E-commerce skyrocketed during the pandemic and shows no signs of slowing down. In 2021, more than two billion people worldwide shopped online, and Statista estimated that the United States will have “291.2 million online buyers in 2025.” Dropshipping is an inexpensive way for entrepreneurs to enter the online marketplace.
Dropshipping is a business model where retailers sell items to consumers and a separate company handles the inventory and shipping. This guide explains the dropshipping business model, including what it is and how it works. Plus, we’ll dive into the benefits and challenges of dropshipping.
What is dropshipping, and how does it work?
Dropshipping is an order fulfillment method used in an e-commerce retail business model. In short, online sellers outsource goods procurement, product inventory, and shipping. Retailers maintain an online storefront where consumers browse and buy products. The retailer is the seller of record, meaning they set the price and collect the payment and taxes.
Once a shopper purchases a product, the retailer confirms the order with the buyer and sends it to a third-party supplier, wholesaler, or manufacturer, known as a dropshipper. The dropshipper may keep a warehouse of inventory or use the just-in-time (JIT) inventory method (where they manufacture products on demand), which is common with custom T-shirt sales. They fulfill the order and ship goods to the retailer’s customer.
Other details, such as shipping times, order returns, and after-purchase customer service, may differ depending on the retailer and dropshipper agreement. Retailers have many suppliers to choose from, including AliExpress, Printify, and SaleHoo. E-commerce platforms like Shopify and Wix integrate with third-party procurement and shipping solutions, allowing entrepreneurs to easily add a variety of goods to their websites.
[Read more: 5 Things You Need to Know About Dropshipping]
Benefits of dropshipping
Removing inventory procurement, storage, and distribution from the online retailer’s process provides several advantages, including lower startup costs and ongoing overhead expenses. According to Datex Corporation, “on average, online retailers require 1.2 million square feet of warehouse or distribution center space per million dollars of online sales.” And the average rent paid for warehouse or distribution in the United States was $7.13 per square foot in the fourth quarter of 2021.
Dropshipping is a business model where retailers sell items to consumers and a separate company handles the inventory and shipping.
With dropshipping, you don’t have to purchase products upfront or overcome inventory management challenges. So, you won’t use inventory software, hire staff to count and track stock, or tie up your cash in goods. This flexible model is also scalable. You’re not on the hook for additional space or inventory, and you can leverage multiple dropshippers to ensure a steady supply of goods.
Dropshipping benefits also extend to existing small business owners. Entrepreneurs can explore new markets or test products without a heavy upfront investment. Plus, you’re not limited by location or online channel. Suppliers offer services worldwide, and you can sell your items through your website, social media, Amazon, or other marketplaces.
Challenges of dropshipping
Dropshipping is far from a get-rich-quick scheme. Driving traffic, engaging new customers, and handling complaints is a full-time job. Just because you sell something doesn’t mean people will buy it. While the market isn’t over-saturated, many retailers sell the same products from the same suppliers, meaning very little differentiates your business from others.
Success stems from traffic, and your key role is to market and sell your products, which can be pricey and time-consuming. You’ll need a good handle on Google advertising, social selling, and influencer marketing. Meanwhile, it would help if you were prepared to mitigate potential brand reputation damage from errors made by your suppliers.
Consider these challenges before starting a dropshipping business:
- Loss of control: You don’t have eyes on the products or packing process, even though the goods are sold under your brand.
- No inventory oversight: You may not have access to real-time inventory updates, meaning it’s possible to sell a product that’s out of stock.
- Shipping issues: Although your agreement outlines shipping expectations, ultimately, you have no control over the fulfillment process timeline, including packaging and shipping.
- Potentially lower profit margins: The market is highly competitive for lower-priced items, and an aggressive pricing strategy can cut into your profits.
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