Dropshipping is an order fulfillment option that allows ecommerce businesses to outsource the processes of procuring, storing, and shipping products to a third party—typically a supplier. Show
This fulfillment model commonly appeals to entrepreneurs seeking efficiency and low overhead, but it can come at a cost—especially when it comes to customer experience. This guide will cover what dropshipping is and explore how this fulfillment method can work. We’ll also look at a few dropshipping alternatives that can potentially save you time, lower your overhead, or simplify your business. What is a dropshipping business model?In a dropshipping business model, you promote products and provide an online storefront. When a customer places an order, you send the order to the dropshipper and inform customers the products are on the way. The rest of the physical fulfillment process is out of your hands. In some dropshipping agreements, you may also handle customer service, while the dropshipping service manages the physical goods and fulfillment. How does dropshipping work?The exact logistics of dropshipping depend on your arrangement, but typically the dropshipping process follows this general sequence:
Dropshipping may appeal to entrepreneurs looking to sell generic products, but it can limit opportunities to build a brand and differentiate products. Businesses that use dropshipping may wind up competing on price, leading to low margins. Looking for other ways to start a business? Here are 38 online business ideas. Pro tipConsider Fulfillment by Amazon (FBA)If you’re considering dropshipping for your ecommerce business, be sure to weigh several potential pros and cons—including some variations and alternatives, such as Fulfillment by Amazon, that offer similar benefits. Key players in the dropshipping modelLet’s unpack some of the key players and their roles in detail, starting with the seller of record—in other words, your business. Seller of recordThe dropshipping process starts with you. As the seller of record (SoR), you’re the individual identified as selling the product to the end consumer. You set the price, record the purchase as revenue, and assume responsibility for the sales tax on a particular sale. Even when a third party stocks and ships the items, you’re the seller of record because you own the products before they ship to the customer. For Amazon sellers, using a dropshipping service is generally allowed by Amazon dropshipping policy, as long as you’re the seller of record and identify yourself as such. ManufacturersManufacturers make products to sell to wholesalers and retailers. You can purchase goods from manufacturers, but the bulk purchase amounts they may require can potentially be a barrier to starting or scaling your business. Some manufacturers may offer dropshipping services. WholesalersIn a typical product supply chain, wholesalers buy from manufacturers and sell to retailers at a slight markup. They function as middlemen; generally, they do not sell to the end consumers but may provide dropshipping services to retailers. Determine which dropshipping providers could be right for you based on your business model and fulfillment requirements, among other factors. Potential pros and cons of dropshippingIn ecommerce, as in life, there are advantages and disadvantages to any fulfillment approach. Whether the gains are worth the pain largely depends on your goals and business situation. Here are potential pros and cons to consider when weighing whether dropshipping is right for your business. Possible benefits of dropshipping include:
Potential limitations for dropshipping include:
For some businesses, dropshipping limitations do not outweigh the potential benefits. Luckily, if you want to lower your inventory management and order fulfillment costs, a service like Fulfillment by Amazon may be an option. For some sellers, FBA provides a happy medium, offering many of the benefits of dropshipping without the downsides. Fulfillment by Amazon: A dropshipping alternative with added perksFulfillment by Amazon (FBA) offers similar benefits to dropshipping while giving you more control over your brand experience. You don’t need to sell products in the Amazon store to use FBA—although with an audience of 200 million unique visitors each month, Amazon is a selling channel worth considering. With FBA, you store products in an Amazon fulfillment center, and we:
Is dropshipping right for you?It depends on your business. Here are a few questions to ask yourself if you’re considering dropshipping. How do you want to build your brand?Your brand is the look and feel of customer-facing aspects of your business. Building a memorable brand impression can help grow customer loyalty. While you may be able to create a branded online experience, dropshipping gives you less control over product quality, delivery experience, and the aesthetics of the final package. If the products and packaging fall short of expectations, a customer may choose not to purchase from your brand again. Dropshipping suppliers often offer little room for product customization. This limitation may make it difficult to set your brand apart from the competition. How much control do you want over product quality?Product quality can have a big impact on other aspects of your business such as customer acquisition, brand loyalty, and returns. While you may be able to inspect the quality of products at the start of your dropshipping relationship, you will likely have limited control over the quality of the items you sell on an ongoing basis. If the products fail to meet customer expectations, your business could receive negative customer reviews. How quickly do you want to ship products?Ecommerce customers tend to expect quick shipping. In a recent survey, nearly 84% of people surveyed regarded delivery as an essential part of their online shopping experience. Long shipping times can negatively impact your business. When working with a dropshipping supplier, review its standard shipping costs and delivery timeframes. For sellers looking for fast order fulfillment services, a service like FBA can be valuable. Did you know?During the 2019 U.S. holiday season, independent third-party sellers—mostly small and medium-sized businesses—sold and shipped over 100 million items with Prime Free One-Day Delivery. How much capital do you have access to?In some cases, the dropshipping business model allows you to hold off on product procurement until customers actually place orders. This can make dropshipping attractive to entrepreneurs who want to get a business up and running with limited inventory investment. Some alternatives like third-party fulfillment also allow you to launch and run your business with less capital compared to sourcing, storing, and shipping products on your own. What is your target profit margin?Compared to other business models, such as owning a retail store or building your own order fulfillment center, dropshipping has a lower barrier to entry. Unfortunately, this can mean more competition for your business. The playing field can be highly competitive for businesses that use dropshipping. Dropshipping sellers are commonly able to offer products at low prices because they’ve invested so little. If you use dropshipping for your business, you may earn low profit margins. You might be able to overcome some of these issues if you position your business within a niche outside of any hyper-competitive field. Find potentially profitable or less competitive niches through market research, networking, and sales. Or invest in differentiating your brand. Are you ready to handle supply and inventory issues?If you choose to use dropshipping, you may have little to no control over the supply chain. Delays in production might determine how many orders your dropshipper is able to fulfill. Having to disappoint your customers by informing them an item is out-of-stock is hopefully the exception and not the rule. Sourcing products through multiple dropshipping services is one way to avoid running low on product inventory. When one supplier is out of a needed product, you can rely on another. However, working with multiple suppliers adds complexity to logistics and fulfillment, which may defeat the purpose of a dropshipping strategy. How will you handle refunds, returns, and replacements?Returns are an inevitable part of ecommerce business. Sometimes the return process can be as simple as a customer contacting you regarding an item they would like to return. The customer sends back the product, then you refund the customer and contact the dropshipping supplier to credit or reimburse you. But this is not always the case. Be prepared for more complex return and replacement processes. Take the time to understand how a dropshipping service handles returns before creating your refund and return policy. Think through the steps of the ecommerce transaction. Here are some examples of questions to ask before signing on with a dropshipping supplier:
Questions like these can help you understand a dropshipping agreement and help paint a clearer picture of the potential costs involved before you make changes to your business model. How will you manage customer fulfillment questions and concerns?Even though you may not physically handle the products, you may still need to respond to customer questions and concerns about a shipment, delivery, or product quality. A seemingly small miscommunication with your dropshipping supplier can result in negative reviews and poor customer experience. To avoid this, consider the entire purchasing process from the customer’s vantage point. Pay special attention to the following aspects of the customer experience:
Optimize each of these touchpoints to create a positive customer experience, which can help you earn positive reviews and build brand loyalty. How to build a dropshipping business in 2024Have you run another internet business? Starting a dropshipping business might share similarities with your experience. Here are some recommendations and steps to take:
How to choose a dropshipping supplierIt’s key to find a reputable and reliable dropshipper that can help you achieve success selling online. You’ll also want to avoid common dropshipping issues, such as botched orders, late shipments, and missing items. But what should you look for in a dropshipper? Here are a few ideas:
Reach out to the dropshipping supplier and ask the following questions:
What are the costs and profitability potential of dropshipping?Your investment in starting a dropshipping business will typically be a lot lower than other ecommerce models because you don’t have to pay for inventory up front. However, you might have other business startup fees to take into account, such as:
The profit potential for a dropshipping business is limitless but it depends on the demand and competition for your niche. Focus on excellent marketing and advertising for a high-demand, low-competition niche to improve your chances of earning more. Some dropshipping companies are earning hundreds of thousands per year, while others are earning much less. It’s impossible to guarantee the amount you’ll earn when starting out, since your marketing methods, the economy, and other factors can play a big role in outcomes. You can also review profit margins to get an idea of the profitability potential. Alternatives to dropshippingIf dropshipping is not right for your ecommerce business, there are alternatives. Here are a few options if your goal is to outsource fulfillment. Outsource storing and shipping products with third-party fulfillmentAs an alternative to dropshipping, some sellers purchase products in bulk, then enlist the help of a third-party fulfillment service to store items, pick and pack orders, and handle the shipping to customers. This approach allows you to procure products upfront, potentially at lower costs. You can also:
If you would like to outsource fulfillment while maintaining control over product quality, learn about FBA. Create your own branded productsAt some point in the life of your business, you may require specialty products featuring your own branding. Selling branded products can help your business grow by helping you:
Some sellers find a dropshipping supplier to add individualized touches like special packaging and branding and create branded products or white label products. Another option is to have a manufacturer produce branded products in bulk, then use FBA for distribution. This method lets you take advantage of Amazon’s fast Prime Shipping, helping you stand out in the crowded ecommerce market. Focus on promotion and earn a commission through affiliate marketingAffiliate marketing is a different business model altogether, but it’s worth considering if you’d prefer to avoid managing customers, orders, and returns entirely. Affiliate marketers don’t sell any products at all. Instead, they promote products for an ecommerce retailer and collect a commission when a customer purchases through a unique referral link. While affiliate marketing is an advertising business model as opposed to a retail solution, it can provide benefits such as minimizing startup or overhead costs while allowing you to build an audience and earn money when products you promote to your audience result in sales. How affiliate marketing worksWith affiliate marketing, you market a product online and include a link for customers to buy the item. The link takes customers to a website where they can place an order directly. You get paid when the customer uses your referral link and makes a purchase. The supplier handles the order confirmation, fulfillment, and shipping. Affiliate marketing can be a way to jumpstart your ecommerce business or monetize an existing asset such as a blog or email list. Since you don’t stock, process, or ship the products, you may be able to operate with relatively low overhead costs. You can also:
Unlike dropshipping, if you use affiliate marketing, your supplier handles returns for products. Thus, there may be a set window in which the supplier holds your commission payment, after which you get paid. Did you know?Amazon has an affiliate marketing programYou can earn a commission on orders customers make from referral links on your website, email, or social media channels. ConclusionAt the end of the day, only you can decide whether dropshipping is right for your business or not. While it may be appealing not to handle physical products, pay for warehouse space, ship orders, or manage stock levels, there are drawbacks as well. Weigh your options and goals in order to find the right online selling and fulfillment strategy to help you grow your ecommerce business. Working toward the launch of your online store?Get tips on starting your ecommerce business and find out how independent sellers, startups, and established brands have flourished selling in the Amazon store. Helpful resourcesWhether you’re looking to start a new brand, expand an existing brick-and-mortar business, or increase ecommerce sales, here are some resources to help support your path to success. Dropshipping FAQWhat is dropshipping? Dropshipping is a business model that allows you to sell products online without having to own or operate the physical location where those products are stored and processed. This means you can start an ecommerce store and sell a wide range of products without handling inventory and fulfillment. How profitable is dropshipping? How much you earn as a dropshipping business depends on various factors. These can include:
Also consider the dropshipper’s process. Be sure to research dropshippers and select the right niche, product, and suppliers for your business. Is dropshipping good for beginners? Is dropshipping legal? Yes, dropshipping is a legal method of order fulfillment. Do your homework on possible dropshipping suppliers and thoroughly review any dropshipping contracts in an effort to avoid surprises and bad actors down the line. Will dropshipping help make my business profitable? Not necessarily. Businesses that use dropshipping services commonly operate on slim profit margins due to competition. Dropshipping may be a viable possibility for your business, but you could find yourself confronted with a tradeoff between low overhead and upfront costs versus lower profit margins. Is dropshipping allowed in Amazon stores? Yes, as long as your business meets Amazon criteria, you can use dropshipping for your business when you sell in the Amazon store. To use dropshipping services for your business in the Amazon store, you must:
Does Amazon offer dropshipping services? Fulfillment by Amazon (FBA) is an alternative to using a dropshipping supplier. You procure products from your supplier of choice while Amazon handles the shipping, customer service, and returns on your behalf. Multi-channel fulfillment allows you to use FBA even when you sell your products through your own domain or other ecommerce channels. What’s the difference between dropship manufacturers, wholesalers, and retailers? With dropshipping, the seller of record does not handle the product directly but instead uses a third party to source and store products, and ship orders directly to customers. Any party in the supply chain can dropship, including manufacturers, wholesalers, and retailers. A manufacturer, wholesaler, or retailer’s role doesn’t change based on the seller’s fulfillment method. For more details on how manufacturers, wholesalers, and retailers fit into the dropshipping process, see . What’s the difference between dropshipping and retail arbitrage? Retail arbitrage is the process of sourcing products from a retailer and selling the items at a higher price. Essentially, a seller re-sells products already available to the public to make a profit. Retail arbitrage can be a labor-intensive venture as it requires you to consistently discover discounted items you can “flip” to make a profit. Sellers might find it challenging to rely on retail arbitrage when combined with a dropshipping method of order fulfillment, especially if the business model already operates on slim margins. Do I need to register my business to use a dropshipping supplier? While it is possible to operate your online store without a business license, you may be leaving yourself open to issues down the line. Registering as a Limited Liability Company (LLC) or another formal entity can reduce your liability and show potential suppliers you’re a legitimate business. Do dropshipping companies ship internationally? Yes, some do. Shipping rates, timeframes, and fees will vary between companies. If you want to reach customers worldwide, be sure to investigate the details of international order fulfillment as you research different dropshipping options. Amazon operates fulfillment centers around the world and FBA international programs can help you reach customers in other countries. |