Thanks to the growth in ecommerce retail sales during the pandemic, the global dropshipping market witnessed a notable development in the past couple of years. From $128.60 billion in 2020, the market reached $159.08 billion in 2021, registering a whopping growth of 23.7%.
Here’s some good news for dropshipping companies! As per Statista, the global dropshipping market size is expected to increase continuously in the coming years and reach $476.10 billion by 2026, with a CAGR of 27.82%.
So, what is dropshipping and how does it work? Dropshipping is a quick, easy, economical, and low-risk way to start selling online. It is a simple business model in which you can fulfill customer orders without warehousing products or worrying about inventory management and shipping costs.
Sounds interesting? Read on to learn how to do dropshipping and what are the pros and cons of it. We will also share some dropshipping product ideas and help you understand if this online business is right for you.
Dropshipping is an ecommerce retail business model in which the store does not keep an inventory of the products it sells. Instead, the store has a partnership with one or more suppliers who take care of order packaging and shipment. Hence, the seller here is a retail partner responsible for fulfilling orders.
When the store receives an order, it forwards the details to a supplier, who then ships the product/s to the customer.
- You have an online dropshipping store where you promote or sell different products.
- A customer visits your online store and places an order.
- You confirm their order and pass on the order details to the concerned supplier.
- The supplier then packs the products and ships them directly to your customer.
This way, you need not worry about maintaining an inventory of products or packaging and shipping the orders.
A dropshipper is an online intermediary or middleman that facilitates transactions between suppliers and customers. Hence, a dropshipper helps fulfill customer orders without handling the products.
For instance, if you are a dropshipper, you need not stock and ship the products to customers. Whenever you receive a new order, you redirect the same to the correct supplier. However, as a dropshipper, you must deal with suppliers, take care of product returns, and provide timely customer service.
Now that you have a fair idea about dropshipping and dropshippers, let’s dive deep into the subject and understand how to do dropshipping, how does dropshipping work, and the pros and cons of this online business model.
A dropshipping business model mainly works with the help of third-party suppliers. Hence, when you are starting this business, look for one or more suppliers selling the products listed on your website.
A reliable supplier database, like AliExpress and Worldwide Brand, can help you find suppliers in your region.
While the process or sequence of dropshipping depends on your arrangement, most businesses follow the following steps:
- You (dropshipper) start an online business and add products to your ecommerce store.
- A customer visits your online store, orders a product, and makes the payment.
- You share the order details with the supplier.
- Supplier processes the order and ships the product to the customer.
- Customer receives the product.
Here’s an example: A customer visits your online dropshipping store, places an order, and makes the payment. The retail price of the product is $350.
You forward the order details to the supplier and pay them the wholesale price which is $250. This way, you earn a profit of $100.
The supplier packs the product and ships it directly to the customer. The customer receives the product and the order the complete.
Yes, dropshipping is worth it in 2023, especially if you are looking to start a low-cost online store. Dropshipping registered a CAGR of 23.7% in 2021. From $159.08 billion in 2021, the dropshipping market is expected to reach $196.79 billion in 2022 and $243.42 billion in 2023.
The COVID-19 pandemic reshaped the world and many consumers started shopping online. The pandemic restricted physical interactions and led to the closure of many brick-and-mortar stores. This led to a notable surge in dropshipping businesses around the globe.
The ease of starting a dropshipping business and good profit margins have contributed to its growing popularity. Increasing smartphone penetration and the global ecommerce surge are also helping dropshippers earn good profits.
The following table shows how retail ecommerce revenue is expected to increase in the United States in the years to come.
On this chart, we can see that the retail ecommerce revenue increased from $516.5 billion in 2019 to $644.4 billion in 2020, recording a growth of 24.8%. In 2018 and 2019, the revenue was 10.2% and 10.3% respectively.
Hence, the chart clearly indicates how the pandemic changed the shopping patterns of consumers in the United States. Thanks to the convenience of online shopping and the availability of products at discounted rates, many people who shifted from offline to online shopping during the pandemic continued to shop online even when the pandemic-related restrictions began to ease.
The retail ecommerce revenue in the United States is expected to grow at a steady pace in the coming years as well, making dropshipping a good option for those looking to invest in an online store.
Dropshipping has three key players:
- Seller or retailer: The business starts with the seller or dropshipper. You are the one who will start the online store, list products on your website, set the price, and take orders from customers. Although you will outsource the manufacturing, warehousing, and shipping to a third party, you are the seller of record (SoR) to the end customer.
- Supplier or wholesaler: A supplier or wholesaler will maintain a ready stock of products in their warehouse. They do not sell products directly to the end customers but execute orders from online retailers or dropshippers.
- Customer: Customers play a pivotal role in this online business. When a customer visits a dropshipping store and places an order, both dropshippers and suppliers stand to gain.
Here’s a look at the pros of running a dropshipping business:
- Less startup capital: You can start an ecommerce store and become a dropshipper or online retailer with minimal investment. A dropshipping business does not require you to stock products in a warehouse or pay for product packaging and shipping.
The initial capital you need is to pay for a domain and the ecommerce platform you choose for your business. Some popular ecommerce platforms to consider include Shopify, BigCommerce, WooCommerce, Square Online, and Adobe Commerce.
- Easier to manage: In a dropshipping business model, you don’t have to purchase products to fulfill customer orders. When you receive an order, you forward the same to the seller or supplier and make the payment. The supplier takes over from there and ships the order directly to your customer. This saves you from the hassles of:
- Renting and managing a warehouse
- Packing products and shipping them to customers
- Stocktaking or maintaining a physical inventory count
- Handling inbound shipments
- Ordering products and replenishing stock
- Low overhead costs: As a dropshipper, you don’t have to store the products in a warehouse or ship them to customers. This helps lower the overhead costs. You can even choose to run a home-based dropshipping business by investing in a laptop and internet connection and meeting small operating expenses.
- Management flexibility: You can run a dropshipping business from anywhere, provided you have a smartphone or laptop with an internet connection.
You can also add new products at any time, decide the retail price, approach new suppliers, and change the business strategy; the possibilities are endless.
- Flexible work hours: As the owner of an ecommerce store, you can work from anywhere and at any time. For example, if you have a day job, you can work on your dropship business for a couple of hours at night.
- Easier to expand: If you want to expand your business, you can approach suppliers and list new products on your website without worrying about the increased workload. A major part of the additional work will be handled by the suppliers.
Although dropshipping is an attractive business model for those wanting to start a business with minimum capital, it has its downsides as well. The following are the limitations of running a dropshipping store.
- High competition: A dropshipping company is easy to start and the overhead costs are on the lower side. Hence, many people and businesses set up their stores online and sell products at competitive prices.
Since most customers compare products and their prices on different online platforms, the chances of losing orders to sellers offering better prices are high.
As a dropshipper, you may not have an exclusive deal with your suppliers. This means your competitors with years of experience and better resources can sell the same products at lower prices. When a customer is getting the same product cheaper, why would they buy from your store?
For example, the retail price of a product on your online store is $50 and another seller is offering the same product for $47. Most buyers will choose to buy from the other store to save $3. This can hurt your potential profit margin.
- Low profit: When running a dropship business, you need not maintain and manage an inventory of products. This reduces your work and overhead costs. However, the returns are also on the lower side.
A major part of the money you make from selling products goes to the supplier. There can be times when the low-profit margins may not be enough to cover the expenses incurred on managing sales orders, website maintenance, and the cost of marketing or advertising the products.
To stay afloat, you may have to work harder and look for ways to increase your customer base to boost sales. Reaching out to prospective customers, addressing the grievances of existing customers promptly, marketing your products, and offering attractive discounts from time to time can help.
- Zero control over the supply chain: If you run a standard ecommerce business, you must maintain a stock of the products listed on your website. In case a customer complains about the quality of a particular product or late delivery, you can look into the matter and sort it out.
With a dropship business, you are at the mercy of the supplier. If a customer is not happy with the product quality or return policy, you convey the same to the supplier and wait for them to address the problems. In the meantime, you reassure the customer that you are looking into the issue which is out of your control.
- No control over order fulfillment timeline: In a dropship business, the third-party suppliers handle the order fulfillment process and you have no control over the same. However, if an order gets delayed due to supplier problems, you will be answerable to the customer.
- Communication delays: A dropshipper is a middleman between the customer and the supplier. Hence, communication delays are natural. With three different parties involved, a late response from one can slow down the entire communication process.
- Difficult to customize products or build a brand: When you are running a dropshipping business, you have little or no control over the product design or brand name.
Moreover, the manufacturers and sellers you are dealing with are likely selling their products to other dropshippers and stores as well. With similar products available in the market, it can be difficult for you to differentiate your offering.
Are you wondering if dropshipping is right for you?
Here are a few important things to consider before starting a dropship business.
- Startup capital: If you are looking to start a business with limited capital, dropshipping is a good option.
In dropshipping, you need not manufacture products, maintain an inventory, or rent a storage facility to stock the products.
To be a successful dropshipper, you just need reliable suppliers who can offer timely services. The overhead costs are on the minimal side.
- Target profit margin: Do you have a target profit margin in mind? A dropshipping business may not yield high profits unless you deal in exclusive products and build a brand reputation.
A dropshipping business is easy to start but highly competitive. Hence, to gain new customers and keep the old ones, you must offer products at low or competitive prices. This reduces your profit margin.
However, if you are dealing with products that are unique and customizable, you can do well in this business. Choosing a niche with low competition and high demand is key to earning good profits. Some examples are eco-friendly products, organic food, pet care products, and home office equipment.
- Dropshipping niche: If you have a lucrative niche in mind, you can run a successful dropshipping store.
Unless you are selling exclusive or private-label goods, you will have to face high competition in the market. When the same products are available from other dropshippers or sellers, it can be difficult to build customer loyalty.
Hence, before starting dropshipping, find a rewarding dropshipping niche that will differentiate your store from the competition.
When looking for a dropshipping niche, you need to find one that will attract more customers and audiences. Running a business with exclusive products but few customers is no good.
For example, if you are running a regular fast-food joint, the competition will be quite high. However, if you are offering vegan food and different cuisines in your eatery, there will be less competition. Add special delicacies for kids on the menu and the competition will be even less.
To find a lucrative niche, you can shortlist some product ideas and test them to determine their popularity. Once you find one, you can start your dropshipping business.
- Building a brand: Are you keen to build a good brand impression? Well, this can be difficult in a dropship business.
In dropshipping, you have zero or minimal control over product quality, packaging, and delivery. If the supplier does not pay attention to these important factors, you will end up losing some valuable customers.
Moreover, there will be little or no scope for product customization. These limitations can make it difficult for you to build a popular brand.
- Product quality: If you want control over product quality, dropshipping may not be the right business option for you.
The quality of the products you sell plays an important role in building brand loyalty and running a lucrative business. In dropshipping, you may not have any control over product quality.
While you can test product quality at the beginning of your dropshipping relationship, it can be difficult to keep a check when selling on an ongoing basis. In case the quality deteriorates in the future, your business will suffer.
- Inventory and supply issues: As a dropshipper, you may not have any control over the supply chain. Production and dispatch delays at the supplier’s end can leave the customers unhappy.
For a successful dropshipping business, you must source products from multiple suppliers to avoid running low on inventory. In case a product runs out-of-stock with one, you can check with other suppliers and place the order. However, keep in mind that working with multiple suppliers will also increase your workload and complicate the process.
- Return and replacement issues: These are part and parcel of an ecommerce business. However, when you are running a retail business by maintaining an inventory of products, returns and replacements are quite simple.
In a dropshipping business model, return and replacement processes are more complex than you think. Here’s an example:
Suppose a customer receives a broken product and wants to return the same. In this case:
- Who will bear the return shipping charges?
- Will the supplier agree to replace the product free of cost?
- If the product is out-of-stock, will the supplier provide a refund?
These are some important questions to ask a supplier before signing a contract with them. These questions will also give you a clear picture of the potential expenses you might have to bear in the future.
Starting a dropshipping business involves the following steps:
- Choose a lucrative dropshipping niche.
- Identify competitors through competitor analysis.
- Look for reputable dropshipping suppliers.
- Build your dropshipping store online.
- Market your business.
- Provide customer support whenever required.
In addition to these, you must also focus on understanding your target audience and look for ways to improve your offering.
The following are some important questions to consider when starting a dropship business.
Register your Business Entity to Dropship
You must register your business once you start making sales consistently. This will create a brand identity and help you expand your business.
The absence of a brand name and official corporate registration can leave the suppliers and customers skeptical about your business. Registration will make your business appear authentic and professional, thereby increasing sales and profit margins.
Suppliers prefer dealing with incorporated businesses to avoid getting into legal issues later.
Brainstorm Dropshipping Product Ideas
For dropshipping product ideas, you must look for niches that have high search volume and low competition. The following are some examples:
- Apparel: Knitted clothes, loose denim, sports tracksuits, yoga leggings, beanies
- Baby products: Baby monitor, baby carrier, alarm clock, teething toys, LED bath toys, small bassinet
- Beauty products: Hair growth oil, scalp massager, face roller, anti-dandruff shampoo, anti-aging cream, makeup products for women, men’s grooming products
- Gaming accessories: Headsets, chairs, keyboards, mouse, stereo speakers
- Home security devices: Security camera, smoke alarm, intruder alarm
- Tools: Repair tool kit, digital micrometer
- Kitchen products: Air fryer, rice cooker, smoothie blender, electric kettle
- Other products: Tripods, laser acupuncture pen, organic tea, oral irrigators, portable air compressor
It is difficult to predict the exact amount you must invest to start a dropshipping store. However, the startup capital is on the minimal side as you don’t have to invest in manufacturing, storing, or shipping the products.
Basically, you need to invest a nominal amount for the following:
- Setting up a dropshipping store online
- Sampling products or checking the quality of products you plan to sell
- Marketing your business via online advertising
To start dropshipping with minimum investment, you can choose an ecommerce platform like Shopify or BigCommerce.
Here’s an example:
The image shows that if you choose Shopify for dropshipping, you can start a business with a startup capital of just $140.
However, make sure you choose reliable suppliers selling quality products and offering timely services. Poor product quality, bad packaging, or late shipments can be big turn-offs for customers.
Considering that suppliers play the most important role in a dropshipping business, you must choose them wisely.
Here’s what you must do to find the best dropshipping suppliers:
- Make a list of the products you plan to sell on your ecommerce website and look for suppliers accordingly.
- Shortlist suppliers and test their products to ensure they are as advertised.
- Check if their packaging and shipping policies meet your criteria.
- Ask them some important questions, like:
- How long does it take to dispatch an order?
- What is their return policy?
- Will they accept returns of damaged products and provide a refund?
- Will they replace damaged products free of cost?
- Will they insure orders?
Make sure you clarify everything before signing a supplier contract to avoid hassles later.
1. How do dropshippers make money?
Dropshippers make money by marking up the price of the products they sell. They work directly with manufacturers or wholesalers and source products at economical rates. Dropshippers add a profit margin to these products when listing them on their website.
As a dropshipper, you can either choose fixed markup on cost (FMOC) or tiered markup on cost (TMOC). In FMOC, you add a pre-set profit margin to the cost of the products you sell. TMOC is a better option if you are dealing in a wide range of products, some being economical and some high in value.
2. Is dropshipping legal?
Yes, dropshipping is a legal form of ecommerce business. Retailers across the globe are using this popular business model to make good money. Most retail stores available in your city and online do not manufacture the products they sell. Dropshippers also follow this approach to run an online business.
3. Can you do dropshipping on Amazon?
Yes, you can start your dropshipping store on Amazon. While Amazon allows you to run an ecommerce dropshipping business, the profit margins are low. As a dropshipper, you must share a certain percentage of your profit with Amazon and this reduces your profit margin.
4. Can you dropship on eBay?
Dropshipping is allowed on eBay. However, you must follow the website terms and conditions for your online business. This includes delivering quality products within the stated time frame. Also, you cannot list a product on eBay and then purchase the same from another retailer to fulfil customer orders.
5. What’s the difference between dropshipping and retail arbitrage
Here’s how dropshipping is different from retail arbitrage:
1. In dropshipping, the seller sources products from manufacturers and suppliers.
In retail arbitrage, the seller sources products from other retailers and sells them online at a higher price.
2. In dropshipping, the seller need not maintain an inventory of products listed on their website.
In retail arbitrage, the seller first looks for discounted products at retail stores and then lists them on an ecommerce platform, like Amazon, at a higher price. They must maintain a stock of the products listed online for timely order fulfillment.
3. In dropshipping, sellers must look for reliable suppliers offering products at economical rates.
In retail arbitrage, the seller must constantly explore different markets to find discounted products for a decent profit margin.
Now that you know the answer to the question of What is Droppshipping, you may be thinking about starting a dropshipping business of your own.
Although competitive, dropshipping can be a profitable business model with proper planning and management. It is also quite hassle-free; just build a website, look for suppliers and advertise your products.
When you receive orders, forward the same to the concerned supplier and they will take care of the rest. The absence of manufacturing, warehousing, packaging, and shipping the products makes things quite easy for dropshippers.
However, do not expect to flourish overnight with a dropship business model. Focus on marketing the products and building your brand and you will see results soon enough.
This is a low-risk business that you can start with a nominal investment and earn a decent profit margin. So, if you are keen to venture into the online retail market and make extra money, dropshipping is worth trying.