According to data gathered by Grand View Research, the market size of the dropshipping industry was valued at almost $150 billion in 2020. What's even more impressive is that it is expected to grow by almost 30% in the next four years. This significant growth can largely be attributed to consumers’ new love for online shopping and the equally impressive growth of the eCommerce industry as a whole.
If you are smiling and nodding, but have no idea what dropshipping is exactly, you are at the right place. In this article, we take a closer look at the steps and pieces involved in the dropshipping model.
What Is Dropshipping: The Process Explained:
What Is Dropshipping Exactly?
Dropshipping refers to a type of retail fulfillment strategy where online stores do not stock their own products. Instead, it buys the products from a third party as required and delivers it directly to the customer without ever handling the product directly. The third-party suppliers will remain invisible to the customer. Their only responsibilities are stocking and shipping the products, while the dropshipping business will be responsible for running the eCommerce website, marketing, and customer service. While it sounds complex, it's actually a very straightforward eCommerce business model used to start a side hustle or full-fledged business.
There are a couple of steps involved in getting the product moved to the customer. When using dropshipping as a business model, there are some steps of the journey that the customer is blissfully unaware of and that is how it should be when it is done right to ensure a seamless buyer’s journey. Here’s how the dropshipping process works:
Step 1: The product gets created by the manufacturer and sold in bulk
In order for you to be able to sell a product, there needs to be a product. That’s the job of the manufacturer. When operating a dropshipping business, you will have zero interaction with the manufacturer. After the manufacturer has created the product, it gets sold in bulk to dropshipping wholesalers and suppliers.
Step 2: The product gets “sold” to retailers
Now that the products have moved in bulk from the manufacturer to the wholesaler or supplier that specializes in dropshipping, the supplier or wholesaler will indirectly sell the products to retailers. So, when you are operating a dropshipping business, you will only enter the picture here as the retailer. Once the customer places an order via your online store, your online store will place the order with your dropshipping supplier.
Step 3: The supplier ships the order directly to the customer
While the supplier will ship the order to your customers, your details will still appear on the packaging. Remember: the supplier remains invisible to customers the whole time.
Step 4: Your online store informs the customer about the shipment
The supplier will have forwarded you the tracking information of the order. You will then send this shipping information to the customer.
This is usually (and hopefully) where the process ends. Though, if your customer is unhappy with the product and wishes to return it, they will contact you directly and not the supplier. If this should happen, here is what you will do:
- You contact your supplier for a return merchandise authorization (RMA) number.
- The customer returns the product to the supplier quoting the RMA number.
- Your supplier sends you a refund for the wholesale price.
- You refund the customer the full price that he/she paid.
If the supplier charges a fee for returns, settle this fee and write it off as the cost of doing business. In the event that a defective product gets returned and it is relatively cheap, you can simply ship the customer a new product without requiring that he/she returns the defective item. This might just work out more cost-effective than having to refund shipping costs and return fees.
Finding a Dropshipping Supplier
Now that you are more clued up about how the dropshipping process works, you would have realized that the dropshipping supplier plays a major role in dropshipping. This step requires a lot of research and careful consideration. At the end of the day, you will be held responsible for any errors that your supplier makes. So, if the product quality or how it gets packed and shipped are inferior, your store’s reputation is on the line.
You can, for example, use a directory like Wholesale Central. The benefit of using a directory is that they often include a vetting process to eliminate fraudulent suppliers.
Depending on the eCommerce platform that you use (more about this in the next section), you can use a platform like Oberlo or Spocket. By using Oberlo or Spocket, you can connect to dropshipping suppliers from across the world. Alternatively, you will need to search for dropshipping suppliers on your own.
Building a Dropshipping Store
As mentioned, you will be responsible for running the eCommerce website and marketing. There are three main elements to creating your actual online store: a domain name, eCommerce platform (such as Shopify, BigCommerce and WooCommerce), and the design. Most eCommerce platforms use customizable templates and easy-to-use drag-and-drop builders so you do not need prior coding experience to design a functional website that looks great.
Once you have selected an eCommerce platform and you have designed the website, you will need to market your dropshipping business and its products. Luckily, there are many marketing strategies that you can use to market your website. The two most powerful methods for dropshipping businesses are email marketing and social media. You can, for instance, use email to introduce your target audience to your brand and its product range and for sharing special offers and discounts from time to time.
Then, to ensure that your target audience remains engaged, you can post photos and videos of your products on social media. Depending on the type of products that you sell, you can, for example, create a couple of educational videos to show them how your product works and its different uses.
Another major aspect of dropshipping is inventory management. Even though you will never have to carry the stock, you still need to make sure that the supplier has stock. Some suppliers offer real-time updates which virtually solves the challenge.
Alternatively, you can also find multiple suppliers that sell the same products. This way, if one of your suppliers is out of stock, you can reach out to other suppliers in your network that stock the same product.
Even with the best practices in place, products will at times be out of stock. This is more likely to happen if you are selling trending products that are in demand. In the unfortunate event that a product is out of stock, you can offer to upgrade the order for free by offering a better product that is similar to the one that customer has ordered.
Dealing with Customers
The last key piece of dropshipping is customer service. This will be your sole responsibility. From time to time, you will have to answer questions about products, the ordering process and shipping, while in other instances you will need to offer post-sales support.
To help lessen the workload of pre-sales customer support, you can add a detailed FAQ section on your website. Here, you can answer all the questions that you regularly get such as your returns policy, shipping costs, sizing, etc.
If you have a bigger team, you can also invest in a help desk software solution. This way, you can assign problems to a specific member of your team.
For post-sales issues, it is best to offer telephonic support. While the logistics are more challenging, it helps to build trust which will, ultimately, help you to get more sales.
It is important to remember that as the supplier is never visible to your customers, you will have to deal with any issue relating to the shipping or product. This is also the case if your supplier was at fault. By blaming a third-party supplier, you will only confuse your customer and end up looking professional.
Should You Start a Dropshipping Business?
Now that you have a much better understanding about what it entails you would have realized that dropshipping is not for everyone. For new online businesses, the advantages will likely outweigh the disadvantages. It is easy to start and involves less risk. As you do not have to take care of inventory and shipping, you have fewer responsibilities. Plus, you need less upfront investment to start as you will only have to purchase the product after a customer has paid for the order. This also leaves you more room to test the popularity of the different products which can be particularly helpful if you are new to industry.
Whilst, the products usually sell at low prices, if you want to be competitive, you will need to be happy with smaller profit margins. Also, as the products will mostly have the branding of the supplier, it does not leave you a lot of room for customization.
So, considering these advantages and disadvantages, dropshipping is better suited for small business owners who are fine with selling unbranded items at a lower cost. At the end of the day, by using dropshipping, you are not going to get rich overnight. It can, however, make a great side hustle to generate a steady stream of income.
Wrapping Things Up
If you are looking for a less risky way to enter the world of eCommerce, dropshipping can be that gateway. It might sound complicated at first, but once you break it down into different processes it can be a profitable side hustle, and, eventually, even a full-time career.
As you do not have to worry about where you will store the products, it is a great model to explore as you can operate it entirely remotely from your small home office. With a network of reliable suppliers and a user-friendly website, there is no reason for you to drop the ball on dropshipping.
The two main disadvantages to starting a dropshipping business is that the profit margins are generally lower and it does not really give you opportunities for branding. One of the big challenges is working out your shipping costs. Most dropshipping businesses use multiple suppliers and each charges its own shipping costs. So, this means you will have to pay different shipping fees depending on which supplier stocks the product that the customers has bought. One aspect that makes it easier to grow a dropshipping business is that extra orders will not necessarily lead to more work. Your suppliers will manage most of the work involved in taking care of extra orders which leaves you with more time to focus on other aspects of scaling your business like marketing. Popular dropshipping niches include healthcare, apparel, kitchen items, home and bedroom items, office products, gaming, and cameras. You can, for instance, sell yoga mats, bamboo toothbrushes, and backpacks. To help you identify more popular items to sell, you can use a tool like Google Trends or Google Keyword Planner. One of the advantages of starting a dropshipping business is that the overhead expenses are lower as you do not have to buy inventory upfront or pay a warehouse for storage. You can run it completely remotely from your home office. All you essentially need is a laptop, internet, and a website.
Frequently Asked Questions
What are the disadvantages of dropshipping?
Are there any challenges to starting a dropshipping business?
Is it easy to grow a dropshipping business?
What are popular things to sell by means of dropshipping?
Is it cheaper to start a dropshipping business?
The two main disadvantages to starting a dropshipping business is that the profit margins are generally lower and it does not really give you opportunities for branding.
One of the big challenges is working out your shipping costs. Most dropshipping businesses use multiple suppliers and each charges its own shipping costs. So, this means you will have to pay different shipping fees depending on which supplier stocks the product that the customers has bought.
One aspect that makes it easier to grow a dropshipping business is that extra orders will not necessarily lead to more work. Your suppliers will manage most of the work involved in taking care of extra orders which leaves you with more time to focus on other aspects of scaling your business like marketing.
Popular dropshipping niches include healthcare, apparel, kitchen items, home and bedroom items, office products, gaming, and cameras. You can, for instance, sell yoga mats, bamboo toothbrushes, and backpacks. To help you identify more popular items to sell, you can use a tool like Google Trends or Google Keyword Planner.
One of the advantages of starting a dropshipping business is that the overhead expenses are lower as you do not have to buy inventory upfront or pay a warehouse for storage. You can run it completely remotely from your home office. All you essentially need is a laptop, internet, and a website.