What Is Drop Shipping? How Does Dropshipping Work?

By Kate Loyola | Last Updated: July 10, 2018

Are you looking for an easy way to start an online business? Have you postponed your business goals because you’re worried about the startup costs or the demands of managing a product inventory?

Drop shipping might be the answer for you.

What is Drop Shipping?

Admit it, you’re thinking of parachutes. The answer, though, is slightly less demanding than hurling your deliveries out of an airplane.

Drop shipping is a business model that lets you sell products without keeping an inventory or shipping out each order yourself. When you dropship a product, your customers order items from you at retail prices. You then get those items from a supplier at wholesale rates and wait for the supplier to deliver orders directly to your customers.

Imagine your business as a traditional brick-and-mortar store. There’s the front of the store, where customers browse product displays and staff ring up orders at the register. Then there’s the back of the store, where you’ll find shelves of product stock, plus the people who manage that stock and send items out from the backroom with every purchase.

With drop shipping, you’re the front-facing part of that store. Meanwhile, your suppliers handle the backroom. The one big difference? Items go directly from the backroom to your customer’s homes.

Compared to other business models, drop shipping is a pretty hands-off business. Most of it happens online: entrepreneurs like you set up online stores and coordinate with suppliers from all over the world. You could run a drop shipping store without ever handling your products in person—or, for that matter, worrying about selling all the boxes you’ve already bought and stored in your garage.

How Does Drop Shipping Work?

Drop shipping lets you build your own business on top of suppliers’ established systems. Here’s how it goes:

  1. You set up an online store: You won’t have to make your own products. Instead, you’ll feature items from your chosen supplier’s catalog/s. Of course, while you might carry various branded items, you can still use your own brand for the store itself.
  2. You take orders from customers: When customers pay for their orders, the money goes directly to you. Your earnings don’t come as commissions paid out by your supplier. You also have the power to set prices for each product.
  3. You lodge the orders with your supplier: You buy your customers’ orders from your suppliers at wholesale prices. You are basically “passing” customers’ orders to your supplier. This is where your profits come from, too: the difference between how much your customers pay for the item vs how much you spend buying the item from your supplier.
  4. Your supplier fulfills the order: Your supplier now takes items from its stock and ships them out to your customers. The items don’t go through you anymore.

Drop shippers earn by facilitating sales between wholesalers and regular shoppers, marking up products along the way. This works because many wholesale suppliers don’t sell directly to the general public — they’re all backroom and no storefront. If customers want to have a particular supplier’s product, they must find a retail store that offers the item. As a drop shipper, you get paid for providing that storefront.

Should You Try Drop Shipping?

Drop shipping has a lot going for it. After all, who doesn’t want to ditch the headache of tracking product inventory, or the pressure of earning back the cost of product stocks you’ve already paid for?

You should consider drop shipping if you’re any of the following:

You’re New to Business (Especially Ecommerce)

Drop shipping eliminates many of the issues that trip up new entrepreneurs, like building up an initial supply of products, setting up processes for order delivery, and so on. Here, your focus will be on marketing your products, building your brand, and growing your customer base. You’ll have fewer things to figure out, and some of your business’ most important elements will be handled by experienced professionals.

You’re Starting with a Limited Budget

Drop shipping also reduces your overhead costs. You won’t need to rent a warehouse for your stock; hire staff to package and ship orders; track and replenish product stocks; and so on. With drop shipping, you’ll also be buying products only when you’ve already made a sale. This reduces the risk of incurring huge losses, since you won’t be buying a huge initial supply that you’ll then have to work to sell out.

You’re Short on Manpower

This can be more of a problem once your business has built a steady flow of orders. If you’re a one-person operation (or working with a group of, say, fewer than ten people), it can be difficult to keep up once your business booms. With drop shipping, your suppliers will take that concern off your hands.

You Want to Sell a Variety of Products

Maybe you want to focus on a broad category, like clothing. You might want to sell ladieswear, menswear, and even baby clothes side by side. Producing a wide-enough range of items by yourself is out of the question. But if you can find reliable suppliers for each type of clothing you want to sell, you can easily offer customers a broad catalog.

You’re Always on the Move

Managing physical product stocks reduces your flexibility. You are, in some ways, tied to your inventory. If you suddenly have to move from one state to another, for example, relocating your existing stock can disrupt your business’ operations. If you’re the one in charge of shipping orders, you’ll need to work out a backup plan if you ever want to go on an extended vacation without losing sales. On the flipside, you can hop from place to place armed with just a laptop and an internet connection, and your drop shipping business could still run without a hitch.

What Are the Dangers of Drop Shipping?

Of course, no business model is perfect. Drop shipping comes with its own challenges and risks, such as:

  1. You Don’t Have Complete Control over Your Products

Since you’re not responsible for your inventory, you have little control over things like product supply and availability. Remember, too, tha you’re probably not the only retailer doing business with your supplier. The products in your supplier’s stocks are shared, at least indirectly, with other businesses. You’ll also have almost zero opportunities to add personal touches that distinguish your products and services from the competition. Depending on the supplier, you might not even find many tools for monitoring how your customers’ orders get fulfilled.

  1. The Competition Can Be Fierce

Speaking of competition, the drop shipping arena can get cutthroat. For any given product niche, you could be competing against thousands of other retailers. The drop shipping resources you’re using are available to other users, after all. Unless you’ve got some solid strategies for setting yourself apart, you can easily get drowned out by the sheer number of competing stores.

  1. You’ll Work with Lower Margins

It’s easier than ever for shoppers to compare prices from different vendors. When there are many of you selling similar products, customers will naturally head to the store with the lowest prices. The problem is that drop shippers find it easier to offer lower price tags, since their overhead costs are so low. Consequently, you might not have much freedom to mark up your products, especially if there are clear competitors who keep driving prices down.

  1. Juggling Multiple Suppliers Could Tie You into Knots

If you’re offering multiple products from different suppliers, things can quickly get complicated. You’ll have to figure out a system for coordinating with different companies. That includes keeping track of each supplier’s billings, monitoring product availability from different sources, paying a different shipping rate for each supplier, and so on.

  1. You’ll Answer for Your Suppliers’ Errors

The bulk of your business’ practical side happens outside your control. If your suppliers mistakenly send a defective item or a delivery gets stalled, it’s your business’ reputation on the line. Depending on your arrangements with your suppliers, there might not be much you can do to prevent these errors, either.

Despite these challenges, drop shipping can still be a profitable business model. Fair warning: You’re not going to get rich quick. But if you put in the work, link up with reliable suppliers, and prepare for the challenges that will come your way, drop shipping can definitely earn you a tidy sum.