How does dropshipping work? Benefits, challenges and getting started.
Online dropshipping can be a great ecommerce option for business owners restricted by inventory access or storage space. A fast, robust and scalable business strategy for today’s online world – dropshipping is quickly gaining popularity among B2B, B2C and side-business managers alike. Find out more about online dropshipping below.
What you’ll learn:
- What is dropshipping?
- How does a dropshipping business work?
- Benefits of dropshipping
- Dropshipping and its challenges
- How to get started with dropshipping
What is dropshipping?
Online dropshipping is a form of eCommerce in which the seller does not stock, or hold, the products sold to customers. All stock is instead purchased from a third-party supplier, who then ships and fulfils any customer orders.
How does a dropshipping business work?
In effect, the seller acts as a shop window, using their site as a virtual location for customers to browse products and place an order. However, all orders are handled by someone else.
The process might work something like this:
- A customer places an order with the seller for a product.
- The seller forwards the order information to the third-party stockist, such as the delivery address and product details.
- The third-party stockist packs and fulfils the dropshipped order.
The third-party stockist is often a wholesaler or a product manufacturer. Often, the seller may have a contract with the wholesaler that sees the third party recoup some of the sale profits, on top of the product’s wholesale price.
Benefits of dropshipping.
Online dropshipping can be a great option for sellers who don’t have the space to hold large shipments of inventory, or don’t want to spend time or money managing inventory lists and delivering items.
As an online dropshipping seller, your company doesn’t hold any physical stock. For this reason, the process only works with online eCommerce businesses and not those that hold inventory in warehouses or a physical store.
Dropshipping can work whether you’re a B2B or B2C (or both) focused business too – as long as a wholesaler can stock and deliver your product range, you can dropship pretty much anything.
The benefits of online dropshipping include:
- No physical store or inventory warehouse needed by the seller.
- All orders and deliveries are handled by a third-party, saving you time and money.
- Lower start-up costs, there’s no need to rent a warehouse, shop floor or storage space. Nor do you have to buy inventory ahead of customer’s placing orders.
- All you need is a deal with a wholesaler and an eCommerce window in which to sell your products.
- An online dropshipping business can be easily scaled. So long as there is inventory at the third-party warehouse, you can upscale your business to handle orders of any size.
- Nor do you have to limit your product range to one warehouse, wholesaler or third-party supplier. So long as your third parties are comfortable, you can offer a range of products from multiple sources on your eCommerce platform.
- By dropshipping, you won’t need to handle any inventory management, delivery data or new stock orders – that’s all handled by your chosen third party.
Dropshipping and its challenges.
Though online dropshipping can be a great option for sellers without the physical space for stock, or limited start-up capital, it’s not without its challenges.
Challenges presented by dropshipping vs direct shipping include:
Lower profit margin
- As you’re effectively paying a third party to keep your stock, handle orders and deliver items, you’ll find profit margins are reduced in comparison to selling stock directly.
- You’ll be relying on a third party to handle deliveries and customer service, which means if anything goes wrong, you can’t handle customer issues yourself.
- Your chosen third-party company will also act as a representative of your business. After all, they’ll be handling deliveries. So, it’s important to choose one who represents your company values.
Is dropshipping right for you?
How to get started with dropshipping.
You can get started with online dropshipping in a few easy steps.
Choose your niche.
Competition in the dropshipping sphere is fierce. Choose your niche well. And do your research beforehand. Look at what products are available, or if certain kinds of items aren’t delivered to your area by local or regional sellers.
Consider how easy it’ll be to find a supplier for your items. Particular items, such as computer parts or specialized automotive parts, may be more difficult to source a wholesaler for compared to, say, garden tools.
Likewise, it’s important that you choose products with a prospect for continued demand. It’s no good choosing to sell something that might be outdated or unavailable in the near future.
Get your website up-and-running.
Create your eCommerce website and make it easy to use and navigate. Your site is not only your shop window, but also the face of your business. So, it’s essential you get it right.
Utilize tools like a back-end CRM or data management product to gather information about the customer order process. This way, you can see who is buying what and start assembling a useful profile of your customers.
Keep a close eye on your finances.
Sound money management is key to any successful business – online dropshipping is no different. Monitor, evaluate and streamline both incomings and outgoings regularly.
Regularly search for more affordable suppliers, or if you have a chosen supplier you’re happy with, see if they’ll match better deals you may have found elsewhere.
Monitor incomings to maximize profits. You might expect to spend more than you make initially as you set the business up, but regularly making a loss will leave your business position untenable long-term.
Find a supplier.
Do plenty of research before choosing a supplier. Not only do you need your supplier to have plenty of stock, but also to be efficient and amenable in fulfilling deliveries.
Consider what happens if your supplier goes out of business, or if particular items are no longer stocked. Having distribution deals with several suppliers can counter any issues and one can always fill the place of another should particular items be unavailable.
Online dropshipping is entirely legal but can present legal issues if managed incorrectly.
Your wholesaler’s location, or where they store their stock, will affect how you pay tax on your items and sales. You’ll need to ensure you’re operating within the legal guidelines and jurisdiction of whichever area you and your stock is located to ensure you are compliant with the law.
Likewise, it’s good practice to ensure that your supplier is selling reputable stock – fake or copyright-infringing items could land you in legal trouble. And, as the seller, you will be held legally responsible.
Why Adobe Commerce for dropshipping?
Launching a successful dropshipping site hinges on choosing the right platform. Adobe Commerce, powered by Magento offers a variety of features, such as catalog management tools, which make it easy to keep track of extensive inventories, even if you don’t stock the products yourself. Other features include:
- Powerful system for tax calculation, allowing retailers to factor in all variables when working with dropshipping suppliers.
- Analytics and reporting features help retailers track orders and maintain profitability at any scale.
This is particularly important for businesses which rely on the dropshipping model in order to achieve a high sales volume while maintaining a small staff.
Ready to get started?
To learn how you can make the most of Adobe Commerce, powered by Magento, request a personal consultation.
How long has dropshipping been around?
Dropshipping may be closely associated with eCommerce and the digital age, but it actually goes back way further. The origins of the concept of dropshipping are the 1960s, when mail order catalogs were the equivalent of today’s online shopping. Like a website today, the mail order catalog was a ‘shop front’ for stock stored in warehouses and sold by a third party.
What’s a dropshipping store?
A dropshipping store is a ‘store front’ or ‘shop window’ that sells stock it doesn’t currently hold. Instead, when people order products from the dropshipping store, the stock is provided by a third party which owns and holds the stock elsewhere. The dropship store owner purchases the stock, and the third party fulfils the order.
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