Dropshipping has surged in popularity in recent years as an e-commerce retail fulfillment method enabling entrepreneurs to sell products without keeping physical inventory. But how exactly does dropshipping work and is it a viable model?
This article explains the dropshipping concept, how the supply chain functions, the pros and cons, and what’s involved in starting a business online.
What is Dropshipping?
Dropshipping is a streamlined retail fulfillment technique where a store sells products but does not stock inventory. Instead, the store owner forwards customer orders and shipment details to a third-party supplier or manufacturer, who then ships the product directly to the customer.
The dropshipping retailer receives a profit margin on the products sold without taking on inventory costs and logistics management. The supplier handles product shipments individually as orders roll in.
This allows ecommerce entrepreneurs to run lean retail operations that scale as sales grow, without warehousing overhead eating into profits. Products only get purchased from suppliers once an order has been received from a customer.
How Does the Dropshipping Supply Chain Work?
The dropshipping supply chain involves a streamlined order fulfillment process between three main parties:
- The dropshipping retailer operates an online store, markets products, provides customer service, and processes orders.
- The dropshipping supplier manufactures, warehouses, and ships products to customers upon order requests from the retailer.
- The customer browses the dropshipping retailer’s online store, places orders, and receives shipments directly from the supplier.
The basic supply chain order fulfillment steps are:
1. Customer places an order and payment on the dropship retailer’s online store.
2. The retailer receives the order and then purchases the product from the supplier at wholesale cost.
3. The retailer forwards the customer’s order and shipping details to the supplier.
4. The supplier packages and ships the product in the retailer’s branding to the customer.
5. The customer receives the product, thinking it came directly from the retailer.
This fulfillment method allows the retailer to run a streamlined operation while leveraging the supplier’s inventory and logistics.
Pros of Dropshipping
There are several advantages to the dropshipping retail model:
- Minimal startup costs – No need for significant inventory or warehousing. Startup costs mainly include store platform fees and branding.
- Easy scalability – Inventory and fulfillment handled by suppliers allow effortless scaling to meet sales volume.
- Low overhead – With fewer moving parts than in traditional retail, overheads are contained. Dropshippers can even run as solopreneurs.
- Wider product selection – Suppliers grant access to vast catalogs with little effort. This provides buyers selection of rivaling huge marketplaces.
- Flexible location – Managing orders and suppliers is possible from anywhere with an internet connection.
For those reasons, dropshipping provides an appealing entry point into e-commerce, especially for first-time entrepreneurs.
Cons of Dropshipping
Some drawbacks include:
Low-profit margins – Compensating suppliers cut into per-sale profits versus wholesaling. Most margins are under 20%.
Quality control issues – Communicating product flaws and defects with suppliers can be tedious.
Shipping delays – Inventory unavailability and shipping from third parties increase delivery times.
Supplier errors – Mistakes in order fulfillment happen. The retailer is responsible for fixing issues.
Customer anonymity – Brands have limited insights into the customers represented just by orders.
While dropshipping makes e-commerce accessible, retailers must pick partners carefully and provide exceptional customer service to succeed.
Getting Started Dropshipping Online
To launch a dropshipping business, follow these steps:
1. Research viable supplier partners that serve your product niche. Assess reliability, fulfillment speed, wholesale rates, and product breadth.
2. Set up an e-commerce platform like Shopify or WooCommerce with branding, marketing, and payment collection functionality. Many integrate apps to sync with suppliers.
3. List products in your store with great photos, descriptions, and competitive pricing. Drive traffic through marketing and SEO.
4. Receive customer orders then purchase inventory on-demand from your suppliers to fulfill.
5. Manage communications between customers and suppliers. Oversee quality control and shipping logistics.
Dropshipping provides an exciting opportunity to profitably sell products online without major upfront investments. Just focus on customer experience and partner closely with reliable suppliers able to make the fulfillment seamless.
With the right platform setup, understanding of order/inventory management, and quality suppliers, dropshipping allows almost anyone to successfully operate an online retail store and tap into booming e-commerce demand.