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What is Dropshipping: A Detailed 101 Guide

Dropshipping is an online retail order fulfillment model where, you purchase products directly from third-party suppliers and ship them to your customers.
What is Dropshipping: A Detailed 101 Guide
Jules

By Jules

 

May 5, 2020

Dropshipping began gaining ground as a useful eCommerce business model in 2006, when AliExpress started to gain popularity in the United States. But, at that time, only a handful of entrepreneurs could answer the biggest question around this service: what is dropshipping?

As a result, only a few savvy retailers were able to take advantage of the low prices offered by AliExpress to launch online stores.

Fast forward to 2020 and dropshipping has grown into a highly lucrative business model in the eCommerce industry with 33% of online stores now using it as a fulfillment model. Gilt, Zappos, Fab, and Wayfair are some of the eCommerce giants who have built successful businesses with a dropshipping business model.

In this guide, we are going to look at the definition of dropshipping, the pros and cons, how it works and how to start a business.

So, is dropshipping worth it?

Let’s dive right it.

AliExpress Dropshipping Website

So What is Dropshipping?

Dropshipping is an online retail order fulfillment model where, instead of stocking products in your store, you purchase them directly from third-party suppliers and ship them directly to your customers.

This online business model means you don’t have to deal with a number of complicated issues in managing an eCommerce business, including finding a warehouse to store your products, maintaining inventory, and worrying about shipping directly.

What makes this model attractive to entrepreneurs is that it’s easier to set up than other types of eCommerce business models, and requires less capital to get started.

With just an internet connection and a laptop, you can build a successful and lucrative business by opening an online storefront and essentially acting as a middleman to bridge the gap between customers and wholesalers. This saves you the cost of having to rent a physical store, buy a huge initial stock, and pay overhead costs associated with the traditional retail model.

But, is dropshipping legal? The good news is that it’s a perfectly legal fulfillment model and many retailers from around the globe have taken advantage of its simplicity to build successful brands that drive customer satisfaction around the world.

Pros and Cons of Dropshipping

Like any business model, dropshipping has its ups and downs. Of course, it has many beneficial aspects that have made it increasingly more popular than traditional business models; but, there are certain challenges, too.

So, what is dropshipping offering as a business model?

Pros

  • Easy to set up: You can set up your online store just in three simple steps. Just identify your products, partner with a good third-party supplier, set up your online store, and list your products for sale. Even if you are a newbie in the eCommerce retail space, you can understand and implement this model with ease.
  • Requires little start-up capital:  This fulfillment method eliminates the operational costs of a traditional retail store, such as purchasing inventory and renting physical brick-and-mortar retail space. The only real cost you incur is the expense of setting up and hosting your website, which is next to nothing compared to traditional retail models.
  • Low risk: Since you don’t keep inventory in stock, you aren’t under any pressure to sell and you don’t have to worry about outdated inventory. Whether you sell products or not, you don’t really have anything to lose - you just won’t be making any money!
  • Sell a variety of products: It’s up to you to decide how many products you want to sell.  No matter your niche or the number of products you choose, there is a dropshipper out there for every product.
  • You have more time and resources to scale your store: Your supplier packages and ships your products to your customers while you earn profits. This means less overhead costs and more time to develop your online store.

Cons

  • Lower profit margin: Many stores sell products at low prices, and due to fierce competition, you might be forced to do the same to compete. Although you have fewer overheads, you may end up having a much lower profit margin.
  • You bear the liability: If your supplier messes up the delivery process, the customer will see that as your fault and you will have to bear the liability because they purchased the product from your website.
  • Low level of control: The supplier handles and ships the products. That means there is no room for personalized branding, packaging, freebies, or notes to accompany the order and drive more customer satisfaction. Also, you don’t have control over the inventory, which can lead to order cancellation or delivery delays when you sell products that are out of stock on your supplier’s store.

Related: Dropshipping vs Owning Inventory: What Will Work for you?

How Does Dropshipping Work?

The dropshipping process and business model is quite simple. This business model is a partnership between a retailer who sells products online and passes the customer orders to a supplier who manufactures and/or warehouses the products.

The third-party supplier then packages and ships the orders directly to the customers in the retailer’s name.  Almost any product can be dropshipped, but to succeed with this business model, you need to pick the right products and market them to the right audience.

Some of the most profitable dropshipping niches are:

  • Tech supplies
  • Jewelry
  • Pet products
  • Stuffed toys
  • Smartphone covers
  • Beauty and health
  • Lifestyle niche
  • Power tools
  • Drones and accessories

Is Dropshipping Profitable?

If you choose the right niche, find the right supplier, and market your products to the right audience, this fulfillment method can be a very lucrative business. Profit margins range from 15% to 45%. But, for luxuries and consumer items like jewelry and electronics, profit margins can go up to 100%. You just have to make sure your dropshipping process is as streamlined as possible.

Woman starting an online dropshipping business

4 Steps to Starting a Dropshipping Business

So, how does dropshipping work? Starting your own store is easy - all you need to do is identify your niche, choose the right platform, and connect with the right dropshippers.

WooCommerce and Shopify are the two best eCommerce platforms for starting a business. Here are the steps you should follow to start.

1. Select products

Once you have identified your niche, you need to select in-demand products so that you can successfully run your store. You can identify in-demand products through websites such as Google Trends or Product Mafia.

2. Select a domain name for your store

You need to select a domain name that resonates with your niche so that customers can find you online.

3. Choose a hosting platform

Shopify and WooCommerce lead the pack when it comes to platforms.  Shopify is a fully automated platform, but it can cost around $100/month for a basic store setup. With WooCommerce, all you need to do is pay for the domain name and hosting of your store since it is a free WordPress plugin.

4. Select a plugin:

Though you can set up your store without plugins, the setup process will be quite tricky. Plugins are easy to use and can quickly connect you to good dropshippers like AliExpress and speed up the whole setup process. AliDropship, WooDroship, Dropfied, and Spocket Dropshipping are some of the plugins that will automate the import of dropship products directly from your dropshippers warehouse to your store with a single click.

Is Dropshipping Worth It In 2020?

Starting a retail dropshipping business online can be easier, cheaper, and more profitable than traditional retail models. That said, the dropshipping business model comes with its ups and downs, and like any other entrepreneurial endeavor, it will take hard work to build a successful business.

Hopefully if you were asking what is dropshipping, you'll have a better understanding of how it works, know the pros and cons, whether or not it's worth it.

Luckily, the dropshipping business model is perfectly legal and you can jumpstart a business very quickly.

Easyship is a key player in eCommerce logistics, and we can help dropshipping store owners further streamline their order fulfillment process with by connecting them to over 250 cost-effective courier services and giving them access to our platform’s full suite of tools that includes automated labels and customs forms, easy shipping rules, and more.

Looking for more information on dropshipping? From the top products to sell in 2020 to the nitty gritty of green dropshipping, we've got it covered:

Last update July 26, 2020 to reflect new information