What is Dropshipping? The Dropshipping Business Model

What is Dropshipping?

Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.

In practice it's broken into four steps:

  1. A customer places an order on your online store.
  2. You send the order to the supplier.
  3. The supplier accepts and packs the order.
  4. The customer receives the order.

Since dropshippers do not need to buy or store inventory it makes it very easy to start, giving access to people who couldn't otherwise start a business.

Advantages of Dropshipping

Dropshipping is a great business model for aspiring entrepreneurs to start with because it’s accessible. With dropshipping, you can quickly test different business ideas with limited downside, which lets you learn a lot about how to choose and market in-demand products. Here are a few other reasons why dropshipping is such a popular model.

1. You can start with a small budget

A traditional retail business requires the purchase of buying inventory in bulk, storing it, and the suppliers to pack and ship it to the customer. Dropshipping avoids these costs by relying on the supplier to handle the storage and fulfillment.

The majority of costs dropshippers incur are from marketing. Your website and advertisements will be the bulk of what you spend growing your business, but you can start with as little as a few hundred dollars to test a product. Once you start bringing in orders you can use the revenue from your sales to fund your ad campaigns.

2. Easy to test ideas

Since your costs are relatively tiny compared to a traditional business model it gives you the ability to quickly test ideas to find something that works. If you have 2 or 3 three products you think could work you can easily run them side by side to find the most profitable. In most cases, you will know if a product is able to scale after a week or two.

3. Easy to scale

Compared to traditional retail, dropshipping is much easier to scale. Traditional retailers have to worry about manufacturing capacity, pack and ship operations, and other problems to scale. Dropshippers on the other hand focus on expanding marketing campaigns. While your product may require some negotiation with your supplier or the use of dropshipping agent to scale that process is a lot easier to handle than all of the operations suppliers are dealing with.

4. Starting a dropshipping store is easy

All you need to start a dropshipping store is a willingness to work hard, learn, and a small budget. Ecommerce platforms like Shopify and WooCommerce make launching a store easy. There are a ton of other free tools and apps that help automate and optimize your store. When getting started keep your store simple and track your ROI along the way. Find what works through A/B testing and getting feedback from friends and family (or join our dropshipping Facebook group).

5. You can dropship from anywhere

Many people that start dropshipping are after a lifestyle rather than an ecommerce site. They want to travel and make money without working a 9-5 style job. Good news, dropshipping is a great way to build passive income from anywhere in the world. Word of caution, dropshipping DOES require work, marketing skill, and hard work, but thousands of dropshipping sites have led to a great profit and lifestyle for their operators.

Disadvantages of Dropshipping

While dropshipping is a great way to quickly start and grow an online business, it's not perfect. While you get the benefit of skipping a large portion of operational costs it means that you have to rely heavily on dropshipping suppliers. When your store relies on third parties it can face problems that are out of your control. Here are some examples.

1. Inventory and supplier issues

This problem usually happens once you start to scale a product. One day you're averaging a handful of orders a day, then all of sudden you're getting dozens (or hopefully hundreds) of orders. While you're celebrating your success, your supplier can't keep up. Since they can't ship the products you aren't able to fulfill the order and end up refunding all your sales.

While this problem is a "good" problem to have it often stops dropshippers from growing their business to its full potential. Make sure you have an open line of communication with your supplier. Before you start dumping money into ad campaigns find out what capacity they can handle if necessary find alternative suppliers.

2. Shipping times

Many dropshippers use Aliexpress or Alibaba to fulfill their orders. While it's easy to find products and start with these types of suppliers, they almost always have terrible 30 day (or longer) shipping times. In today's world that just won't cut it. Max shipping times should be less then 10 days and ideally less than 5.

If you find a product that you want to test on Aliexpress we recommend ordering the product from the supplier to see how long it takes to deliver. You can also contact the supplier to see if they offer faster shipping times.

3. Supplier errors and quality control

As a dropshipper you have essentially no control of what your supplier ships to customers. Since the customer ordered it from your store, you are the one they are contact to get the order corrected. To make the situation right you have to contact the supplier and order to get another product shipped or refunded etc. This gets time-consuming and frustrating quickly.