Dropshipping Explained: How Does This Fulfillment Method Work?

Are you new to dropshipping and don’t know where to start? Don’t worry!

Dropshipping is a fulfillment model that involves selling products without carrying any inventory. While dropshipping, you outsource the production, storage, handling, and shipping to a third party.

Whether you're a newbie or an experienced business owner, this article will give you a comprehensive understanding of what dropshipping is.

Let's get started with the explanation of what dropshipping means!

How does dropshipping work? (Step-by-Step)

Here's a detailed step-by-step guide to help you understand how dropshipping works:

1. You create an online store and list your supplier's products

First, you need a place to display your products and sell them online.

And what's a better place than your own online store?!

You can use an ecommerce platform like Shopify or BigCommerce to build an online store without any technical skills.

Next, you need to source products.

So instead of investing your hard-earned money in buying and storing the inventory in your house, you can use a dropshipping supplier to fulfill your orders.

There are many apps, like Spocket, Sellvia, and DSers, that help you source products and automate orders.

Now that you have an online store and a supplier to source goods, it's time to add products to your store and create an attractive store design.

Here are a few examples of successful dropshipping stores:

And one more:

Feel free to check our article on 23 successful dropshipping store examples for inspiration!

2. A customer places an order on your online store

When a customer places an order on your online store, you forward the order to your dropshipping supplier.

You can use apps like Sell The Trend and Syncee to sync supplier inventory and fulfill orders automatically.

If you aren’t using such dropshipping automation tools, you can simply place the same order manually with your dropshipping supplier.

3. Your supplier ships the product directly to your customer

The dropshipping supplier will pack the order and send it straight to your customer.

Now, you may be worried that the customer will know the package didn't come from you directly.

Since your supplier dropships, they know they shouldn't send any advertising material in the cartons. The supplier will also ensure that there are no invoices or receipts in the packages.

A brief history lesson about dropshipping

Dropshipping started in the late 1990s and early 2000s as ecommerce began to take off.
Long before that, businesses would typically purchase large product quantities upfront and store them in a warehouse.

However, this changed in the 1950s when big brands like J.C. Penney and Sears started accepting orders via telephone and mail. These companies would then ship the order directly to the customers' doorsteps.

Then came the internet in the 1990s, when mail orders transitioned to online orders. Ecommerce companies grew slowly and steadily, with Amazon being a prime example.

After online marketplaces like Amazon and eBay, then came social media channels. Facebook Pages was introduced in 2007 to help brands target users based on their interests.

And not too long after that, Alibaba and AliExpress came along and helped international sellers buy bulk products from China at cheap rates.

But it wasn’t until 2014, that dropshipping really took off, thanks to Shopify.

The ability to create an online store without using technical skills allowed more and more people to start online stores.

And that combined with the growing popularity of Alibaba and AliExpress gave rise to dropshipping as we know it today.

Noticing a steady increase in the number of dropshipping stores, Shopify acquired Oberlo, an app that allowed its sellers to import dropshipping products from AliExpress directly to their store.

Now, there are many dropshipping apps and services that allow you to find suppliers and list their products on your store with ease.

You can read our article on the history of dropshipping to get a deeper understanding of the early days of this business model! Or check out the history of Shopify here.

Pros of dropshipping

Now that you know the history of dropshipping, let’s look at the pros of dropshipping to understand why this business model is so popular.

1. No inventory

The best part about dropshipping is that it eliminates the need for large upfront investments in inventory.

You only purchase products from your supplier after a customer has placed an order on your website.

This allows you to test different products without the risk of being stuck with unsold inventory.

2. Low startup costs

Starting an ecommerce business can be expensive. It has many costs, such as inventory, physical store, warehouse rent, utilities, website design and development, and liability insurance.

But if you're running a dropshipping store, you only need to build an online store. You don't need to invest in inventory, a physical store, or a warehouse to start.

Instead, you can focus on other important aspects, such as marketing and customer service.

3. Less experience required

Dropshipping doesn't require a lot of experience.

You don't need experience in inventory management, logistics, or the technical aspects of an ecommerce business.

You only need to focus on digital marketing, sales, copywriting, customer service, and conversion optimization. There are plenty of free resources available online that help you learn these skills.

4. Learn about ecommerce

Starting a dropshipping business is a great way to learn about the ecommerce industry and gain invaluable insights into how it works and what it takes to be successful.

Along your dropshipping journey, you'll acquire skills like content marketing and sales.

In addition, by working with different suppliers, you'll learn about different types of products, and how to find winning products to sell.

5. Easy to open a dropshipping store

There are many ecommerce solutions like Shopify that make it extremely easy to set up and run an online store.

These platforms take care of hosting and allow you to build an attractive website with their intuitive drag-and-drop website-building tools.

Plus, they offer various apps that help you add essential functionality to your store, such as payment gateways, inventory management, and shipping.

6. Easy to scale

Dropshipping is a scalable business model.

Unlike traditional retail businesses, which require significant investments in inventory and other resources to scale, dropshipping allows you to easily expand your product offerings on a budget.

You can also turn your store into a brand. Many dropshipping stores successfully turned into D2C brands, such as Pillow Slides and Eiken.

Cons of dropshipping

Most people think dropshipping is an easy way to get rich. But that’s far from reality. Although dropshipping is a legit fulfillment method, it has some cons.

1. Limited control

One of the main cons of dropshipping is that you have no control over the fulfillment of the products you sell. You have limited influence over the way the products are packaged or the time it takes for your customers to receive them.

Since you don't stock the products, you don't know if they have any manufacturing defects unless the customer complains about them.

And since you aren’t in charge of the branding, packaging, or design of the products, your ability to create a unique and memorable customer experience is also limited.

2. Unable to combine products for an order

If a customer orders various products from your online store and you use multiple dropshipping suppliers to fulfill orders, you can't combine the order into a single package.

In addition, you’ll need to charge separate shipping fees for each product since your suppliers might have warehouses in different places.

Every now and then, you’ll also come across customers complaining of receiving multiple packages instead of a single delivery.

3. Difficult to ensure quality control

As a dropshipper, you don't have direct control over the manufacturing process. This can lead to negative reviews and poor customer satisfaction.

You never see the product during the entire fulfillment process. You'll only see the product when a customer sends an image with a complaint.

And at that time, it will be too late to do anything other than initiate a return or exchange.

4. Stock issues

As a dropshipper, you don't have control over the supplier's inventory.

If a product you're selling is out of stock, it could result in lost sales, dissatisfied customers, and damage to your reputation.

5. Lesser profit margin

Suppliers generally provide bulk discounts to encourage more purchases.

Since dropshipping mostly involves selling smaller units, you can't ask for heavily discounted pricing from your suppliers.

In addition, competition among dropshippers can be intense, leading to lower prices.

6. Complicated returns

Returns and refunds can get complicated with dropshipping.

Your supplier may be located in another country, making the shipping times two to three weeks.

Plus, it can be difficult to coordinate returns and exchanges if you’re dealing with multiple returns, suppliers, and shipping companies.

7. Difficulty in giving helpful solutions to the customers

As a dropshipper, you don’t have control over the supply chain.

If a customer has an issue with the product quality, you need to discuss it with the supplier first before providing a solution to your customer.

This can lead to delays in resolution, which can result in negative reviews.

8. High Competition

Dropshipping has a low barrier to entry which can lead to intensive competition.

As competition increases, it can also lead to price wars and lower profit margins, making it increasingly difficult to generate significant profits.

You may find it difficult to offer unique products or create a brand identity since dropshippers often source products from the same suppliers.

But there are ways to deal with the competition. Want to learn how?

If so, check out the following articles:

• Unique Dropshipping Store: 11 Amazing Tips to Create One
• 7 Tips to Beat the Competition of Your Dropshipping Store in 2024!

How much do you need to invest to start dropshipping?

Starting a dropshipping store costs around $275 at a minimum. However, the actual costs depend on your niche.

Here’s a breakdown of dropshipping costs:

• Online store. Shopify’s Basic plan costs $39 a month.
• Apps. $30 a month. The average cost of a Shopify app is around $15 a month. You should expect to pay for at least two apps when starting out.
• Domain name. $15 a year. Make sure the domain name and your dropshipping store name are the same to avoid confusing your customers.
• Sample orders. $100. This cost may vary based on your niche.
• Marketing costs. $100. This is the minimum amount you need to use for Google Ads, Facebook Ads, Pinterest Ads, and Instagram Ads.
• Business registration. $125. The cost to form an LLC varies depending on your country and state.

This is a bare-bones budget. Ideally, you should have the capital for three to six months as it can take time for your dropshipping store to take off.

Other expenses you must consider are product photography, website customization, and branding.

A minimum budget of $1,000 is a good place to start. It gives you enough capital to keep your business running for three to four months.

If you really want to start dropshipping on a low budget, here are five unusual tips on how to start dropshipping for free.

Plus, check out this article here, which goes over how long it takes to make money with dropshipping.

How do you start dropshipping in 2024?

Starting a dropshipping business in 2024 can be a great way to enter the ecommerce market.

Here's a step-by-step guide to help you get started:

1. Learn the basics. Before you start, it's important to understand the basics of dropshipping and how it works. This includes understanding the differences between dropshipping and other ecommerce business models, as well as the pros and cons of dropshipping.
2. Choose a platform for selling. Once you have a good understanding of dropshipping, you will need to decide where you are going to sell. Shopify, BigCommerce, and WooCommerce are popular platforms that are easy to set up and offer a wide range of features.
3. Select a niche. Next, you need to decide what kind of store you want to open. This includes choosing a niche for your store.
4. Product research. This step includes looking for products that are in demand, popular among your target audience, and profitable.
5. Target audience research. At the same time, it's also important to research your target audience to understand their needs, preferences, and buying habits.
6. The basics of your store. With your niche and target audience in mind, you can create a website, set up payment and shipping options, and add product listings.
7. Find a dropshipping supplier. One of the most important steps in starting a dropshipping business is finding a supplier. This includes researching different suppliers, comparing prices and quality, and setting up an account with the supplier.
8. Sourcing your products differently. It can be beneficial to source products from multiple suppliers to reduce the risk of stockouts and increase your product variety.
9. Working with dropshipping suppliers. Once you have found your suppliers, it's important to establish a good working relationship with them. This includes setting clear expectations, communicating regularly, and keeping track of inventory levels and shipping times.
10. Add store branding. Your brand will set you apart from your competitors, so it is important to give it the attention it deserves. This includes creating a logo and developing a brand voice.
11. Improve store customizations. Once your store is set up, it's time to make it even better. This step covers optimizing your store for conversions, adding features like reviews and ratings, and making sure your store is mobile-friendly.
12. Add a few products. Focus on a small number of products at first to ensure they are perfect. This will help you start with a strong foundation and make it easier to scale up later.
13. Marketing. To get your first sales, you will need to advertise your store. This step consists of creating a marketing plan, setting up social media accounts, and creating ads.
14. Get your first sale. To get your first sale, you need to use tactics like email campaigns, social media, and influencer marketing to drive traffic to your store.
15. Study about dropshipping. There are many online resources such as online tutorials, podcasts, and ebooks that can teach you the skills you need to succeed.
16. Making your customers happy. Once you have your first few sales, it's important to focus on making your customers happy. This includes providing excellent customer service, responding to customer reviews, and handling returns and exchanges.
17. Running your business. As your business grows, it's important to track your finances and stay on top of your taxes.
18. Receive payments. You will also need to set up payment methods for your store. This includes accepting credit card payments and setting up payment gateways like PayPal or Stripe.
19. Optimize your store. Optimizing your store includes testing different layouts, adding upsells and cross-sells, and checking your store's analytics to make data-driven decisions.
20. Configure your email marketing. Email marketing allows you to communicate with your customers and build relationships. This step includes setting up an email marketing service, creating email campaigns, and segmenting your email list for more effective targeting.

If you are not sure how to get started, you can check out our dropshipping checklist.

Each step has detailed guides that help beginners take their dropshipping stores to the next level!

6 Alternatives to dropshipping

If you’re worried that dropshipping is saturated and want a more reliable business model, then we have some great alternatives that you may want to consider.

• Print on demand. Print on demand is similar to dropshipping, where you create and sell designed graphics on products without keeping inventory. Once a customer places an order, the seller prints and ships it to your customer.
• Private labeling. Private labeling, also known as white labeling, allows you to add your own branding on products manufactured by a supplier. This allows you to create a unique product line without the need to invest in product development.
• Third-party fulfillment. Using third-party fulfillment, you can buy inventory and send it to a third-party fulfillment center. This company will handle all aspects of the fulfillment process, including storing and shipping products.
• Affiliate marketing. Affiliate marketing is a business model where you earn a commission by promoting other people's products on your website or social media. You add a custom link to the product you’re advertising, and when someone clicks that link and purchases that product, you receive a part of the revenue.
• Reselling. With reselling, you can buy products from a wholesale supplier and resell them at a higher price. This is a great option if you want to sell popular, in-demand products without investing in product development.
• Drop servicing. Drop servicing is a business model where you provide a service to customers and outsource the actual service to a freelancer or an agency. This allows you to offer a wide range of services without having to do the work yourself.

Each of these dropshipping alternatives has its own set of pros and cons. You should evaluate your skills, interests, and resources when choosing a business model.

FAQs about dropshipping

Here are some FAQs about dropshipping:

Summary

Before we go to the conclusion, we've created a quick summary of this article for you, so you can easily remember it:

• Dropshipping steps: you create an online store and list your supplier's products, and when a customer places an order on your store, your supplier ships the product directly to your customer.
• Dropshipping is popular because you don't need to carry inventory, the startup costs are low, you require little to no experience, it's easy to open a store, and you can scale your business easily.
• Dropshipping isn't all sunshine and rainbows. Common issues you face while dropshipping are limited control over the fulfillment process, inability to combine orders, difficulty in ensuring product quality, stock issues, low profit margins, complicated returns, and high competition.
• Check our 22-step dropshipping checklist to start, build, and grow your business.

Ready to dropship in 2024?

Dropshipping is a great business model that you can start with minimal investments. It's also a great way to learn about the ecommerce industry.

But dropshipping does require effort and dedication to finding the right products, target audience, and marketing strategies. As with any business model, it requires significant time and effort to set up and run.

It also helps to have a clear understanding of the costs involved and to budget accordingly for profitability. With the right approach, market research, and ability to adapt, dropshipping can be a profitable venture in 2024.

So are you ready to dropship in 2024?

Want to learn more about dropshipping?

Ready to move your dropshipping store to the next level? Check out the articles below:

• Dropshipping Mindset: 6 Things to Know Before You Start
• Marketing for Dropshipping: How to Pick the Right Method
• How to Become a Dropshipper in 5 Steps: A Beginner’s Guide