What is Dropshipping? And How it Works?

What is Dropshipping
Do you want to start your online store without holding any inventory? Do you want to receive the orders and payments first, into your account before buying the product or inventory yourself?

If so, Dropshipping is exactly what you have to get into. So, what is Dropshipping?

Dropshipping is by far the best online business model to start your own online store. This article on ‘What is Dropshipping? And how it works?’ gives you a clear understanding of how you can start your own online, eCommerce store.

And as always, for any one-on-one consulting and assistance, you may mail me at tariq@bloggersbloom.com
Tariq Digital Marketing Consultant
Tariq SP

What is your ideal online business model?

The orders keep flowing in and have the cash registers ringing in. And all you have to do is sit back and monitor the orders and the payments. How cool is that? 😉

And it that possible? What if I said, hell YEAH! 🙂

That is definitely possible with a fairly untapped business model called Dropshipping.

You would agree there are a number of options to make money online. Be it starting a blog, being an Affiliate Marketer, Coaching & Consulting, etc. Among all the options, running your own online store is not only profitable but is also very fulfilling. And you have total control over the products (well, almost), the costs, etc.

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The reason I say almost, in the case of products, is because unless it is your own product, and you have all the inventory with you, you are at the end of the day, dependent on a third party for sourcing your inventory.

That apart, unlike in an Affiliate Marketing model, where you are dependent on the merchant for the commissions to be paid out to you, and not to mention the holding period of close to 3 months to get paid, in an eCommerce model or having your own store, you get paid immediately.

Dropshipping is a business model that has huge advantages.

This is one such business model that allows you to work from just about anywhere. All you require in your laptop or mobile phone and a decent internet connection. And while you do have the flexibility of working from anywhere, you are building a brand for yourself, selling real physical products. All it requires is, couple of hours a day to monitor the orders received and you coordinating for the booked products to be delivered.

Which takes us to an all-important question. Why aren’t there more people getting into dropshipping? Why are they more Affiliate Marketers around that Dropshippers?

The following Google Trends is a clear indication that Affiliate Marketing is still ruling in comparison to Dropshipping, as far as the Indian market is concerned.

what is dropshipping

And compare this to the US market. It is a role reversal. Dropshipping is way more popular than Affiliate Marketing.

what is dropshipping

But yes, the same Google Trends also indicates that the concept of Dropshipping has been growing steadily in India.

what is drpshipping

The answer is simple and obvious.

Not a lot of people are aware of what dropshipping is. Let alone the concept of Dropshipping and how it really works. This article will help you understand what is Dropshipping, how to get started with it, the advantages, and yes, the disadvantages too.

By the end of this article, I will help you with the tools and resources you will need to start a Dropshipping business for yourself and start making money. And what’s best, you needn’t invest in buying any inventory too!

You know the drill. As always, let us begin with the basics! 😉

How does your conventional online store work? Let’s break this down into steps.

Step 1:

You have your products lying with you. That is, you have your stock, inventory in your store or in your warehouse. This would typically mean until your stock is sold, your cash flows are on hold. Right?

Step 2:

Next, when you receive an order you fulfill the order by having it neatly packed, picked up, and shipped by the concerned logistics team.

Correct me if I am wrong, but I suppose this is the normal course of action if you were operating a conventional online store.

In the conventional approach, you would buy items from the wholesalers at a discounted price and you would then mark up the selling price and keep the difference, which is your profit margin.

Well, to each his own.

But, the problem with this model is that you need to make an upfront investment in procuring the stock. Then on receiving the order, you have to deliver the products to your customers and fulfill the orders.

However cautious you are, this model has some financial risk by ordering and holding on the stock in advance. If you were to make zero sales, well, it’s a huge loss.

In addition to the financial risk, you are also responsible for all the administrative tasks. Be it shipping, order fulfillment, taking stock of your inventory, deliveries, refunds to customers, etc. And would you be able to accomplish all of these single-handedly? Nope, you will need to hire and maintain a team and an office, if required.

Now, let’s understand the concept of Dropshipping. What is Dropshipping?

what is dropshipping
(Source: Oberlo)

To begin with, you do not hold on to any inventory. That’s right. No inventory to invest in at all. Which means, you are not blocking your funds and holding on to inventory. You can use the funds for marketing and in the promotion of your store.

In fact, you will receive the payments for the order placed for a product you are promoting on your store, and only then do you go ahead and procure the product from your vendor or wholesaler.

Wikipedia defines Dropshipping as, a supply chain management method in which the retailer does not keep goods in stock but instead transfers its customer’s orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer.

In a Dropshipping model, the wholesaler or the vendor you tie-up with will fulfill the order. You receive an order on your store, and in turn will forward the order, along with the customer details to the vendor. The vendor will have the product shipped directly to your customer. Thereby eliminating the entire back office process, which otherwise would be your responsibility in the conventional eCommerce model.

While we did divulge into Affiliate Marketing as well, let us understand the differences between the two.

Dropshipping vs Affiliate Marketing

Now, it’s natural to start comparing the two and finding similarities between the two as well. After all, in both cases, you are not handling the product directly.

In Affiliate Marketing you are merely facilitating the sale via your Affiliate links. The client gets redirected to the merchant’s website (web store) and proceeds (may or may not) with the purchase. And you get a commission once the sale has concluded. Well, not immediately. There is a holding period of 30 to 60 days before you get paid.

The profits you make out of a sale in the Dropshipping model is way higher than you would in Affiliate Marketing.

How? Let’s consider this example.

Let’s say you have a physical product of $29 listed on your website. If this was an Affiliate Product, what do you think is the commission you’d earn?

Amazon’s Affiliate program has a varied commission slab for various categories. Listed below is the commission structure for various products.

what is dropshipping Amazon Affiliate associates

Let’s take the highest commission slab mentioned of 10%. Thereby, if you’ve sold a product of $29, you will earn a commission of $2.9.

Now, in a Dropshipping model, I would have procured the product for half the price, if not even lesser. Hence, my cost price maybe $9, and I will mark up the price and sell it at $29. Thereby, my profit is $20.

This is the most common practice in the Dropshipping model. And how do you find such products and vendors? We will cover all that and more.

Another huge advantage of Dropshipping over Affiliate Marketing is that the customer never knows your store is into the dropshipping business at all. You are building your brand as an online store. You are in a position to capture customer details, such as name, email address, contact details, etc.

In an Affiliate Marketing setup, the customer is aware (and you also make it explicit with your Affiliate disclosure) that they are reading a review of a product on your store and gets redirected to the actual merchant’s store. Here you are not in a position to capture the contact details of the customer.

This is a huge disadvantage, especially when you would like to send the latest product updates to your customers. The Dropshipping model allows you that.

How Does Dropshipping Work?

what is dropshipping
(Source: Shopify)

Let’s make it really simple with an example.

Consider the following product.

This is a Mini In-Ear 5.0 Bluetooth Earphone Wireless Headset With Mic Sports Earbuds.

I find a vendor who supplies this at $2.35.

what is dropshipping

Now I can mark up the price and sell it at $24.99 as shown in the picture below.

what is dropshipping

My profit here is $22.64. So, when the order is received, I get a credit of $24.99. Out of this, I purchase the actual product from the vendor at $2.35. I also pass on the customer details to the vendor. I can have the product white-labeled, i.e., have my store branding on the product and have the same shipped across by the vendor.

The key is finding a vendor who is reliable, trustworthy, and with whom you can build a long term association.

The Advantage and Disadvantages of Dropshipping

I’m guessing by now you can already see the advantages of starting a Dropshipping business. This section of the article will dwell a little more on the various advantage of Dropshipping.

And while I wouldn’t want to speak only on the advantage and what is Dropshipping, I will cover a few disadvantages too. This will help you understand the pros and cons of the business before you venture out into it.

Advantages of Dropshipping

1. Zero upfront Investment in Products

And this is THE biggest advantage. You do not buy and stock up on inventory. You merely purchase the product, after you have received an order for the particular product.

2. Ability to Sell Physical Products

If selling physical products and earning a small commission or selling digital products, as is the case with Affiliate Marketing, is not your cup of tea, then Dropshipping is definitely worth trying out. With the margins, you could earn much more than in Affiliate Marketing.

3. Flexibility

For starters, you can work from anywhere. All you have to monitor is the orders that come in. On receiving an order, you coordinate the purchase with your vendor and arrange for the shipping.

In addition to this, you can try various niches and industries. Since you are not purchasing and holding on to inventory, you could try various niches. If a particular niche is not working, you could try another one.

4. Reduced Risk

By not holding inventory, you are eliminating the biggest risk in the shopping business. And that is unsold inventory. Unsold inventory means, capital on hold. With the Dropshipping model, you don’t have any risk, because you’re not investing upfront. You simply find the product you want to sell and then promote it!

5. Easy to get started

Running an online business is way easier when you don’t have to deal with physical products. With Dropshipping, you don’t have to worry about managing or paying for a warehouse, packing and shipping your orders, tracking inventory, handling returns and inbound shipments, continually ordering products, and managing stock level.

6. Easier to test

Dropshipping is a useful fulfillment method for both launching a new store and for business owners looking to test the appetite customers have for additional product categories, e.g., accessories or wholly new product lines. The main benefit of dropshipping is, again, the ability to list and potentially sell products before committing to buying a large amount of inventory.

7. White Label Dropshipping

In some cases, the products you promote can have your company name on them. You send the invoice to your vendor, to be in turn included in the product to be shipped to the customer. You can, with a long term association in mind, have your products branded. Thereby the customer knows the product is from your store.

8. Easier to scale

With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work.

Disadvantages of Dropshipping

1. Inventory issues

If you stock all your own products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change on a daily basis.

Fortunately, these days, there are a handful of apps that let you sync with suppliers. For example, when a product is no longer available, you can automatically unpublish the product, or keep it published but automatically set the quantity to zero.

2. Shipping complexities

If you work with multiple suppliers, as most Dropshippers do, the products on your online store will be sourced through a number of different Dropshippers. This complicates your shipping costs.

Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these calculations can be difficult.

3. Supplier errors

Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway?

Even the best dropshipping suppliers make mistakes fulfilling orders, mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments, and low-quality packing, which can damage your business’s reputation.

4. Limited customization and branding

Unlike custom-made products or print on demand, Dropshipping doesn’t give you a lot of control over the product itself. Usually, the product Dropshipped is designed and branded by the supplier.

Some suppliers can accommodate your business’s product changes, but even then, the supplier has the most control over the product itself. Any changes or additions to the product itself usually require a minimum order quantity to make it viable and affordable for the manufacturer.

I hope this article has given you a clear understanding of what is Dropshipping. In my next article, I will cover the challenges of Dropshipping, how to find your Dropshipping partners, choosing a profitable niche and industry, and a whole lot more.

Stay tuned! 😉

I hope you now have a clear understanding of what is Dropshipping. And are you all excited to start Dropshipping now?

Let us know your thoughts!

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