.
Dropshipping is a method for fulfilling retail orders through a third-party supplier. It means ecommerce stores don’t need to keep any inventory because when a customer places an order, the order is packed and shipped directly from the supplier. Wayfair is an example of a brand that uses dropshipping—while Wayfair is the retailer, the goods sold through the brand are shipped from the supplier who manufactured the items.
It sounds straightforward—but adding another link to your supply chain brings with it some additional factors for ecommerce business owners to consider.
The dropshipping process consists of a few steps behind the scenes which allow consumers to place their orders without necessarily being aware that you’re using dropshipping.
Dropshipping shares some similarities with third-party logistics (3PL) or ecommerce fulfillment services, but they’re different concepts. With dropshipping, the manufacturer of the products is responsible for shipping them to your customers. 3PL warehouses hold products from many different manufacturers and are solely responsible for storing, picking, packing, and shipping products for multiple ecommerce stores.
What does the dropshipping process look like, exactly? For each order a consumer places, there are three main stages involved:
A consumer places their order through your ecommerce store and pays you the retail price.
Your consumer's orders are forwarded to your dropshipping supplier, and you pay them the wholesale price. Depending on your business model, you might work with one or multiple suppliers.
Your dropshipping supplier ships the product directly to your customer.
Dropshipping is an easy way to enter the world of ecommerce. It brings many benefits to retailers, including lower costs, convenience, and flexibility.
Dropshipping saves ecommerce brands a significant amount of money when it comes to purchasing and storing inventory. This initial cost can be a barrier to many people wanting to enter the ecommerce market. With dropshipping, you can start selling directly to customers without holding any stock. You also don’t need to pay warehousing staff to pick and pack orders. And if you’re focusing on seasonal products like clothing or decorations, you don’t need to worry about any losses from unsold products.
Trends can change in the blink of an eye—and with dropshipping, you can quickly pivot to capture emerging markets and business opportunities. Rather than find yourself stuck with 5,000 cat ear mugs that no one wants anymore, dropshipping means you’re never at risk of holding excess stock. As long as you find a supplier with plenty of trending products to choose from, you can always add new products to your store or create a new store that taps into a specific niche.
With a business model based around dropshipping, you can run your business from anywhere with an internet connection. Because you don’t have to manage a warehouse, perform inventory checks, or chase late deliveries, you can work from home, the office, or even the nearest coffee shop. Removing these tasks also leaves more time to work on marketing your business—an essential component to ecommerce success.
As with any business model, there are also some downsides to dropshipping. The key is working out whether any of these outweigh the benefits for your business.
While dropshipping can be profitable, it’s also important to recognize that profit margins can be lower compared to other order fulfillment methods. This is because you’re adding another link to your supply chain—the dropshipping company. Dropshipping lowers your costs because you don’t have to store and ship items yourself, but your margins will also be lower because you’re paying another company to fulfill your orders. This downside is even more exaggerated in a highly competitive niche. Many ecommerce brands that use dropshipping end up spending a significant amount of money on marketing and advertising to drive sales, which again impacts the bottom line.
Dropshipping relies on a third party to pack and fulfill your customers’ orders. You won’t have any control over the supply chain, delivery delays, or quality assurance. If you’re dealing with multiple suppliers, managing these obstacles can become overwhelming. If consumers receive a defective or incorrect product, it’s up to you to resolve it. After all, bad reviews will affect your business reputation—not your supplier’s.
Creating a positive customer experience is vital to business success—and this extends beyond when your customer receives their product. Many customers want to know what your returns and refunds policy looks like before purchasing a product. Returns to dropshipping suppliers add another layer of complexity. Returning faulty items can sometimes cost more than sending out a new item. Generally, most dropshipping companies won’t cover returns shipping costs, so you’ll have to absorb this.
Ready to build your ecommerce business around the dropship model? If you’re new to ecommerce, we’ve answered all your questions.
Setting up a dropshipping business can cost less money than storing and shipping products yourself, but it still requires time and effort. As a rough guide, you’ll need to perform the following steps:
Whether your dropship business becomes profitable depends on a huge range of factors, including your website, the products you choose, your marketing and advertising budget, and the reliability of your supplier. But many businesses can make a good profit from dropshipping, which is why it remains a popular business model.
The answer will depend on several factors, including if you’re going to take advantage of the free trials offered by many ecommerce platforms, how much you’re going to invest in marketing, and the cost of your website’s domain name. But as a rough guide, you can typically get started on your dropshipping business with an investment of $200 and up.
dropshipping is a legal method for fulfilling customer orders. Even so, it’s always sensible to use a dropshipping agreement contract with your supplier that outlines key terms you and your supplier agree on. This might include prices, shipping standards, returns, and anything else you want to include.
The money made by a dropship business comes from the margin between your retail price and the price you pay your supplier. Most dropshippers make 10 to 30 percent profit from every sale. Don’t forget, you’ll still need to invest in marketing plus other fixed costs like subscription fees and credit card processing.
Dropshipping is a strong global market that doesn’t show any signs of slowing down. In 2020, the global dropshipping market was worth $128.6 billion. By 2026, the market is expected to expand to $476.1 billion. The COVID-19 pandemic created a strong demand for dropshipping, with many more consumers placing online orders and many business owners looking for new ways to make money. While only you can decide if a dropship business is worth it for your brand, the global demand from consumers is there.
Airhouse helps direct-to-consumer (DTC) companies fulfill their orders quickly and efficiently. Our deep expertise means we’ve got the knowledge to help you scale your business. Leave the logistics to us, and enjoy creating a profitable dropshipping business that works for you—not the other way around.
Connect with a fulfillment expert at Airhouse to learn how we can help streamline your dropshipping business and maximize your profits at the same time.
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