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7 Min. Read

What Is Dropshipping & How Does It Work?

What Is Dropshipping & How Does It Work? A Guide (2021)

If you’re interested in, or currently working in any eCommerce business, the chances are you’ll have heard about dropshipping.

It seems to be the current craze. You’ll see blog after blog talking about dropshipping being the new way to conduct an online business and all of the huge benefits.

But is dropshipping as easy and risk-free as it’s being touted? As with any online business, it is far from being a completely safe way to operate.

So we’ll take a closer look at what dropshipping is, how it works, and the benefits and disadvantages.

Here’s What We’ll Cover:

What Is Dropshipping?

How Does Dropshipping Work?

The Advantages of Dropshipping

The Disadvantages of Dropshipping

Key Takeaways

What Is Dropshipping?

Dropshipping is a fulfilment method used by eCommerce companies. It works by having a store that doesn’t keep the products that it sells in stock. Instead, the store will have an agreement with a third-party supplier or manufacturer.

This agreement will mean that they will ship the product directly to the customer.

This essentially means that you don’t have to handle the product directly as you don’t own any stock or inventory. This also means that you have no overhead warehouse or storing fees and no shipping costs.

How Does Dropshipping Work?

There are four basic steps to the dropshipping process:

  1. Your customer browses your online store and places an order.
  2. Your store will automatically send the order to your dropshipping supplier.
  3. Your supplier will prepare the customer's order.
  4. The supplier will then ship the order to your customer.

So dropshipping allows you to sell and process stock without having to own anything apart from your online store.

The easiest way to look at it is by seeing yourself as the front face of a two-part system. You handle the customer service side. This would be including the relationship and customer experience of your customer base. Whilst the supplier purely deals with the stock and shipping.

That means that you are in charge of driving traffic to the store and processing the orders - which is essentially the job of a middleman.

The Advantages of Dropshipping

There are many reasons why dropshipping is such a popular way to run an eCommerce site. Here are some of the main benefits of dropshipping.

1. It’s Accessible

Dropshipping is a great way for aspiring entrepreneurs to start their own businesses. You can test a number of different business ideas with minimal downsides which gives you a fair amount of freedom. This also lets you learn a lot about how to pick and market in-demand products.

2. Initial Investment Is Low

This is easily one of the biggest advantages that dropshipping offers. It’s entirely possible to launch an eCommerce store without investing thousands of pounds in inventory and storage.

One of the biggest traditional hurdles of starting a business is the huge amount of capital necessary to purchase inventory. But with the dropshipping model, you don’t actually have to purchase a product unless you’ve already made the sale.

So therefore the startup costs for a dropshipping business are significantly lower than operating a business with a more traditional retail model. This also means that there is far less risk involved with starting a store or testing out new dropshipping products.

3. It’s Easy to Start

As you’re only running the front-facing side of the business, it’s much easier to get up and running as there are few barriers to entry. If you are organised and put a lot of hours in, you could potentially start an eCommerce business within a few days.

And as you’re not having to deal with physical products you don’t have to worry about managing or paying for warehouse space. You also don’t have to worry about packing and shipping the orders, tracking inventory or handling returns.

4. Low Overheads

As we previously mentioned, many of the costs associated with running a business won’t apply to you if you’re running a dropshipping business. To successfully run a store, all you need is a laptop and a website domain. You don’t even need an office space as you can comfortably run the business from home.

Of course, as you grow your business the cost will likely increase and it may become more complicated. But your overhead costs will still be low in comparison to a traditional brick-and-mortar or online store.

5. Work From Anywhere

As long as you have access to a computer and a decent internet connection, you can run your business from anywhere in the world.

It’s also essential to have good communication with your suppliers and customers. So as long as you have these three things in mind, you can run and manage your business on the go.

6. No Limit to Product Selection

When you’re running a traditional store, it’s always a risk to introduce new products. This is because you have to pre-purchase the items you sell, so if they don’t sell you’re stuck with worthless stock.

But if you are simply allowing a supplier to sell their products with you, there is no risk or limit to what you can sell.

The Disadvantages of Dropshipping

These advantages can seem overwhelmingly positive. But dropshipping does have its downsides. These include:

1. Low Margins

Dropshipping is highly competitive. Because of the obvious benefits, there are thousands of competing stores looking to sell a supplier's product.

Since the start-up and running costs are so low, a dropshipping business can run on an incredibly small profit margin. This is because many competing stores will sell items at rock-bottom prices in order to increase sales and grow revenue.

This fierce competition will only serve to lower your profit margins.

2. Inventory Issues

If you’re running a traditional business it’s much easier to keep track of your inventory and your stock levels. You know exactly what items are available to sell. However, when you’re not in charge of your inventory, you can sell something that may not be in stock.

This creates issues with your customers as they are paying for something that isn’t available.

3. Supplier Errors

As you are the face of the business, you will be the one held responsible for any shipping or supplier errors.

If a dropshipping supplier makes an error, then it is you who will face the consequences of an upset customer. This means you have to choose your suppliers carefully as it is your reputation that is on the line.

Key Takeaways

Dropshipping is a hugely attractive way to run a business. It has a large number of advantages, but that’s also why it’s such a fiercely competitive field.

So for every advantage, there’s a number of complexities that come with it that will need to be addressed.

However, with some careful planning and a lot of hard work, a dropshipping business can be a lucrative one. But be prepared to work for very low margins and a whole lot of competition.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.