What is Dropshipping and How Does it Work?

Dropshipping is a retail business model in which the seller sells the products to the customer without actually keeping physical stock in hand. It is an e-commerce business model where on receiving the order, the seller transfers the order to the third party (manufacturer, Wholesaler, distributor, or other retailer), who directly ships the product to the customer on behalf of the seller. This means the seller sells the product without actually seeing, handling, or storing the product. Therefore, the seller has very little control over the quality, shipment, inventory management, and storage of the product. Dropshippers play a role in the selling and marketing of the product. The profit earned by the drop-shipper is the difference between the wholesale price and retail price of the product after adjusting all the selling and shipping expenses.

Profit of the Dropshipper = Retail Price – Wholesale Price – Selling Cost

In a modern time where no one has time to visit physical markets, e-commerce, and supply chain has gained popularity which in turn has made the dropshipping business popular as it requires minimum start-up investment and low working capital. Besides this dropshipping business model eliminates the cost of storing and managing the stocks and also lowers the risk of inventory management.

Who is a Dropshipper?

A drop-shipper is an individual or a firm engaged in online retail business, who sells the product without actually buying or storing the product through a supply chain. He is a business operator who performs tasks related to customer service and marketing while relying on a third party to deliver the product to the customer. As a drop-shipper, a business operator builds and maintains a healthy relationship with the suppliers and creates an attractive marketing platform.

How does Dropshipping Work?

The dropshipping business works through a supply chain model where the actual seller relies upon a third-party supplier for the fulfillment of the order and delivery of the product to the customer. However, the sequence of the working of the dropshipping model is:

Step 1: Setting Up an Online Store: To enter a drop shipping business, online stores are to be set up by getting registered with an e-commerce platform or online marketplace.

Step 2: Product and Supplier Selection: The dropshipper needs to select the products to deal in and establish a relationship with reliable suppliers. The supplier agrees with a dropshipper in this regard. The selection of supplier is made based on the quality of the product and shipping service offered by him.

Step 3: Product Listing: Once the supplier selection and agreement formalities are done, dropshipper list the products on their online store along with product descriptions, pictures, and price details. Products are marketed at online stores by drop shippers to attract potential customers.

Step 4: Receiving Orders: When a customer places an order at the drop shipper’s website and makes the payment, the dropshipper passes on the order to the supplier along with the shipping details of the customer.

Step 5: Shipping and Delivery: On receiving an order from the drop-shipper, the supplier makes the order ready and ships it directly to the customer’s address. The details of the supplier are not mentioned anywhere, so it seems to be shipped directly by the dropshipper.

Step 6: Customer Care Service: The dropshipper takes up the responsibility of providing customer services to the customers. Dropshipper handles customer inquiries, returns, and any other issues related to the purchase. It is important to take care of the customer’s grievances to build up a loyal customer base.

How to Choose the Best Dropshipping Suppliers?

Market research and analysis should be conducted before selecting the supplier. Some basic points that need to be examined properly before choosing a dropshipping supplier include:

1. Product Quality: It is most important to ensure that the quality of the product being delivered is of a high standard. Few samples can be ordered to check the quality, shipping service, and packaging standards.

2. Reliability and Stability Check: Join hands with a supplier who has a good reliability and stability record and a market reputation for on-time delivery. This means knowing the capacity of the supplier regarding fulfillment of order volume and on-time delivery service is important. Analyzing suppliers’ inventory capacity to meet the orders on time is essential to avoid stockouts or long waiting times.

3. Price and Profit Margin: Businesses always aim to earn high profits, so before dealing with a supplier market research on prices offered by different suppliers shall be conducted to maintain competitive pricing while earning a reasonable profit margin.

4. Review Shipping and Packaging service: Good packaging and on-time delivery is essential for customer satisfaction. So, verifying the quality of these services offered by the supplier is most important to retain loyal customers.

5. Minimum Order Requirements: It becomes important to get a knowledge of the minimum order requirements of the supplier as this affects the cash flow and the scale of business.

6. Return Policies and Warranties: Inquiring about the supplier’s return and refund policy, warranty, guarantee, or any associated fee gives dropshipper clarity about customer dealing. This helps in handling returns and refunds with customers.

7. Support Service: Examining the supplier’s communication and support service is important for the smooth execution of the dropshipping agreement. A cooperative supplier helps in resolving customer issues quickly.

8. Location of the Supplier: The location and time zone of the supplier affect the shipping and order processing time which is directly directed to customer satisfaction and business sustainability.

9. Terms of Dropship Agreement: Reading and understanding the clauses and terms of the agreement with the supplier is crucial before entering into such an agreement. This helps in avoiding future disputes and issues.

10. Integration Capacity: The supplier’s capacity to integrate with the e-commerce platform of the dropshipper plays a vital role in choosing a supplier. It is important to look for a supplier who provides automated order processing, inventory management, and tracking tools to streamline dropshipping operations.

11. Feedback and Reviews: Seeking feedback and reviews from other drop shippers who have working experience with that supplier gives an idea about the supplier’s reliability and overall service quality.

Benefits of Dropshipping

1. Low Establishment Cost: Individuals who want to enter the business world with minimum investment opt for a dropshipping business model. The cost of establishing physical stores, inventory stocking, hiring workers, etc. are eliminated.

2. Product Variety: The dropshippings model allow dropshippers to deal in wide range of products without actually storing the inventories. This increases their customer reach and enhance the chance of market expansion.

3. Low Overhead Expenses: Dropshipping business help business to cutdown overhead expenses related to inventory management like warehousing and storage charges, packaging, and shipping cost. This reduces the overall cost of operation.

4. Location Flexibility: Dropshipping business is a part of an e-commerce model that is location-friendly. This means business can be operated from anywhere with good internet connections.

5. Low Risk: Dropshippers degree of risk associated with inventory blocked or unsold, loss of inventory, spoilage, etc. Besides, risk of payment blockage is also eliminated as dropshippers passes on the order only on receiving the payment from the customer, and no credit sale reduces the risk of loss.

Drawbacks of Dropshipping

1. Low Profitability: The drop-shippers have very little control over the product pricing. From them the, profit margin is the difference between the supplier’s price and selling price which is usually low. Moreover competing over price eat up the profitability of the dropshipper.

2. Inventory Issues and Stockouts: The dropshipper often faces the problem of stockout and inventory availability as he is completely dependent on the third-party supplier for the fulfillment of orders. This hampers the market reputation of the dropshipper and leads to customer dissatisfaction.

3. Low Control Over Quality: The dropshipping model allows retailer to sell the product without actually seeing the product. Since the order is directly shipped by the third-party supplier, the dropshipper have no or little control over the quality of the product which again risks the market reputation of the dropshipper.

4. Intense Competition: Ease of entry in this business model invites many players that intense the competition level in the market. Besides the same supplier may deal with number of dropshippers at the same time for the same product forcing dropshippers to compete over price that pulls down their profit margin.

5. Limited Brand Control: High dependency upon third party makes it difficult for dropshidrop shipperst the personalised requirement of the customers and branding of the product. Low control over product branding holds back the dropshipper from building their unquie unique identity and to grab competitive advantages.

Frequently Asked Questions (FAQs)

1. What is Dropshipping?

Answer: Dropshipping is a online retail business model that allows to sell the product without holding physical stock. It is based to supply chain management where the order is fulfilled directly by the third party supplier.

2. Who is a Dropshipper?

Answer: A dropshipper is a person who owns and operates a online store without making upfront investment. He sells products without physically owning them.

3. Who is Dropshipping Supplier?

Answer: A dropshipping supplier is an individual or a firm that physically holds the products that is showcased at the website or online stores of a dropshipper. The dropshipping supplier is in charge of storing the inventory.

4. How to find reliable dropshipping suppliers?

Answer: There are various aspects analysed before considering supplier as reliable, including product quality, shipping and packaging, return and refund policy, communication and support service,etc.

5. What kind of products can be sold through dropshipping?

Answer: All categories of products from needle to huge electronic items can be listed at online stores owned by the drop-shippers.

6. How much investment is required to start a dropshipping business?

Answer: A dropshippings business can be set up with minimal upfront investment as the overhead cost related to inventory storage and management can be eliminated. However, some investment is needed for marketing the product and providing customer services.

7. Is dropshipping legal and need of business license?

Answer: Like any other retail business, dropshipping is legal in eyes of law. Registration of dropshforping business is optional but, it is always recommendable to obtain business a license to run a dropshipping store.

8. Who is responsible for customer support in dropshipping?

Answer: The dropshipper is responsible for all of the customer support and additional services as the customer buys product from him.

9. How to market the dropshipping business effectively?

Answer: A dropshipper can uses various mode of marketing like social media marketing, paid promotions, free sampling, search engine optimization (SEO), etc.

10. What are the profit margins in dropshipping?

Answer: A dropshipper can earn the average profit in the industry and can grab various competitive advantages to earn more. Profit margin highly depends on the product selection, high-margin items definitely yields high profit.