What is dropshipping & How does it work? | An Ultimate Guide
Dropshipping: Explore your Gateway to E-commerce Success! Start, Sell, and Succeed with Minimal Investment and Maximum Profit.
April 25, 2013
With current market trends and e-commerce, new doors of opportunity have opened for aspiring entrepreneurs where no upfront business investments are required.
Today, the retailers do not lease the warehouse, go around to handle the supply chains or manage inventories for a new business. Instead, they prefer to follow a business model which requires minimal capital investment. And dropshipping ventures are the best example of a small capital investment business.
Dropshipping works on less investment with decent profits, where the retailer sells products through a supplier without maintaining stocks. The supplier is then responsible for on-time deliveries to the customers.
Let’s discuss dropshipping, its pros and cons, how an entrepreneur can start a dropshipping venture, and some crucial tips for a successful dropshipping business.
What is Dropshipping?
Dropshipping is a simple process in which the seller hires a supplier or manufacturer providing them the shipping details for further delivery of shipment to the customer. It is a retail model in which the business does not keep inventories or products in stock. Instead of holding inventories, the seller passes on the order to a third party (either a manufacturer or wholesaler), who is then responsible for delivering it to the customer.
If you follow the right approach, dropshipping can help you build a successful and growing business. Here is everything you need to know about dropshipping before you make it a part of your business.
How does Dropshipping work?
Dropshipping is a great option for aspiring entrepreneurs who wish to grow as sellers. They do not need to burden themselves with stock maintenance. All they need is to find the right supplier who can hold products for them and ship the customer orders.
The general process of dropshipping works as follows:
1. Choose Products
To choose the product list, you should be clear about the business concept. You need to select products that you wish to feature in your online store from the manufacturer’s catalog. Initially, you can start with limited product options. Afterwards, you can add a diversified range of products to meet the market trends and target audience.
2. Setup the Online Store
In the next step, you have to create an appealing and user-friendly website or you can add products to online marketplaces. There are several e-commerce marketplaces available, from which you can pick the popular one. You need to showcase a wide range of products with product descriptions and images. This will attract a larger audience.
3. Customer Places an Order
The customer browses your product list, picks the required products and creates an order. As soon as the customer places an order on your website or marketplace, you will receive the order details and shipping address. You have to then prepare the customer details for the supplier.
4. Forwarding the Order
Once you have the order details, you can forward it to the supplier, including the shipping address and delivery details. They will arrange the product from their stock to fulfill the customer requirements with an estimated delivery date.
5. Supplier Processes the Order
Once the supplier receives the details of the order, they start with product packaging. In the order packing, they have to maintain the product quality, product tags and bills. Then, the order is shipped to complete the shipping process. The shipment will then directly reach out to the customer.
6. Customer Receives the Product
The customer finally receives the product delivery on their doorstep. They can share the reviews or ratings on the product. Further, for any queries or complaints, and return or replacement, the customer can contact the dropshipper, and then dropshipper will reach out to the supplier.
Benefits of Dropshipping
As of now, you have understood the process and working of dropshipping well. So, it is time to know why dropshipping is becoming a popular business model. Here are some of the most important benefits of Dropshipping:
1. Low Startup Costs
One of the biggest advantages of dropshipping is that it can be launched with a small capital investment. The initial investment is minimal in comparison to traditional retail methods, as you don’t have to maintain stocks. This benefit attracts a lot of aspiring entrepreneurs in dropshipping ventures.
2. Wide Product Range
Retailers can offer a diversified range of products as there is no constraint on the physical storage of products. With more product options, the chances of selling the products also increases. So, new categories and products can be experimented under the dropshipping business.
3. No Dependence on Location
Dropshipping is a successful business that anyone can run just by having a good internet connection. The main things required in dropshipping are communication with suppliers, successful deliveries, and customer support. So, a dropshipper can use any location for operating a business.
4. Reduced Risk
As there is no inventory management, there is no risk of unsold products affecting the invested capital. This minimizes the financial risks and allows better cash flow management. This factor is one of the main reasons for aspiring entrepreneurs to be a part of the dropshipping business model.
5. Easy Scalability
By following the traditional retail business model, if the retailer wishes to scale the business, the manual hard work increases. But it is completely different in the case of the dropshipping model, as most of the work is done by suppliers. There are several e-commerce platforms that can be used for dropshipping.
Challenges of Dropshipping
Dropshipping comes with several benefits making it a very attractive model for online businesses, but it has some downsides too. Before jumping into the pool of online businesses, check out these challenges that you might face in the dropshipping business.
1. Supplier dependence
In the dropshipping business model, the success of a dropshipper completely relies on the reliability and efficiency of the suppliers. In case anything happens at the supplier end, the dropshipper has to take responsibility and provide satisfactory customer support. If a customer experiences issues like missing items, packing issues, or bad product quality, it can damage the business reputation of the dropshipper.
2. Low profit margins
As dropshipping is a business with minimal investment, there would be many competing businesses setting up their dropshipping stores resulting in thin profit margins. In this case, a dropshipper with better product quality and service will survive and grow to establish the brand name.
3. Inventory issues
When a retailer stocks up the inventory, it is easy to keep track of inventories. But when the products are being outsourced from several warehouses (who are fulfilling orders for other merchants also), the inventories change on a daily basis. Nowadays, with the tracking apps, if any product is unavailable, it can either be unpublished from the e-commerce or quantity is set to zero.
4. Errors at the supplier end
Have you ever encountered a situation where you have been blamed for something which was not your fault, but you still had to take responsibility? It can sometimes happen in the case of dropshipping when the supplier provides low-quality material or packing. This may harm the brand’s reputation.
5. Shipping complexities
When a dropshipper works with multiple suppliers, product shipping will be complex. The dropshipper has no control over the supply chain. With multiple shipments of the products, complexity increases, and sometimes the drop shipment also becomes difficult to calculate.
Strategies for Successful Dropshipping Business
For a successful and profitable dropshipping business, an entrepreneur can follow several approaches and strategies. Each approach comes with pros and cons, so it is important to find the suitable strategy. The strategies will work according to the business resources, expertise and goals. Some common approaches to grow dropshipping business are:
1. Research on Market Trends
Market trends always change. So, it is better to research and study the market trends before investing in any business. When you are entering the e-commerce world for the first time or launching a new product, it is good to test it with a trial period by investing in dropshipping.
2. Strategic Shipping
When you are running an e-commerce business, shipping complications are a major challenge. The delivery of product involves shipping costs and fees, which hikes when the warehouse and delivery location are far. So, it is better to use the dropshipping service instead of opening a new facility during the trial period of a product.
3. Prioritize High-maintenance products
While shipping, it is important to handle the products with care. But some products need more attention and some involve more cost to stock and ship than others. These products can be categorized as high-maintenance products.
- Large products
- Heavy products
- Fragile products
- Valuable (jewelry, antiques, etc.)
All these product categories require special assistance and handling expertise. So, it is better to choose dropshipping instead of stocking up.
How to Pick the Best Supplier for Dropshipping?
Choosing the best supplier for dropshipping is a critical step in building a profitable and successful dropshipping business. Once you find the right supplier, it will impact the customer experience, quality of product, and overall success of the business. Here are a few questions that you can ask yourself before signing on with a new supplier:
- Are there any reviews or references available online?
- Do they insure orders or products?
- Do they provide satisfactory customer support?
- What approach do they follow to handle order returns and damaged products?
- How long do they take to ship the order and deliver it to customers?
Difference between Dropshipping and Regular Mail
Now, you have clarity of the differences and similarities between regular mail and dropshipping. It will be easy for you to pick the suitable option.
Start your Dropshipping Venture with Compu-Mail
At Compu-Mail, we can help aspiring entrepreneurs establish a successful dropshipping business. Although dropshipping cannot work magically to eliminate all stops in the mail flow, it significantly reduces several. The result is a shorter delivery time of 2-5 days instead of 7-10 days.
With our expertise in mailing and strong partnerships with USPS, FedEx, UPS, and Canada Post, we can offer you valuable and expert assistance in setting up your dropshipping venture. Through these strategic partnerships, you can benefit your business with low shipping rates and attractive discounts on shipments. Moreover, our tracking options will allow you to monitor orders and deliveries effectively, ensuring that our Client Service Representatives (CSRs) meet shipment deadlines and provide top-notch service.
Q: What is a Dropshipper?
A: A dropshipper could either be an individual or retail business who follows the dropshipping model of business. The main role of a dropshipper is to sell products without holding inventories, instead they find suppliers or manufacturers who complete the shipping for them.
Q: Is dropshipping profitable?
A: Yes, dropshipping can be profitable. It is a good side business with a decent income for aspiring entrepreneurs. Once the seller will invest time, money and effort, business will scale, increasing the sales and profits. The minimum profit ranges between 10%-20% for every order.
Q: Are there any legal or regulatory considerations to be aware of while dropshipping?
A: Yes, there are some legal and regulatory considerations when you are becoming a part of the dropshipping business, and it varies according to the locations. When you are working with Compu-Mail, all your processes will be streamlined by our experts as customers trust our experience and expertise while navigating through legal and regulatory requirements.
Some of the key considerations are:
- Business Structure and Registration
- Sales Tax and VAT
- Import Duties and Customer Regulations
- Product Regulations
- Privacy and Data Protection
- Business Permits and Licenses