What is dropshipping and how it works?

If you’re looking for a way to make money online, you might want to learn more about dropshipping and see if it is a fit for your need and goals. In this post we’ll discuss what is dropshipping, if it is worth or not to work with dropshipping, where and how to create your online store, and how to find suppliers for your products.

What is dropshipping?

Dropshipping is a business model created to free the retailer from handling and dealing with inventory. In other words, it is a retail fulfillment model that after a sale, the retailer buys the item from a third party supplier and have the merchandise shipped directly to the end user.

The only difference from a regular retail business model from dropshipping, is that the retailer does not need a stock, because the orders will be automatically sent to a third party supplier to be fulfilled.

Benefits of having a dropshipping business

After people understand what is dropshipping, they get the feeling on why it is so attractive to young entrepreneurs. The main reason for that is because in this model, you do not need to build a physical store and spend a lot of money with inventory. Instead, you can create an online business to sell products that will be produced and shipped directly from a third party supplier, keeping your costs as low as possible. Sound good right? Check out some other benefits we pointed out for you.

What is dropshipping - represented by an Illustration of a drone delivering a product.
Only an illustration. Drones are still not delivering in dropshipping business model, but maybe in the future.

1. Easy and simple to get started

It is much easier to work with and run an e-commerce when you do not have to deal with inventory issues. By having a third party deal with the physical products of your online store, you won’t have to worry about:

  • Manage a warehouse
  • Storage costs
  • Manage orders
  • Packing orders
  • Shipping orders
  • Manage stock level

2. Low initial capital need

Compared to regular retail business, dropshipping requires a really small amount of capital to create your business. Since you do not need to purchase inventory unless a sale is made and already paid for. This gives you the chance of investing more in paid and targeted ads, to boost your sales and gain market share within your specific niche.

In fact, the costs are so low that many dropshipping business are runned in a home base environment, because all you need is a website to create your online store and send traffic to your pages to sell the products. If you still do not have or own a website but want to get started, you can check our free tutorials on how to create your own website by clicking here!

3. Easy to scale up

When you’re running a traditional e-commerce and have to own and manage your stock, growing is always a challenge. You have to match the increase in sales with your inventory, and that will mean extra work on packing and distribution as well.

The fact that dropshipping uses a third party company to manage and distribute the products for you, makes your life easier when you’re advertising and increasing your sales. Dropshipping suppliers that usually works with this business model have a great infrastructure to handle larger orders, and because of that all online stores working with them can benefit from it.

4. You can work from anywhere you like

Were you’re located does not matter for this business model, you just need an internet connection to put your products and promote them online, as well as to communicate with your dropshipping suppliers and/or with your customers.

Disadvantages of having a dropshipping business

By now I believe you already undestood what is dropshipping and how good it could be for you having into consideration all the benefits listed above. But to keep it real,everything in life has its disadvantages, and it is good to know them in advance so you can make up your mind to enter or not in this business model and mitigate the downsides of it. For this reason we listed a few points here for you.

1. Low margin rates

Many online stores tend to opearate on really low margins so they can leverage their sales. Another thing that will reduce your margins is the fact that sales will only come in if you build a brand or spend money advertising your products online, the key thing in this business is getting traffic to your pages, and that will cost you money.

2. High competition

After people discover what is dropshipping and its advantages, specially due to the low cost and barrier to entry in a dropshipping business, many people join this market. Therefore the competition in this niche is really high and it is your challenge to build a nice brand and differentiate your product from your competitors if you want to stand a chance.

3. Supply chain complications

Mistakes and problems during the fulfillment process can happen even with the best dropshipping suppliers in the market, and you need to take the responsibility for these mistakes, apologize and give the support needed for your customer to get the product.

At this point it is really important to choose the best dropshipping suppliers for your business, because the less mistakes and problems with fulfilling the orders, the best for your and the image of your brand.

4. Customization options are limited

Most of the suppliers within the dropshipping business market offer little or no customization options for you to differentiate your products from your competitors.

It is quite hard to compete with custome-made products if your customer can find your products from every single online store out there fighting in a price battle to sell their similar products.

How to choose the best dropshipping suppliers?

Now that you know what is dropshipping, you’re probably wondering, how you can choose the best suppliers to have the least amount of problems with production or shipping issues to deal with.

The main points you want to look at are the quality of the products, the production capacity in case you want to scale up, and the shipping time and conditions. It is always good if you can purchase something from this supplier so you can have the customer experience and test the points above.

To find the best supplier to work with, we came up with a few questions to help you choose from your list of suppliers.

  • from the sale to delivery, what is the time frame they can fulfill the orders?
  • Can you find reviews from this supplier online?
  • How do they deal with damaged products or return and exchange of products?
  • How good is their customer support?

Want to make it simple?

You can create an online store using a plugin that links products from aliexpress directly to your store. This plugin makes you life super easy to set up an e-commerce store using WordPress and Woocommerce. You can easily import products and reviews from Aliexpress and build a great looking webpage. Click here if you want to check out this plugin and how it works.

Other similar business models

Still not so happy after figuring out what is dropshipping? o worries, there are still some other similar business models that offer you the possibility of customizing your product or by adding your brand logo or your own designs and graphics to the products.

Print on demand

Print on demand is a mix between two worlds, the dropshipping and the custom-made products. It allows you to create branded and customizable products for your online but with the practicality of the dropshipping business model of not holding and managind production and inventory.

A great example of a company working on the print on demand method is Printful, as in image below. We’ll soon create a full tutorial on how to create an e-commerce store using WodrPress/Woocommerce and Printful.

Printful website screenshot. Print on demand model and dropshipping business.

Selling on Amazon or Ebay

Amazon FBA and Ebay are platforms where you can sell your own products and reach a great amount of buyers. Both platforms can be a little bit more challenging for beginners, since you’ll have to purchase an inventory to sell. The main difference between Amazon FBA and Ebay, is that Amazon will take care of the fulfillment of your products, just keep in mind Amazon will charge you a $39 per month plus selling fees, but you won’t have to deal with packing and shipping the orders. Ebay is the opposite, you won’t have any cost in advance, only after you sell the product you’ll be charged 10% of the final amount sold, but you’ll be responsible to manage your inventory, pack and ship the orders.

You can have 2 major advantages using these two methods, more customization options/branding and better profit margins. To show you what kind of profit margins we are dealing with, let’s put similar products from websites usually used to purchase the items and items on Amazon.

Price example at Aliexpress

Paracord bracelets are just one example that you can find similar products in Aliexpress and Amazon. You can check it out yourself for other products that you’re interested in.

In this case, we found the bracelet for $2.16 the unit, but if we buy more than 20 we get extra 5% off, plus $2.20 for shipping costs. So doing the math by purchasing 20, the unit would be around $2.16. Let’s see how much it costs a similar product in Amazon.

Price example at Amazon for similar product

A similar product, that just by adding a simple logo and becoming branded can be sold for $9.99. Does that sounds good for you? It gives you a diference of $7.83, which is way more than enough for you to print your logo on it, cover the Amazon costs, pay taxes and still get a good margin for you.

As you can see from the example above, the margin is pretty good right? Just by printing out a logo from a nice looking brand, people can sell the exact same products from ali express for a higher ticket. This could be a nice option if you’re having trouble to find a nice product in the dropshipping business and wants to customize more your products to your brand style.

Now that you know what is dropshipping, Amazon FBA and simply selling on Ebay, you can choose the best fit for you and your business! Let me know in the comments below which path you’re choosing and why.

Post Cover Photo by Kelli McClintock on Unsplash