After people ask, "what is drop shipping?" the next question we usually hear is, "how does dropshipping work?" or "how to dropship".
It's actually much simpler than you may think. Much like consignment inventory or using 3PL eCommerce fulfillment, this model takes a lot of the hard work and places it on another party, so you can focus on selling.
Read on to learn how dropshipping works, the structure of the model, the steps involved, how to start a dropshipping business, and how to make money.
How Dropshipping Works
Dropshipping works by having a supplier handle all inventory storage and fulfillment of any orders you take through your storefront. The products are owned and stored by the supplier until they are sold and the reseller pays for them to be shipped to the customer.
You can use dropshipping websites as a supplementary source of products to sell or as your sole source. For example, if you already sell DTC food, you can seek out other food suppliers with food that complements yours. You then list their best dropshipping products alongside yours in a digital catalog, continue selling food online, and increase your average order value without ever having to stock inventory to sell.
Dropshipping Model
The dropshipping business model consists of three parties, a store that purchases items from a third party, the supplier who ships them, and the customer. This model allows small businesses to avoid paying for inventory storage and focus solely on increasing sales. It makes going from new dropshipping business ideas to profitablity much quicker.
In the dropshipping model, the supplier is responsible for storing, picking, packing, and shipping all products. These vendors must have a solid control over their supply chain lead time and a good supply of decoupling inventory or safety stock to ensure smooth operations. They must also be able to ship products quickly and provide tracking information to the customer.
The reseller only has two responsibilities in the dropshipping model. First, they are responsible for creating a storefront to sell their products using a dropshipping website builder. This also includes using eCommerce marketing techniques to attract customers. Their second responsibility is to seek out dropshipping suppliers and establish relationships.
Drop Shipping Process
Though the dropshipping model is slightly more complicated than the traditional one, the sales process is fairly simple.
The dropshipping process generally follows these steps:
- Customer places an order. In the first step of the dropshipping process, customers purchase products on the retailer’s headless eCommerce site or on an online marketplace. Likely, the customer is not aware that the products they are purchasing are not owned by the reseller. The customer should receive an order confirmation email from the seller using eCommerce marketing automation.
- Reseller passes the sale on to the supplier. All information from the sale is then passed on from the retailer to the supplier. This is best done using eCommerce software to automate the data transfer, though orders can be manually passed along. The reseller also pays the supplier for the products purchased at this time. In the traditional model, the payment would have happened much earlier and the reseller would hold the inventory in their own warehouse or in the hands of a 3PL fulfillment company (see 3PL meaning).
- Supplier picks and packs the order. Now that the supplier has all the information they need, their order fulfillment team can begin picking products (see order fulfillment meaning). They seek out each product by SKU number, assemble them, and put them in eCommerce packaging. Unless the reseller has a deal in place for branded packaging, the materials are all generic and a non-branded packing slip is inserted.
- Customer receives the order. With everything packed, the eCommerce shipping team then sends the package out and begins tracking. The order travels to the customer using the preferred shipping company and arrives at its destination. If the customer runs into issues with the product, they can use a supplied RMA to begin a return, but this process must go through both the reseller's customer service for dropshipping team and the supplier.
How Do Dropshippers Make Money?
The dropshipping model is profitable, but the margins are generally small. So, is dropshipping worth it? Well, dropshippers make money by selling larger quantities and keeping their overhead costs low. Luckily, dropshipping businesses can scale much more quickly than traditional ones. This means they can increase eCommerce sales more easily without needing to invest in warehousing or employees.
One way that dropshippers make money is by using a method known as drop surfing. This involves picking a product and searching a wholesale directory to learn how to find vendors that sell the product at the lowest cost. Then, you turn around and sell it at the same price as other dropshippers, maximizing the dropshipping profit margin from each sale. This is key in understanding how to make money dropshipping.
Another great way for dropshippers to make money is by running their dropshipping business through a digital storefront like BlueCart. We handle all the hard work in creating a digital catalog, letting you sell B2B wholesale, direct to consumers, or both. You can even grow your business enough that you have start hiring for new dropshipping jobs.
How To Incorporate Dropshipping Into Your Business
Dropshipping is often used as a supplementary source of products for existing businesses. These products can help attract customers and increase order value without greatly increasing a business' costs.
Here are the steps you should follow to incorporate dropshipping into your business:
- Study your market. Look at your customers and the products, companies, and dropshipping niches they enjoy shopping with. This can give you insight into the product offerings you should seek out. This customer data should also be present in your drop shipping business plan, so you can always make decisions that can benefit your business. This goes doubly for reverse dropshipping where you sell abroad, so you really need to understand your market.
- Research the competition. The most important thing you need to know is your competitors' pricing. Adding new products to your catalog won't be very helpful if you aren't pricing them effectively. Try to find a balance between profitability and attractiveness and look into psychological pricing.
- Find suppliers. Look for suppliers that have many products available. You'll also want to make sure the suppliers have participated in dropshipping before and are well-known in your industry. You need to know how to find dropshipping suppliers that are reliable. These businesses are often also wholesale suppliers (see how to buy wholesale), so if you try to find wholesalers, you’ll likely come across a number of dropshipping suppliers.
- Establish a fulfillment process. Though the supplier likely has a dropshipping process in place, work with them on any special requirements for your business. You'll also want to work together for automated dropshipping to complete data transfers and establish a steady flow of information regarding orders and shipments. You’ll also need to sign a contract regarding the manner in which you’ll purchase these products when orders come in. This is not the same as a traditional wholesale contract, so make sure your contract reflects this (see how to buy wholesale).
- Promote the new products. Once everything is set with the supplier, you'll need to add the new products to your storefront. Treat them as though they are your own products, but make sure to list any special shipping rules or conditions for them, not doing so is one of the biggest dropshipping beginner mistakes. Then build effective SEO for eCommerce product pages, create dropshipping ads, and begin selling. You can also look into using affiliate marketing vs dropshipping to help promote your own or another dropshipping business.
Drop It Like It's Hot
The dropshipping model can be a profitable one if you invest time and energy into finding the right suppliers and maximizing your margins. It is more complicated than the traditional sales model and cross docking but comes with its own unique set of benefits that makes it a great choice for startups and small business owners. Stick with quality items to grow your business and avoid causing people to ask "is dropshipping dead"? or "is dropshipping legal"?
For more information, check out our free drop shipping for dummies guide or try reading dropshipping books and taking dropshipping courses.
Another great way to increase your business’ offerings is to start a subscription box service. Like dropshipping, make sure to find the right subscription box suppliers to maximize your success.