What is dropshipping and how does it work?

Apr 05, 2024

Bridging the gap

The bridge between a product and its consumer has grown shorter and shorter over time. New developments in the shipping industry are continually transforming how businesses operate.

The introduction of eCommerce dropshipping has revolutionized how companies manage inventory and warehousing. The combination of eCommerce and dropshipping has drastically cut down the time and effort required to sell products.

What is dropshipping?

The eCommerce dropshipping model of business does not require inventory maintenance on the seller's part.

To be precise, dropshipping is a system where sellers tie up with manufacturers to deliver their products directly from the assembly line to the consumer.

This means that the products an eCommerce seller displays on their website might not always be the items they are holding in storage. Once an order is placed on the website, the item is shipped directly from the manufacturer to the buyer.

This allows eCommerce entrepreneurs to focus all their efforts on selling rather than managing stock and inventory.

How does dropshipping work?

Generally speaking, there are four steps through which dropshipping works. Before you start your dropshipping process, you’ll first have to partner with a dropshipping supplier. The four steps involved in dropshipping are:

1. A customer goes to your website, browses your catalogues, and places an order for one or more product(s). At this point, important information like shipping address, payment details, etc., is collected.

2. Once an order has been placed and subsequently confirmed, the next step is where order details are sent to the dropshipping suppliers or the supplier you have tied up with. This usually includes all the information you gathered from the customer in the previous step.

3. After the supplier receives the required information about orders placed, they can start preparing and packaging the order. At this step, the supplier is required to package the product adequately and attach the labels and tags necessary for the product to reach its destination safely.

4. The last step in the dropshipping model is the supplier shipping the packaged and readied product to the customer who placed the order.

How is dropshipping changing the eCommerce industry?

1. Packaging & shipping - As the demand for online shopping has increased, so have the standards customers expect from sellers. Nowadays, fast and secure shipping is a must-have for any retailer selling online.

This is one very prominent aspect of the eCommerce business model that dropshipping has completely taken over. By eradicating the need for inventory management and stock, dropshipping has made the packaging and shipping aspects of eCommerce faster and easier than ever before.

2. Product sourcing - Dropshipping makes sourcing unique products and materials much easier than it used to be. Traditionally, sourcing products from various suppliers would require a lot of inventory management and sourcing.

However, you only need to locate and partner with a supplier.

3. Order fulfillment - Fulfilling orders in a regular and timely fashion is one of the biggest challenges of operating an eCommerce business. Earlier, factors like packaging, shipping, logistics, etc., would make the process much longer than it should be on the seller's part.

Now, all these responsibilities are managed by the supplier, whose sole focus is to ensure that orders are fulfilled quickly.

4. Scalability - Dropshipping has helped many businesses scale their operations by simply making more revenue available.

By saving companies money on aspects like inventory management, shipping, and packaging costs, dropshipping free up revenue for businesses to invest in more value-generating, operational scaling areas.

3 Major benefits of dropshipping for the eCommerce industry

Using dropship solutions extends well beyond the obvious perks of saving time and money. Some of the most prominent benefits you can enjoy with the help of eCommerce dropshipping are:

1. No inventory costs - The purpose of dropshipping platforms is to eradicate the need to manage inventories and maintain stock for sellers. Not having to store goods also means sellers do not need to purchase them in the first place.

As long as they can partner with a manufacturer willing to take care of the packaging and shipping side of things, there is no need for inventory management. This can, and has, saved businesses a lot of money in terms of inventory costs.

2. Easy logistics - Apart from inventory management and stocking, the logistical parts of selling have also been a point of concern for retailers.

Keeping orders packaged, bills printed, etc. in time and in a fast and efficient manner is easier said than done. It requires a lot of time, effort, and experience to make sure orders are fulfilled without any hiccups.

Logistics is also the area where buyers tend to have particularly rigid standards. People want orders delivered as fast as possible and with options like same-day delivery becoming more and more common, this standard is not going anywhere. However, partnering with a manufacturer who can handle the demand can save your company a lot of time, effort, and money.

3. Operational mobility - A dropshipping eCommerce business model can do wonders for operational mobility, i.e., it gives you a level of freedom and flexibility of working that you do not get with traditional methods.

As long as you have a stable internet connection and a working computer or laptop, even a phone, you can manage your dropshipping suppliers no matter where you are in the world.

Are there any risks in starting a dropshipping business?

● Reduced margin of profit - One of the issues entrepreneurs face with eCommerce and dropshipping is the small margin they have for earning profit. Basically, in the dropshipping model you’re giving up higher profit margins for low overhead costs.

Moreover, the flipside of how dropshipping makes starting a business easy is that the competition in a market increases. More people can start businesses and as a direct result of this, there is increase in supply and a reduction in profit margins.

● Reputational risk - Another risk you have to consider when starting dropshipping is that while you are the entity selling and marketing your products, your supplier is a completely different entity.

In case there are any discrepancies in shipping and supply, it will be your reputation that will be put on the line, not the suppliers. This is the reason why thorough vetting of suppliers is a must before you get on board.

● Possibility of shipping complications - Dropshipppers rarely ever work with a single supplier. Typically, you should have a range of suppliers on your roster. However, more suppliers may also invite complications such as shipping charges, delivery consistency, and so on.

Is dropshipping a profitable business?

Partnering with the right suppliers and designing a well-structured dropshipping model is the key to run a profitable business. While it is true that dropshipping comes with its own share of obstacles, it also drastically reduces the overhead costs associated with running a business.

Both the costs incurred and the risk taken on the seller’s side are relatively much lower. As long as you have a clearly defined system and a list of vetted and approved suppliers, you can definitely run a profitable dropshipping eCommerce business.

Dropshipping best practices

Some examples of best practices to ensure you’re running an effective dropshipping business include:

● Before stocking up on a new, unpredictable product, try selling it via dropshipping first. This can protect you in case the product you’re trying to sell does not perform as well as expected, especially if inventory costs for the product are high.

● Always keep dropshipping options in hand to protect your business from extreme scenarios, e.g., seasonal overflows. Instead of stockpiling a product you’re predicting will sell out, just keep a dropshipping supplier as a backup. This can protect you against extra investments on goods that might not sell out.

● Before you get them on board, keep your vendor selection criteria in mind. As we’ve already mentioned, it’s your brand’s reputation on the line and not the suppliers’. So make sure you only partner with dropshipping suppliers with a proven track record of being consistent.

● In case you have a long list of suppliers, use a vendor management system, preferably a software-based one such as Volopay, to ensure that all transactions are kept in check.

With the help of vendor management softwares like Volopay, your eCommerce dropshipping experience can be far more streamlined. These softwares work as unified dropshipping platforms through which you can maintain complete visibility and control over all your vendor payments.

You can use these platforms to set up recurring payments for vendors you work with regularly.

Manage vendors and make payments with one comprehensive platform