What is Dropshipping?

With the advent of the internet, commerce has slowly transitioned to e-commerce.

It is more convenient to sit in front of a laptop or lie down with a mobile phone and order what you want. You save time, energy, and money when you shop online.

There is no reason why people do not want to shop online. It is obviously better than physically going to stores and shopping for products. And, with the advances in technology, there are more and more reasons every day to shop online from where you are.

Capitalizing on the online shopping trend among consumers, a lot of businesses have been built around e-commerce. It is no wonder that Amazon which is the world’s largest e-commerce store is among the top 10 largest companies by market cap, flaunting a market cap of nearly $2 trillion.

As more and more people willingly shop online, there is huge potential for new e-commerce businesses to grab a share of the giant e-commerce market that is set to grow exponentially in the coming years.

New businesses and aspiring entrepreneurs who are looking to start their e-commerce businesses are looking at drop shipping as an exciting option to explore.

What is Dropshipping?

Dropshipping is a retail fulfillment method where the store that sells the product doesn’t keep stock of the product. When a customer places an order, the product is shipped directly from the manufacturer/distributor instead of the retailer.

This has a major benefit for retailers — they don’t have to maintain an inventory of products.

This is a huge positive for retailers as usually there is a lot of effort needed to ensure proper warehouse functioning to make sure products ordered are packed and shipped to the customers in time. There are a lot of moving parts here and any slip-up can be costly and can set back the retailer and invite not-so-pleasant responses from waiting customers.

By letting the manufacturer/supplier handle the order processing, the retailer can focus better on advertising, marketing, and expanding into other product categories to grow the e-commerce business.

How Does Dropshipping Work?

what is dropshipping

To understand how dropshipping works, let us view a typical order from the point of view of the customer and the point of view of the drop shipper.

From the Point of View of the Customer

Let’s say “Jane” places an order for a product from your online store.

Step 1: Jane places an order on your online store

Step 2: Jane receives order confirmation on her email and phone number

Step 3: Jane receives order tracking details on her email when the order is shipped. The order is usually shipped within 2 days of placing an order.

Step 4: Jane receives her product

For Jane, all she did was place an order and wait for it to be delivered to her. She also got the tracking details to better track her order and see if it is on track to be delivered by a given date.

She does not know anything regarding the association between you (retailer) and the wholesaler/distributor.

From the Point of View of the Drop Shipper

From your point of view, as the operator of the dropshipping business, these are the steps involved when an order is placed on your online store.

Step 1: Order details of customer received via email. This is made possible with the order management software you’re using.

Step 2: You share the order details of the customer with the supplier.

Step 3: The supplier receives the order details and prepares the order for you.

Step 4: The supplier ships the product to the customer under the shipping label and name of your online store. The supplier also shares with you the tracking details for the shipment.

Step 5: You share with the customer, the tracking details you’ve received from the supplier.

Step 6: The customer receives the product with the label and name of your online store and believes that you’ve shipped the product.

As a dropshipping business, your job is to,

  1. Take the customer order and hand it over to the supplier.
  2. Take the tracking details from the supplier and share them with the customer.

If everything goes smoothly, you will no other task other than these two.

However, if you’re working with an unreliable supplier, you may run into issues with delayed orders and have to ramp up your customer support team to handle queries from customers.

Pros and Cons of Dropshipping

Like any other online business model, dropshipping too has its pros and cons. As an aspiring new entrepreneur, you have to weigh them both and decide if dropshipping is for you. While a lot of people have preconceived notions about online businesses and have their own reasons, it doesn’t hurt to do your own research and come to a conclusion whether or not you want to try dropshipping.

Pros of Dropshipping

  1. Easy to Start

Dropshipping doesn’t require a lot of upfront work to get started. There is little to no investment required and anyone can start an online dropshipping store easily. All it takes is a few hours to set up things and get a dropshipping online business started.

  1. Very Little Capital Requirement

Starting a dropshipping business requires very little investment. Usually, all that is needed is a laptop and an internet connection. Everything can be managed from your laptop and even when the business grows, you don’t need to a lot of investments to keep it going.

  1. Easy to Grow

Since you do not manufacture products yourself, you can easily expand into other product categories by finding the right supplier for the product. Since there is no need to handle inventory, the process of growing a dropshipping store is relatively easy compared to stores that handle inventory.

  1. Flexibility

Operating a dropshipping store gives you a lot of flexibility. If you can automate the processes and ensure everything goes smooth without you having to actively monitor it, you can free up your time and focus on other projects or things that interest you. There are a lot of e-commerce millionaires who have built multiple successful dropshipping businesses that require little time to manage, allowing them to travel the world and live their life.

Cons of Dropshipping

  1. Smaller Margins

As a dropshipping business, you have to settle for slim margins. You should note that there are certain niches where you will have better margins, but it would not be close to anything you’d make if you have your own branded products and sell them to customers. Since convenience is prioritized over margins, you will be working with slim margins as a dropshipping business.

  1. No Control over Products

Since you’re the retailer acting as the middleman between the supplier and customer, there is no control over the products you sell. You do not get to physically see the product before it is shipped to the customer. This is why it is very important to choose a good manufacturer/supplier that has good processes and quality checks in place so that your customers get the best products every time they order from your store.

  1. Customer Service Problems

Since the manufacturer directly ships the product to the customer and has no communication whatsoever with the customer, the customer believes that you are the one doing all the work. This is the magic of dropshipping. The customer doesn’t know that you’re the retailer buying from a wholesaler and selling them the goods. So, when there is a problem with a purchase, customers turn to you to resolve their problems. From your point of view, since you had not physically shipped the products, you aren’t aware of the problem and have to get in touch with your supplier to have the issue fixed. If there is any communication gap between you and the customer or you and the supplier, the whole customer service experience turns bad. This is a challenging aspect of dropshipping.

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