Dropshipping is a way of retailing that does not involve storing the products being sold in your warehouse. When an item is sold in an online store, the dropshipper buys it from a third party, who then ships it to the buyer. As a result, the seller does not have to handle the shipping themselves.
The main difference between dropshipping and the standard retail model is that the seller does not own or store the product being sold. Instead, the seller purchases the product from a third party as needed. Typically, the supplier is a wholesaler or manufacturer.
How does dropshipping work on Shopify?
The two most common methods for dropshipping on Shopify are to search for a supplier anywhere in the world in databases or using the Shopify app, which gives you access to thousands of suppliers.
As an application, you can choose a suitable one from the dozens of applications available in the Shopfy store. We recommend the DSers application, with which you can search for products for sale on Aliexpress and import them to your store.
Ordering a product in DSers is only completed after the customer buys it in your store. The service automates this process and the only thing left for you to do is check the data and click the “order” button. After that, the product will be sent from the supplier to the buyer - wherever he is.
Benefits of Dropshipping
Due to its accessibility, dropshipping is a great model for new entrepreneurs. It allows you to quickly test different business ideas with a limited budget. This allows you to test and select only the most popular products for sale. But there are several other reasons for the popularity of this business model.
1. Lower starting capital
The biggest advantage of dropshipping is that it allows you to launch an online store without investing thousands of dollars in it. The traditional model requires an entrepreneur to spend a lot of money on material and technical resources.
This makes it possible to start a successful business with a very modest budget. In addition, opening a dropshipping store is associated with less risk, since you do not purchase goods in advance.
2. Easy start
It is much easier to manage online sales when you do not have to deal with physical goods. With the dropshipping model, you will be freed from the following hassles:
- Warehouse management and payment;
- Packing and shipping of goods;
- Tracking balances for accounting;
- Processing returns and incoming deliveries;
- Constant ordering of goods and control over the level of trade stocks.
3. Low overhead costs
You don't have the costs of maintaining a warehouse or purchasing inventory, so your overhead costs are quite low. Many successful dropshipping stores operate as home-based businesses that require little more than a laptop and some running costs.
As your business grows, these costs will also increase, but will still remain low compared to the standard model.
4. No location binding
Dropshipping business can be run from almost anywhere where there is internet. To manage the business, you just need to be able to communicate with customers and suppliers.
5. Wide selection of products for sale
Since there is no need to purchase the product in advance, you can offer your store visitors a wide range of products without additional costs, adding any product that suppliers have to your display.
6. Ease of testing
Dropshipping can be useful both when starting a new store and when expanding an existing business. It gives you the opportunity to explore the demand for additional product categories, such as accessories for existing products or completely new product lines. At the same time, there is no need to buy them before putting them up for sale - and this is the main advantage.
7. Ease of scaling
If you were operating under the traditional model, receiving three times as many orders would require three times as much work. With the dropshipping model, most of the work of handling orders falls on the shoulders of suppliers. This allows you to scale your business with less hassle and less extra effort.
Growing sales always comes with extra work to support customers, but companies using the dropshipping model have an advantage over traditional online retailers.
Disadvantages of Dropshipping
All the advantages mentioned above make dropshipping a very attractive model for those who plan to open an online store or expand the range of an existing one. But it has its drawbacks, like any other approach. Convenience and flexibility come at a price. Here are some disadvantages to consider.
1. Low margins
Low profitability is the biggest disadvantage of working in the dropshipping niche. Since it is easy to start such a business and the overhead costs are minimal, there is high competition and dumping. Due to the low investment at the start of the business, many competitors allow themselves to work with a minimum markup, thus trying to increase profits due to turnover.
If you start selling on Amazon through the dropshipping model along with selling through a Shopify store, the margins on this sales channel will be much lower.
Competing sellers typically have low-quality websites and poor customer support (if any). You can use this to differentiate yourself from them. But it won’t stop potential buyers from comparing prices on similar products from you and others. Increasing competition in a niche quickly leads to burnout and decreased profitability. Fortunately, this problem can be solved by choosing a niche or vertical that is well suited for dropshipping.
2. Inventory problems
If you have the product in stock, then tracking the balance is quite simple. But when you work with several warehouses that serve other clients in addition to you, the balance can change daily. Fortunately, there are applications for synchronization with suppliers. They allow you to transfer orders to suppliers in one or two clicks and track the stock of goods in real time.
DSers is one of them. The service allows you to automate the reconciliation of balances. For example, if a product is out of stock at a supplier, it can be automatically removed from the display case or left with a zero quantity.
3. Delivery difficulties
If you work with multiple suppliers (and most dropshippers do), your products will be shipped to your customers from multiple sources. This increases shipping costs.
Let's say a customer orders three items from different suppliers. In this case, they will have to pay for delivery three times, and it would not be entirely right to shift these costs onto the customer's shoulders. And even if these costs are included in the price, calculating them automatically may not be an easy task.
4. Supplier errors
Have you ever been accused of something that wasn't your fault, but you still had to take responsibility? This unpleasant situation can happen if you work with a dropshipping system.
Even the best suppliers sometimes make mistakes - and you will have to answer to your customers for their mistakes and apologize. What can we say about bad or even just not very good suppliers? They will cause endless disappointment to customers due to missing goods, delivery failures, poor packaging. This can damage the reputation of your store.
5. Limited customization and branding options
Unlike custom manufacturing or on-demand sales, dropshipping does not provide control over the product, which is typically designed and labeled by the supplier.
Some Aliexpress suppliers may slightly customize the product for you, but even in this case, control over the product will remain in their hands. Any changes and additions imply a minimum order of a certain volume, which is impractical for retail orders when dropshipping.
Common questions about dropshipping
In the rest of this guide, we'll walk you through all the steps needed to start a profitable dropshipping business. But before we go any further, we'll answer a few frequently asked questions.
How much do you need to invest to start a business?
It is difficult to accurately predict the initial investment in each specific case, but there are several areas that every dropshipper will have to spend money on. Here is a short list of the main expenses:
Online store
Estimated cost: $32 per month.
You need to find an e-commerce platform to create and host your store. We recommend Shopify. Such a store can be easily synchronized with DSers to access products from suppliers. In addition, you will get a full set of themes and free branding tools to quickly launch your business.
Domain name
Estimated cost: $5-20 per year.
Without your own domain name, it is difficult to gain consumer trust. While there are a number of top-level domains available, such as example.shop or example.co , we still recommend choosing a .com domain that matches your brand name, if you have one.
Use Shopify's domain name generator or learn how to come up with a catchy store name.
Test orders
Estimated cost: depends on the product and assortment
Dropshipping allows you to work with a large range of products without investing money in them. Despite this, at the beginning you will still have to spend some money and time to test the products you are going to sell. Without doing this, you risk selling your consumer a product with a large number of defects, which will lead to dissatisfaction, a damaged reputation and the hassle of returns.
Online advertising
Estimated cost: increases as the business scales. At the initial stage, we recommend investing at least $500 in promotion.
Every e-commerce entrepreneur should be looking for ways to reduce customer acquisition costs by using free or potentially free channels: content marketing, SEO, and word of mouth.
But for a quick start, paid advertising is still necessary and useful. The most suitable and common methods of promotion are: contextual advertising in search networks, mobile and media advertising, targeted advertising in social networks.
How do dropshippers make money?
Dropshippers act as intermediaries, bringing the best and latest offers from suppliers and manufacturers to the buyer. Their profit is the difference between the final price, the cost of the product from the supplier, and the costs of advertising and service. It is worth remembering that the marketing that the dropshipper undertakes to help buyers find, evaluate and buy the product takes time and financial investment. Also included in the cost is the cost of customer support, which will be required if there is a problem with the product or its delivery.
Taking all these factors into account, dropshippers mark up their products in exchange for the effort of distributing them. For this reason, suppliers agree to cooperate under the dropshipping model. The online stores of such sellers give manufacturers an additional market and profit that they would otherwise miss out on.
In order for a dropshipping business to generate income, you should calculate the average cost of attracting a customer, add it to the price of the product from the supplier, and set your price for the product based on this data.
Is dropshipping legal?
Dropshipping is simply a sales model used by many international retailers, and it is completely legal. As with any business, the key to long-term success is meeting customer expectations and creating a brand that resonates with your target audience.
Typically, doubts about legality arise from a misunderstanding of the dropshipping model. Most retail stores you are used to shopping at are unlikely to produce the products they sell. They source them from other suppliers. Dropshipping takes the same approach and adapts it to an online format.
Of course, there are legal nuances that need to be taken into account in order to formalize a business legally. To find out the relevant details in each specific region, it is better to consult a lawyer before launching.
So, is dropshipping worth it in 2024?
As stated above, dropshipping is not a way to build a successful business without effort. It will take hard work to get started. The dropship model has certain advantages, but it does not exclude a number of problems that will need to be solved.
In the following articles, we will look at these issues in detail and how to overcome them. With careful planning and a thoughtful approach, most obstacles can be overcome and will not prevent you from building a profitable business.
Next Chapter: How to Find a Profitable Dropshipping Niche