What is Dropshipping? A Guide to Order Fulfilment

drop shipping

Drop shipping is a popular inventory method for online businesses. Learn everything about how drop shipping works and decide if it’s right for your business.

Whether you’ve outgrown a storage warehouse or you’re struggling for room in your home-based business, dropshipping is a great way to free up space. It takes away the challenge of managing your inventory, as a third-party supplier stocks and ships your products directly to the customer.

In this guide, we’ll take a look at how a dropshipping business model works for eCommerce businesses and the benefits of using this popular supply chain method.

Here’s what you should know about dropshipping, including:
What is dropshipping?
How does dropshipping work?
The benefits of a dropshipping business
The challenges of dropshipping
How to select a dropshipping supplier
Product ideas for dropshipping
Tips for a dropshipping business
FAQs about dropshipping

What is dropshipping?

Dropshipping is a business model where you sell online without ever having to hold products in a physical location or ship them. Instead, when someone buys an item from you, you send that order to a third-party supplier who then sends the product directly to the customer. It means you don’t ever have to deal with inventory management and fulfilment but you can still run a profitable eCommerce business.

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How does dropshipping work?

Dropshipping is a form of supply chain business model that uses a network of suppliers, materials, manufacturers and retailers to create and distribute a product.

From production to customer delivery, dropshipping typically involves the following:

  • Manufacturers create the products. They usually don’t sell to the public, but sell in bulk to wholesalers and retailers instead.
  • Wholesalers buy products from manufacturers, and then mark them up before selling them on to retailers. Wholesalers usually stock products from a variety of manufacturers.
  • Retailers sell products directly to the public, at a markup.

And here’s how it works:

  • The customer places an order with your business, the retailer.
  • You alert the dropshipping partner — either the manufacturer or the wholesaler — who packages and ships the product to the customer.
  • The dropshipping partner charges you, the retailer, for the service and you charge the customer and the dropshipping partner also ships the order to the customer.

Generally, the shorter the supply chain, the greater your profits will be. This is because there are fewer parties taking a cut. The shortest dropshipping supply chain is one where you deal directly with the manufacturer.

The benefits of a dropshipping fulfillment model

Dropshipping isn’t just a great way to save space, it can also help you start a business and test ideas, with limited risk. Here’s a look at the other advantages of dropshipping:

It lowers your start-up costs of starting and maintaining a business. Dropshipping drastically reduces the initial costs of starting an online store since you don’t have to invest in building inventory upfront. As you don’t have to deal with purchasing inventory (or managing storage for that inventory), your overhead remains relatively low. It also means you aren’t stuck with products that won’t sell, so you don’t have to mark down those items and take a loss.

Your location can be flexible. Dropshipping businesses can also be more adaptable than those with more traditional structures. Because you don’t have physical inventory, you can basically run your eCommerce store from anywhere you find an internet connection.

You can offer customers a wider selection of products. Since you don’t have to invest in building your own inventory, you can stay on top of trends and quickly add new products to your site. You can also quickly switch up your offerings without first having to order new items or clear out backstock – perfect for when you have a calendar of retail events to stick to.

You don’t have to manage inventory. A lack of inventory also means that you won’t have to manage it. Organising and stock checking inventory can be complicated and time consuming (although inventory management software can make the job much easier). Not having to watch, reorder, and process your stock means you and your employees have more bandwidth to work on other aspects of your business to help it grow.

The challenges of dropshipping

Dropshipping can be beneficial for business owners, but there are drawbacks that might not bode well with your overall business plan. Here are a few examples of why dropshipping might not be right for you:

  1. Reduced profit margin. The longer your supply chain, the lower your profits. So, when you consider the costs of handling fees and percentages taken out by various middlemen, it might not be worth it to pursue a dropshipping operation. There’s also a lot of competition in the dropshipping niche. Because it takes so little investment to get started, dropshipping businesses often provide products at very low prices. To compete, you often have to drop your prices too.
  2. Inventory issues. When you own inventory, it’s easy to check stock levels. But when you get products from multiple suppliers — who in turn are working with other retailers — it’s more difficult to make sure that the products you need are readily available.
  3. Complex shipping costs. If you’re working with a number of dropshipping suppliers, your shipping costs become quite complicated. Let’s say that a customer orders two items, each from different suppliers, each with different shipping costs. You’ll need to determine how to charge the customer for shipping in a way that the customer won’t feel overcharged.
  4. Lack of control over customer experience. By putting reliance on a drop-shipping partner to get products to your customer, you’re acting in good faith that they will deliver the orders on time and intact. If they don’t come through on their end of the deal, or deliver items late, broken or not at all, it can result in bad reviews and a loss of consumer trust that can negatively impact your company and any customer relationships you’ve worked hard to build up.
  5. Potential problems with suppliers. It’s imperative to have solid relationships based on trust and mutual respect with your suppliers. Suppliers are at the core of your business, so be selective about whom you partner with, and never take those relationships for granted by paying them late or being difficult to work with. To build strong partnerships, it’s important that you learn how to manage your suppliers effectively in order to maximise dropshipping efficiency.

How to select a dropshipping supplier

Your chosen dropshipping suppliers will determine your supply chain’s success, so you need to do your due diligence during the selection process.

Generally speaking, you want to set up dropshipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line, so whenever possible, it’s best to work directly with a manufacturer.

Here are some questions to ask potential suppliers:

  1. How much do you charge? Crunch the numbers before selecting a dropshipping partner. If the wholesale price isn’t enough for you to make a decent profit off of the products, look elsewhere. Also ask, is there a handling fee? If so, assess how it may affect your profit margin. Again, every fee and each middleman affects your bottom line, so you want to streamline the process as much as possible.
  2. How are products shipped? You want a partner who ships items via a service that provides tracking numbers (which they should send to you). That way, if your customers inquire about the status of their orders, you can provide them with accurate, up-to-the-minute information. And, with shipping comes returns. Find out the return and warranty policies. If returns aren’t accepted or products not guaranteed, steer clear.
  3. What is the billing process? Do dropshipping partners charge your credit card as soon as you submit an order? Or do they send you a monthly bill? Make sure to choose a partner whose billing process is a good fit for your cash flow.

Product ideas for dropshipping

Now you’re all up to speed about how dropshipping works, it’s time to think about the type of products you may wish to sell. You could create a subscription service for repeat purchases, provide niche products for a specific hobby or cater to business clients who bulk buy office products.

Whichever option you choose, it’s always a good idea to do some market research before you settle on your product range. You can use Google Trends and social media to monitor popular interests and engage with your target audience, while a competitor analysis can help you see what’s already on the market.

Get some inspiration from our dropshipping ideas below:

Health and self-care products

Online searches for self-care have risen by 250% since March 2020, so the health and wellness industry has never been more in demand.

From face masks and organic teas to skincare serums and teeth whitening, there’s endless possibilities for dropshipping in this market. Try to build a strong social media presence to support your brand, so that people think of you when looking for these products.

Fashion and accessories

The fashion industry is constantly evolving, with old trends resurfacing and new ones emerging. Vintage-inspired head scarfs and colourful 2000s scrunchies are just some of the popular accessories you can dropship.

The past year has also seen ‘quiet luxury’ become a dominant trend, so why not take advantage of the current demand for muted tones and simple silhouettes?

Home comforts

Whether you’re interested in selling cleaning products or trendy homeware, the interiors and lifestyle market has a variety of avenues for your dropshipping business. Wall art and prints have long-term appeal, while statement furniture tends to come in phases.
You can use social media sites like Pinterest and Instagram to spot the latest trends, before finding a manufacturer or wholesaler who can supply the products for you.

Turn your technology interests into a business by dropshipping the most up-to-date tech, such as wireless earbuds and chargers, fitness trackers and drones.

You could even appeal to existing brand audiences with accessories that support their devices, like cases and repair kits. Phone cases for the latest iPhone are continuously in demand and you can easily expand your business to other devices if you’re successful.

Tips for a dropshipping business

There are a few best practices to implement to ensure your dropshipping business is a success.

Make online shopping a pleasure
From ordering to delivery, you want to make the experience as seamless as possible. That starts with a user-friendly e-commerce experience. You want to invest in building an elegant website that is easy to use (on all devices).

Be particular about products
While dropshipping allows you to sell a wide variety of products, that doesn’t mean you should sell everything. Do your market research and analyse trends to determine what you should be selling in your shop. Think carefully about what is marketable, what is easy to ship and what is hard for people to find locally.

Focus on quality
Even if you thoroughly vet a supplier, you should remain vigilant about the service once you’re working together. For example, if there are several incidents of damaged products, lost packages or late deliveries, question the supplier and cut ties if necessary, to avoid losing the confidence of your customers.

Be organised
Dropshipping can lead to lots of admin and adds a lot of more work to your operations management. It might be worth finding a dedicated staff member for dealing with the parties in your supply chain, to keep things organised and ensure everyone’s happy.

Build a trusted business
Your reputation is everything, so not only do you need to follow through on your promises with reliable dropshipping partners and a great website, you should also work to boost your online credibility to ensure customer trust. From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your dropshipping business. Dropshipping could be the right option for your eCommerce business. Its flexible approach to supply and demand lets you test out your product ideas, avoid expensive stock storage and target the latest trends. So, start your dropshipping business today with Square.

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FAQs about dropshipping

What is dropshipping?

Dropshipping is a business model where you don’t handle or physically send the products you sell. You sell products through your online store, but inventory and fulfilment is taken care of by a third-party supplier. Effectively your eCommerce website acts as a shop window - you promote and sell the products but a manufacturer, distributor or wholesaler will be the one responsible for shipping the products and making sure they reach your customers.

How much money do I need to start a dropshipping business?

When you start dropshipping you are starting a business so there are some costs involved. You don’t have traditional costs of inventory, storing products and fulfilment but you do need a website and you will need to market your products to make sales. You can spend thousands on web design and marketing specialists or you can handle a lot of it yourself, creating a free online store with Square and using social media to spread your message. Like any business though, it’s a great idea to have a business plan in place and a budget so you know what you have available and how best to allocate it to get your venture off the ground.

Is dropshipping profitable?

Dropshipping can be profitable, though it depends on a number of factors. When you consider the costs of handling fees and percentages taken out by various middlemen, it might not be worth it to pursue a dropshipping operation. In addition to the amount of shipping fees that your company decides to absorb for the customer, you will need to pay the dropshippers.

There’s also a lot of competition in the dropshipping niche. Because it takes so little investment to get started, dropshipping businesses often provide products at very low prices. To compete, you often have to drop prices too.

Is dropshipping too saturated?

Nope, there’s plenty of room for new sellers! Asking if dropshipping is too saturated is like asking if shopping is too saturated. Dropshipping is a fulfilment method rather than a product itself, it’s a means to an end. So, provided you’re selling a product which is popular, sellable and marketable then you could use dropshipping to get it to your customers. Just because you try selling one product and it doesn’t sell doesn’t mean dropshipping is overrated. It may simply mean there wasn’t enough demand for it or you didn’t get your marketing quite right. Another product, on the other hand, could become a bestseller.

What’s the difference between dropshipping and affiliate marketing?

Dropshipping and affiliate marketing are both eCommerce business models, but they differ in their approach. As a dropshipper, you sell products that are manufactured and shipped directly by a third-party supplier, without having to handle inventory yourself. In contrast, as an affiliate marketer, you promote other companies’ products or services and earn a commission for each sale or lead you generate through your marketing efforts. With dropshipping, you take on more responsibility for the customer experience, while with affiliate marketing, your primary role is driving traffic and earning commissions without direct involvement in product delivery or customer service.