What is dropshipping? How does dropshipping work in 2023?
What is dropshipping?
Dropshipping is a fulfilment strategy that allows ecommerce businesses to outsource the processes of procuring, storing, and shipping products to a third party—typically a supplier.
What is a dropshipping business model?
The rest of the physical fulfilment process is out of your hands. In some dropshipping agreements, you may also handle customer service, while the dropshipping service manages the physical goods and fulfilment.
How does dropshipping work?
- Seller signs agreement with dropshipper.
- Customer orders online.
- Seller receives order.
- Customer receives an order confirmation.
- Seller forwards the order to dropshipper.
- Dropshipper ships the order.
- Customer receives their product.
Dropshipping may appeal to entrepreneurs looking to sell generic products, but it can limit opportunities to build a brand and differentiate products. Businesses that use dropshipping may wind up competing on price, leading to low margins.
Key players in the dropshipping model
Seller of record
The dropshipping process starts with you. As the seller of record (SoR), you’re the individual identified as selling the product to the end consumer. You set the price, record the purchase as revenue, and assume responsibility for the sales tax on a particular sale. Even when a third party stocks and ships the items, you’re the seller of record because you own the products before they ship to the customer.
Manufacturers
Wholesalers
In a typical product supply chain, wholesalers buy from manufacturers and sell to retailers at a slight markup. They function as middlemen; generally, they do not sell to the end consumers but may provide dropshipping services to retailers.
Determine which dropshipping providers could be right for you based on your business model and fulfillment requirements, among other factors.
Potential pros and cons of dropshipping
In ecommerce, as in life, there are advantages and disadvantages to any fulfillment approach. Whether the gains are worth the pain largely depends on your goals and business situation. Here are potential pros and cons to consider when weighing whether dropshipping is right for your business.
Possible benefits of dropshipping include:
- Overhead costs: Since you don’t store or ship the products, dropshipping has the potential to lower overhead costs, such as maintaining a storage facility or sending products to customers.
- Starting costs: Entrepreneurs looking to start a business with minimal investment may turn to dropshipping as they don’t need to invest in facilities or resources to process orders.
- Reduced risk: Since you don’t have to pay for inventory, there’s less risk of losing money due to lost merchandise or over-ordering products.
- Multi-channel selling: You can use dropshipping for your business while selling on your own domain, through a store like Amazon, or social media channels —or all of the above.
- Operating location: Dropshipping allows you to fulfill orders regardless of your operating location, opening up a possibility to work from anywhere.
- Scalability: Leveraging suppliers can make it feasible to accept more orders without increasing the inventory you store, package, and ship.
- Wide variety of products: Depending on your agreement, there may be no need to pre-purchase inventory, so you can sell a broad range of items and increase your earning potential.
- Flexibility: Not sure what goods to sell? Dropshipping allows you to test different goods to see what sells best, without worrying about losing your investment.
- Competition: Given the low cost and investment to get started, dropshipping is a highly competitive field.
- Product quality: Dropshipping reduces your involvement in the order fulfillment process, curtailing your ability to monitor and guarantee product quality.
- Branding: Because the products you sell may not be unique or distinguishable from similar offerings by other sellers, you could have trouble differentiating your offering.
- Profit margins: Little to no product differentiators means your business may end up competing more aggressively on price. Selling at low prices can eat up your profit margin.
- Fulfillment timeline: When a dropshipping service handles the fulfillment process, you do not have control over order selection, packaging, and shipment.
- Inventory management: Up-to-the-minute updates on what is available in stock may not be possible. If a customer places an order only to find the product is out of stock, this poor experience can discourage future orders and damage your brand.
- Range of offers: Because you don’t handle order fulfillment, you may be limited in the special offers and promotions you can run, such as bundling or free shipping.
- Supplier errors: Low-quality dropshippers may make mistakes when fulfilling customer orders. This could lead to botched orders, low-end packing, and missing items.
- Complex customer service: With dropshipping, you’re still responsible for your reputation and keeping customers happy. If things go wrong with the fulfillment process, managing customer support might be up to you.
Is dropshipping right for you?
How do you want to build your brand?
Your brand is the look and feel of customer-facing aspects of your business. Building a memorable brand impression can help grow customer loyalty.
While you may be able to create a branded online experience, dropshipping gives you less control over product quality, delivery experience, and the aesthetics of the final package. If the products and packaging fall short of expectations, a customer may choose not to purchase from your brand again.
Dropshipping suppliers often offer little room for product customization. This limitation may make it difficult to set your brand apart from the competition.
How much control do you want over product quality?
Product quality can have a big impact on other aspects of your business such as customer acquisition, brand loyalty, and returns. While you may be able to inspect the quality of products at the start of your dropshipping relationship, you will likely have limited control over the quality of the items you sell on an ongoing basis.
If the products fail to meet customer expectations, your business could receive negative customer reviews.
How quickly do you want to ship products?
Ecommerce customers tend to expect quick shipping. In a recent survey, nearly 84% of people surveyed regarded delivery as an essential part of their online shopping experience.
Long shipping times can negatively impact your business. When working with a dropshipping supplier, review its standard shipping costs and delivery timeframes.
For sellers looking for fast order fulfillment services, a service like FBA can be valuable.
Did you know?
How much capital do you have access to?
What is your target profit margin?
Compared to other business models, such as owning a retail store or building your own order fulfillment center, dropshipping has a lower barrier to entry. Unfortunately, this can mean more competition for your business.
The playing field can be highly competitive for businesses that use dropshipping. Dropshipping sellers are commonly able to offer products at low prices because they’ve invested so little. If you use dropshipping for your business, you may earn low profit margins.
You might be able to overcome some of these issues if you position your business within a niche outside of any hyper-competitive field. Find potentially profitable or less competitive niches through market research, networking, and sales. Or invest in differentiating your brand.
Are you ready to handle supply and inventory issues?
How will you handle refunds, returns, and replacements?
Returns are an inevitable part of ecommerce business. Sometimes the return process can be as simple as a customer contacting you regarding an item they would like to return. The customer sends back the product, then you refund the customer and contact the dropshipping supplier to credit or reimburse you. But this is not always the case.
Be prepared for more complex return and replacement processes. Take the time to understand how a dropshipping service handles returns before creating your refund and return policy.
Think through the steps of the ecommerce transaction. Here are some examples of questions to ask before signing on with a dropshipping supplier:
- Who is responsible for defects?
- Who covers return shipping fees for defective items?
- What are the supplier’s restocking fees?
- What is the return window for customers?
How will you manage customer fulfillment questions and concerns?
Even though you may not physically handle the products, you may still need to respond to customer questions and concerns about a shipment, delivery, or product quality.
A seemingly small miscommunication with your dropshipping supplier can result in negative reviews and poor customer experience. To avoid this, consider the entire purchasing process from the customer’s vantage point. Pay special attention to the following aspects of the customer experience:
- After ordering, do customers get a shipping notification on when to expect their orders?
- Do packages arrive in the expected time frame?
- Do products arrive in proper condition?
- Is the packaging a good reflection of your brand?
How to build a dropshipping business in 2023
- Select a niche: Although you can sell a range of products, consider choosing a specialty area where you can build your brand. This can also help set you apart from competitors and define the audience you want to market toward.
- Conduct competitor research: Before deciding on a niche, check out the competition. Are there a lot of businesses selling in the same niche? That could indicate the market is saturated and might be tough to break into. Are large brands competing for the same customers? If so, then you might be better off pursuing a different niche as a new brand.
- Find a quality dropshipper: Choose a dropshipper with a great reputation for accurate and on-time deliveries, as well as quality products.
- Create an online store: Represent your brand online with an ecommerce storefront. An online store can be a branded destination for customers to learn about your business and the products you offer.
- Encourage sales with marketing: Use a mix of paid ads on search engines and social media to capture attention and drive traffic to products. If you’re selling in an online store like Jonyx, you can leverage advertising to rank in search results.
- Analyze and optimize listings: Amazon offers a brand analytics dashboard to keep track of store metrics. Monitor this data to keep an eye on sales trends, learn how customers find the products you offer, and get insights into why they buy certain items. Use this knowledge to improve your catalog by adding high-demand products. You can also optimize listings to increase your ranking in search results.
It’s key to find a reputable and reliable dropshipper that can help you achieve success selling online. You’ll also want to avoid common dropshipping issues, such as botched orders, late shipments, and missing items.
But what should you look for in a dropshipper?
Here are a few ideas:
- Go directly to the manufacturer to reduce or eliminate involvement of middlemen.
- Review a dropshipper’s website to see if the business is reputable. (For instance, does it list contact information?)
- Look at customer reviews to see what others have to say about their experiences with the supplier.
- Request product samples to measure shipping speed and product quality.
- Test the dropshipper’s customer support. How long does it take to get a response? Did they resolve your problem?
- What are your policies
