What is Dropshipping? How Does Dropshipping Business Model Work? [Detailed Guide in 2023]
Most likely, if you’re looking for an online business opportunity, you’ve heard about dropshipping. For the aspirant e-commerce business owner, dropshipping model is a profitable online business concept. This business can be started with a minimal amount of initial money and some labour. Then, when you begin to experience success, you may grow by devoting additional resources to branding and promotion.
In 2019, the global dropshipping market had a value of $162.44 billion. As per a leading research agency, the dropshipping industry is projected to be worth a whopping $591.77 billion by 2027. From 2020 to 2027, the market is projected to expand at a CAGR of 18.3%.
How did the concept of dropshipping begin?
Dropshipping was first introduced in the 1960s when customers could purchase products from the catalogues they received in the mail. A warehouse would deliver the goods you choose when you place a call and specify where you want them delivered.
How does dropshipping operate, and why should you use this strategy to fulfil your business aspirations?
You must understand the definition of dropshipping before moving ahead. Read our blog on dropshipping vs order fulfillment to find out which model is right for your business?
- What is Dropshipping?
- Who is A Dropshipper?
- A Complete Overview of Dropshipping Order Process
- Process Of The Dropshipping Business Model
- 7 Common Dropshipping Challenges for eCommerce Retailers in 2023
- Benefits and Drawbacks Of Dropshipping Model
- 7 Advantages Of Dropshipping Business
- 4 Disadvantages of Dropshipping Model and Strategies to Avoid Them
- Frequently Asked Questions
What is Dropshipping?
Dropshipping is a retail fulfilment for online retailers where merchants buy goods from outside suppliers as consumers place orders rather than storing inventory. After that, the merchandise is delivered right to the customer. In this manner, the seller is relieved of direct product management. Sounds recognizable?
The shipping and order fulfilment process is hands-off, mainly for a retail store manager. The retailer is not required to have stock on hand, place large orders for goods, or physically complete any orders. Instead, the third-party logistics or vendor will handle the merchant’s goods shipping. Read the blog on dropshipping vs 3pl to understand the key differences.
Dropshipping is advantageous for business owners since it requires less operating capital to operate a store than the conventional retail model. For example, you don’t need to start a brick-and-mortar business, employ staff, maintain lighting, pay expenses, or carry inventory. Instead, you set up an online storefront and purchase bulk from suppliers with inventory and storage facilities.
Who is A Dropshipper?
A manufacturer or supplier who handles inventory for a retail merchant and sends orders to their customers is a dropshipper. Since the merchant is mainly in charge of bringing clients to the business and handling orders, you will essentially be acting as a middleman. Despite this, you will make most of the money by adding a markup to the things you sell. It’s an easy business strategy that has the potential to be incredibly lucrative.
Due to its minimal entrance requirements and inexpensive startup costs, dropshipping is a popular business model with millions of businesses. You’re curious for that reason. However, the most exciting news is that this business model enables you to launch a viable long-term business from the comfort of your laptop.
Before launching your own dropshipping eCommerce fulfilment business, it’s critical to consider this business strategy’s challenges, benefits and disadvantages. But once you know the advantages and disadvantages, mastering this business model will be simple — especially with the fantastic modern-day tools offered to entrepreneurs!
A Complete Overview of Dropshipping Order Process
Having established what dropshipping is, let’s examine the procedure in detail.
The supply chain in this business model is the path a product takes from a manufacturer to a client.
The chain technically starts with the mining of the raw materials. However, concentrating on the major players – manufacturers, suppliers, wholesalers, and retailers- will be enough to comprehend the dropshipping model.
There are three prominent players in the dropshipping supply chain-
The person who makes the things you dropship and sells them in bulk to suppliers and wholesalers.
You can choose to have your purchases sent straight from the makers. So, for instance, you may get in touch with manufacturers at Alibaba rather than going to AliExpress to search for suppliers.
As a result of skipping the supplier, you will pay less for your goods in this manner. Additionally, you will be able to alter your logo slightly.
The issue is that manufacturers typically have minimum order requirements that you must satisfy. This entails making a sizable initial financial investment, which might be problematic when you’re just establishing a drop shipping firm.
Supplier OR Wholesaler
A supplier or wholesaler is the individual who purchases goods from producers and resells them to retailers.
Suppliers frequently focus on a specific industry, making it simple to locate the goods you want to sell. The goods are a little marked up. It is far more convenient for you because their purchase minimums (if they have any) are often significantly lower than those manufacturers impose.
You are the one making the direct sales to the consumer. Your consumers’ place of purchase is here.
Your job is to ensure your profit margins are high enough for you to make money but not too high that your potential consumers would select your rivals after the product has gone through the supply chain and been marked up numerous times.
WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.
Process Of The Dropshipping Business Model
Let’s examine the procedure for handling a dropshipping order. For example, we’ll use a hypothetical order placed with Laptop Outlet, an online retailer specializing in laptop accessories. All of the products sold by Laptop Outlet are dropshipped from its pet supplier.
Here is an illustration of what the whole ordering procedure may entail:
Step One: The customer places an order with Laptop Outlet in step one.
The customer uses the laptop outlet’s online store to order a new laptop for his professional use. However, several things take place after the order is approved.
The store’s software automatically sends an email confirmation of the new order to the customer and laptop outlet.
Payment from customers is taken during the checkout process and is immediately put into the bank account of the laptop retailer.
Step Two: Place an order with a supplier through a laptop retailer.
Usually, all required to complete this stage is for the laptop retailer to transmit the email order confirmation to a wholesaler salesperson. The wholesaler will charge the laptop outlet’s credit card on file for the wholesale price of the products, as well as any shipping or processing costs.
Step Three: Delivery of the order by the wholesaler
If the product is in stock and the wholesaler successfully charges the laptop outlet’s credit card, they will package the order and send it straight to the consumer. Even if the cargo comes from a wholesaler, the packing slip and invoice will have the outlet’s name, address, and logo. In addition, the wholesaler will provide the laptop outlet with an invoice and a tracking number once the shipping has been completed.
Step Four: The consumer is informed of the shipment by Laptop Outlet.
The laptop outlet will likely use an email interface embedded within the online shop interface to provide the consumer with the tracking information once it has received the tracking number.
The order fulfilment process is finished after the order is dispatched, the payment is received, and the client is informed.
7 Common Dropshipping Challenges for eCommerce Retailers in 2023
Unquestionably, dropshipping products is one of the most extraordinary developments brought about by the internet and our new way of life. With this new business model, savvy entrepreneurs may enter the e-commerce market with less funding and still make progress. Although this business model provides many advantages, there are also some inherent difficulties. Dropshippers must manage the challenges that the business model presents as entrepreneurs. Here, we’ll go through seven of the most typical problems with dropshipping and how to fix them-
Order Processing Delay
Customers anticipate that their orders will be completed as quickly as feasible when purchasing from your e-commerce website. Most clients are unaware that, in most cases, you have little control over how fast you execute their orders. Sometimes, a producer’s order that you’ve previously placed will be delayed. As clients wait for their tracking code, the delay may cause some irritation to them. Let it go quickly. Contact your provider to resolve the issue if you don’t hear back from them within 24 hours of making your purchase. Then, you will at least know why the order hasn’t been handled and how long you have to wait.
Supplier Compliance and Transparency
Your consumers will hold you accountable for the quality of the products they purchase from your store since you are the face of your company. Even if you have nothing to do with creating and packing the products you sell through dropshipping, you are still in charge of them. A robust service level agreement (SLA) with your suppliers is one method to manage this difficulty. You must be very explicit about what you anticipate from them regarding adhering to the agreement. The SLA should also be detailed about the repercussions of breaking it. Consider every client complaint seriously and look for measures to confirm that your providers are constantly following the SLA requirements.
Delivery to the Wrong Address
Some orders are sent to invalid or incorrect addresses, as unpleasant as it may sound. You could also have to deal with that as an e-commerce business owner. Preventing address errors on your end is the easiest method to deal with this issue. You must double-check the address you submit to the supplier for every order. Some kind of documentation should support any shipping address you provide.
Returns of Products
In e-commerce, you can’t get away from this. Since dropshipping usually involves a third party, it is rarely ever your responsibility. You cannot also set all the rules in this place. You must discover ways to explain suppliers’ various return policies to your consumers. Remember that your consumers will come to you rather than the provider. On your website, be explicit about your return policy. Make all necessary efforts to ensure that the procedure is simple for your consumers.
Even though dropshipping needs very little initial commitment, sound money management is essential if you want to make money over the long haul. Keep track of the profit made from each sale, and if your present line isn’t bringing in the desired amount of money, don’t be hesitant to look into different product options.
Additionally, you must regularly review your business alliances. Then, you might be able to locate a new vendor who provides the same goods at a lower price. This level of customization is essential for optimizing your earning potential.
Finally, take taxes into account while calculating your budget. Because sales tax computations are partially based on the supplier’s location, dropshipping makes taxation a little bit more complicated.
Finding reliable suppliers is the first big problem most dropshippers encounter. Many producers and sourcing firms might act as your suppliers, but you need to agree on the partnership’s specifics. Next, you must locate reliable vendors who can maintain the calibre of their vendors.
In practically any niche you pick, finding suppliers is not too difficult. You may find a lot of materials to aid you in your search. Just make sure the provider you choose can accommodate your demands. Think about supplier costs, order minimums, industry-specific expertise, and scalability.
Running Low On Supplies
Even if you are already in business, this might still occur. It is one of the most widespread issues and is more common during particular seasons. Additionally, organizations with just one supplier are particularly impacted by this issue. If you are dealing with a huge producer and order fulfilment company, you might not feel the full effects of running out of stock. Even if you look for alternate ways to complete customers’ purchases, you must notify your clients as soon as you run out of stock. It is wise to use many suppliers.
Like other business concepts, dropshipping has several difficulties. These seven are typical and are covered here. However, overcoming them can assist you in expanding your e-commerce firm in various ways.
Benefits and Drawbacks Of Dropshipping Model
A straightforward approach for potential business owners to get started in e-commerce is through dropshipping. You don’t need a pricey degree from a business school or a lot of money to enter the industry. You also benefit from the trend of consumers favouring e-commerce over physical storefronts.
Despite the considerable flexibility of dropshipping, there are several drawbacks. Let us examine the advantages and disadvantages of this business model to determine if this business strategy suits you.
7 Advantages Of Dropshipping Business
The following are some of the benefits of becoming a dropshipper.
Easy To Setup
Starting a dropshipping business doesn’t require any prior business expertise. You can establish a business fast and pick up the rest of the knowledge as you go if you take the time to understand the fundamentals.
This business is simple to launch since its startup expenses are inexpensive compared to other retail company models. For instance, you don’t need a crew or a warehouse to keep your items. Additionally, you don’t have to bother about shipping or inventory. Surprisingly, once you get rolling, it’s hands-off.
Low Startup Costs
Businesses that use dropshipping strategy don’t have to spend money on stock purchases or setting up a place to store it. Additionally, they are spared the time-consuming tasks of inventory organization and staff hiring for order fulfilment. As a result, dropshipping has a shallow entry barrier since anybody may start this business even if they lack the financial resources required to operate a regular retail firm.
Because order fulfilment is not reliant on the size of a physical location or the number of employees required to ship an order, dropshipping retailers may grow swiftly. Dropshipping may thus be quite advantageous for merchants whose sales fluctuate due to seasonal variables or other considerations.
Easy To Manage, No Office Is Required
You may run an entire business from your laptop without needing to make any significant financial commitments. Your most considerable outlay will be advertising, which you may increase as your store’s popularity grows. Your expenditures will be cheap, especially compared to typical business expenses, even as your organization expands.
Minimal Inventory Management Costs
This Business model lowers the administrative burden that retailers must bear by doing away with the requirement to retain physical inventories. In addition, because shipping is outsourced to suppliers, they do not have to spend time maintaining or tracking the merchandise’s infrastructure.
Numerous Product Offerings
This business model lets you expand the range of products to sell. As a result, retailers can carry a broader variety of goods, enabling small businesses that would not otherwise be able to provide as many alternatives.
Dropshipping gives a retail firm more freedom in a variety of areas. For example, a brand may operate from any location, provide a variety of items, and simply modify its selection as consumer tastes shift.
4 Disadvantages of Dropshipping Model and Strategies to Avoid Them
Shipping goods from independent vendors have inherent drawbacks, just like any other company strategy.
Shipping Might Become Quite Challenging
Calculating the delivery expenses is simple if you buy your items from one provider. Dropshippers typically employ many suppliers for various things, though.
When many goods from the same purchase have varying shipping rates, determining the delivery costs becomes slightly more challenging. Additionally, various vendors could use different invoicing methods.
Start with a single provider and add more later.
Limited Ability To Regulate Branding
When you dropship things, there isn’t much you can do to customize them. Yes, you can have a well-designed website with excellent product descriptions. However, if you want to take branding to the next level, you may organize professional photography of your items.
You can’t do anything about the packing or the instructions that come with the items you sell, like most dropshippers.
You may decide to dropship your goods from an online retailer like Alibaba. This website enables direct product shipment from producers. In this method, you may get in touch with manufacturers and ask them to add your brand name (if you want one) or alter the packaging of your goods.
Since adjustments frequently need the minimum order quantity (MOQ), be aware that you will be asked to pay extra up front.
But you may always practise your negotiating abilities!
Customer Service May Be Annoying
Up until a client complains, it’s fantastic that you don’t have to handle inventory management yourself. After that, however, you are responsible for the suppliers’ failures to fulfil your requests. Therefore, to prevent receiving unfavourable evaluations, be prepared to apologize profusely and offer top-notch customer service.
If the goods are damaged, you may send your client to the supplier for assistance. You’ll need to track the shipment with your supplier. That is why choosing a reputable supplier is crucial. Additionally, you might wish to spend money on software enabling online shopping and connecting you with clients. To be more effective, use can use Shopify applications with customer support.
Profit Margins Can Be Pretty Low
You’ll probably encounter a lot of competition due to the low admission criteria. So keep your pricing as low as possible to stay alive until you establish a strong clientele.
However, many business owners that maintain extremely low margins don’t consider how their store seems. You must outperform your competition in marketing if you want to win over potential clients.
Make your business appear legitimate, and customers will be willing to pay a little more for your products.
Dropshipping involves practice, careful preparation, and study. However, entrepreneurs still choose it since it is the simplest method to launch an internet business and is fantastic for testing new product concepts. Moreover, you may try your hand at eCommerce with little risk because it needs little initial cash.
Dropshipping may be combined with various useful tools and services that can simplify and automate some of the more challenging portions of the process while avoiding some of the issues we’ve covered in this essay. With the help of these resources, you can focus on creating effective marketing strategies and building your brand to maximize earnings.
- Pan India Fulfillment & Darkstore Network: Plug-and-play fulfillment infrastructure with no minimums, which is compliant with Amazon Seller Flex, Flipkart Assured, Myntra and other marketplaces
- Inventory & Network Planning Excellence: Best-in-class AI models for sales forecasting, product segmentation, and inventory management to reduce inventory by 40% and increase revenue by 10%.
- Vertically Integrated Fulfillment Tech Stack: Our Fulfillment Tech Solution supports integrations with 20+ top marketplaces & D2C platforms, and prominent national, regional and hyperlocal couriers, enhancing reach by covering deliveries for 27,000+ pin codes
- Supply Chain Productivity Applications: Integrate a host of supply chain productivity apps with a single-click to your existing CRMs, ERPs & accounting software to manage your logistics workflows from one command center. Use Apps like RTO Shield to get 100% RTO protection, Branded Tracking to turn your order tracking page into a profitable marketing channel, and many more.
Trusted by 300+ top Indian brands, we are helping them accelerate online sales and expedite their growth through a synergistic combination of advanced technology, robust fulfillment infrastructure & seller enablement services!WareIQ is backed by leading global investors including Y Combinator, Funders Club, Flexport, Pioneer Fund, Soma Capital, and Emles Venture Partner.