What is Dropshipping and How Does It Work?

Dropshipping is a retail fulfillment business model that allows organizations to ship a third-party product directly from a supplier to the customer, which the customer purchases from your business. 

Even if you have a brick-and-mortar store, you don't keep these items in stock. Instead, when the customer purchases, you'll order it directly from the manufacturer or a dropshipper(called "the supplier"), and it will ship directly to the customer. The seller never actually handles the product at all, and only facilitates the order. 

The dropshipping process itself is incredibly simple, and if you're taking the right steps to do everything from choosing the right products to marketing them on the right platforms, your e-commerce business can take off before you know it. 

Here’s everything you need to know about dropshipping

1. How does dropshipping work?

Wondering how exactly the dropshipping business model works? In short, it enables you to sell products to customers without worrying about order fulfillment.

That means no stocking inventory, packing up orders, or shipping. Instead, you let a third party take care of the entire supply chain for you. Then, you can focus on building your brand, picking your dropshipping products, making sales, and providing a good customer experience. 

Here's a quick overview of how the dropshipping process works, and in fact, there are only 4 parties involved:

• The product manufacturer

• The dropshipping supplier or wholesaler

• The retailer (you)

• The customer

And the way it works is very simple:

• The manufacturer creates the products and sells them to the dropshipping supplier (or wholesaler)

• The dropshipping supplier (or wholesaler) sells the products to you (the retailer)

• The customer places an order through you

• You (the retailer) pay and send the customer order to the dropshipping supplier, who is now responsible to pack and ship the order to the customer

• You (the retailer) must ensure that the customer receives the order, and handle any customer service inquiry

The dropshipping business model can cut out many of the pain points that ecommerce store owners face. You don't have to worry about buying inventory upfront, storing inventory, or the hassles of shipping. That means there is no need to rent storage space, spend hours packing orders, or make weekly trips to UPS. You can also dropship on Amazon, Etsy, and eBay.

However, the challenging part can be finding a reliable supplier with quality products that provide a good service experience. You also have to consider low margins. Because you don’t ship products, or do much legwork besides offering a range of products, your margins are usually pretty thing. You’ll need to focus on selling online via social media, search engine optimization (SEO), and paid advertising.  

If any of those factors are missing, your online business can suffer. Luckily, there's no shortage of options through well-known supplier databases like Alibaba and AliExpress, as well as supplier directories that can integrate directly into your store's backend DSers. You can shop around amidst many well-established suppliers to find the best fit for you.

2. Benefits of dropshipping

Dropshipping offers several benefits to budding entrepreneurs, and they include the following:

• There are fewer costs involved. Since your supplier handles manufacturing, storing, and shipping items, your startup costs are relatively low—you'll likely just need some marketing and customer service expenses, which will increase your profits more quickly. 

• There is a much smaller financial risk. If products don't sell, your business doesn't lose the money spent on inventory as you would when working with a wholesaler.

• You can offer more selection to your customers. If you're manufacturing tea kettles to sell at your online tea shop, you might only be able to create one or two models. If you work with a wholesaler, you might be able to afford a few more. With dropshipping, you can offer as many as you'd like, increasing potential customer satisfaction and sales.

• Manage your business from anywhere. If you want to be one of those business owners who are answering customer emails and uploading new listings from Belize, Paris, and beaches in Greece, you can do so with dropshipping. You don't need to be close to your inventory so you can ship it on time. You just need an internet connection and an e-commerce website. There is a low barrier to entry with dropshipping.

• It's scalable. Want to add more products to your store? Great! Just find them and add them, simple as that. And if you want to expand into a new niche, it's a simple process compared to the alternatives of manufacturing or finding a wholesaler. 

• There's more time for business decisions. When you aren't managing a large inventory or needing to worry about tighter cash flow, there's more time and money for you to make smart business decisions. Invest more time into strategy, marketing, and improving your business overall.

• You can test new products at no risk. Do you own a dropshipping store for running shoes, and want to see if your customers would be interested in additional items like water bottles, athletic attire, or foam rollers? Offer these items on a dropshipping basis and see how well they perform.

• Get started faster. Wholesale selling and manufacturing your own products both take significantly more time with dropshipping. When you're using a dropshipping model, you just need to get your website up and start driving sales; there's no wait time based on product development and availability.

3. Cons of dropshipping

While dropshipping is a positive experience overall for many businesses, there are some disadvantages that you'll want to factor in, too. These drawbacks include:

• You're not in full control of when the product ships; if there's a delay, the customer will hold you responsible

• You don't get to inspect the merchandise yourself, so there's no opportunity for quality control on your end; if you're selling low-quality items without realizing it, that can hurt your store

• If the manufacturer sells out of an item, it can cause stock shortages

• Dropshipping may increase the per-product price, because wholesale buying in bulk may yield discounts; you may be limited in how much you can reduce pricing to stay competitive while still maintaining decent profit margins

Ultimately, the biggest drawback of dropshipping is the potential loss of control and resulting quality or customer service issues. In order to prevent this, focus on working with suppliers who value product quality. Even if it’s a basic t-shirt, make sure the material is good and it won’t break after three washes.

4. Is dropshipping worth it?

Despite there being some disadvantages, yes dropshipping can be profitable being built on a low-risk business model, which minimizes your personal and professional risks.Even if you manufacture or focus on wholesale selling for the majority of your products, it's clear that dropshipping can create valuable business opportunities, whether it's your first venture into entrepreneurship or a new addition to your business portfolio.Here are a few key ways dropshipping can provide new opportunities for profit and growth for your business:

• Offer more to your existing customers, increasing your overall value (and order value) in their eyes. And, even better, you can do this without a large cost on your part. 

• Expand your business and set yourself apart from the competition by curating high-quality products that your specific audience niche will love.

• Test new products or even a whole new niche without financial risk. You can add new products to your storefront and remove them just as quickly if they aren't working out.

• Open up additional businesses (or your first business!) relatively quickly with dropshipping. All you need to do is get your site up and running.

5. How to select a dropshipping supplier

If your dropshipping supplier is unreliable or inconsistent in any way, that will directly impact your customer's experience and your brand's reputation.

Choosing reliable suppliers is essential in dropshipping. Here are a few methods you can use to do this.

• Contact the product manufacturer. The first step you should always take is to contact the product manufacturer as soon as you know which particular products that you want to sell. If they don't sell the items directly themselves, they can put you in touch with trusted sellers and distributors. This can help you ensure that your customers aren't receiving a knock-off, outdated, or fraudulent product, which is unfortunately relatively common. Look them up online, and search for contact information like an email address or phone number. If you're interested in sourcing products from different manufacturers, you may notice that one or two sellers are listed again and again. These can be considered reputable, and you're likely safe to purchase other products from them, too.

• Use supplier directories. Supplier directories typically charge a fee in order to access their information, but they come with valuable data on different reputable suppliers that will help you feel confident in who you're working with. Wholesale Central, Worldwide Brands, and Inventory Source are all great examples.

• Use third-party tools. You can also use dropshipping platforms like Oberlo and Spocket, which come with a large catalog of products from thousands of reputable suppliers. This allows you to quickly source products while cutting back on some of the hassle and management. Many of these types of platforms also work seamlessly with e-commerce platforms like Shopify and WooCommerce for added convenience.

Know the signs of non-reputable suppliers

While you're looking for the best suppliers to work with, it's helpful to know what signs may flag a less-than-stellar supplier.

These may include the following:

• They'll sell to anyone, including the general public, no application process is needed

• They charge ongoing, flat-rate fees just for establishing a partnership 

• They won't sign any contracts

• It's hard to find information about them online, or they have negative reviews

6. Dropshipping for beginners: FAQs

What's the difference between dropship and wholesale? 

There is one big similarity between dropshipping and wholesale selling: Both allow you to provide goods to customers from a third-party manufacturer. That's where the similarities end.

With wholesale selling, you'll place an order for products yourself, which becomes your inventory. You'll need to order the items, wait for them to arrive, and store them in a physical location that you rent or own. You'll then market the items to the customer, and they'll either purchase in person, or you'll ship the item to them yourself. Wholesale selling comes with some financial risk: you become the owner of that inventory, so if it doesn't sell, the loss in profit comes out of your bottom line. Since you're typically buying items in bulk from wholesale, that can cause a big hit. 

With dropshipping, however, you never officially own any inventory, and you never touch the product directly. Dropshipping companies act as middlemen between you and the manufacturer. Sometimes, they even are the manufacturer!

There's no purchasing inventory, warehousing, inventory management, or shipping processes involved for the seller; they just make the sale and get profit from the markup. The risk is low, because there's no financial investment required, and items are purchased on an as-needed basis by the customer instead of in bulk quantities by your small business.

Do I need to register a business entity to dropship? 

It's typically recommended—if not required—that you become legally incorporated. If you're expanding an existing business with dropshipping, you are likely already legally incorporated, but all new businesses will need to understand this critical step.Legal incorporation is the simple act of registering your business and obtaining a business license. In the United States, you'll register with your state. Incorporating has three key benefits:

• It creates some separation between your personal assets and your business, protecting yourself. If someone sues your business, they can take everything the business is worth but it would be harder for them to go after assets like your home, car, or personal bank accounts.

• It may be legally required. If it's not required, it's often recommended.

• Many manufacturers may require you to have a business license, a tax identification number like an EIN, and a business address. 

Be sure to check local, state, and industry laws to ensure you're compliant in your area. If you aren't sure where to get started, you can reach out to a local business lawyer. They can help you determine what licenses and permits you need to keep your business going. 

Why should I start dropshipping?

There are a few specific circumstances where dropshipping is one of the best options you can consider. These include: 

• If you are interested in starting a new retail business quickly but don't want to invest a lot of capital or time into the startup process.

• If you want to focus on e-commerce only but don't have the funds or storage space to purchase, manage, store, and ship a large inventory.

• If you are already selling goods and services, but want to expand your product offerings and branch out into new niches. 

• If you want to test new products or niches without investing significant capital into a large bulk order first. 

Plenty of businesses incorporate at least some dropshipping into their retail fulfillment process, even if they also sell wholesale goods themselves or manufacture most of their own products.

What are the best dropshipping suppliers in 2024?

Here's a look at some of the leading suppliers.

1. Wholesale Central 

Designed for market vendors, online stores, and independent retailers, Wholesale Central provides a free directory of over 1,000 U.S.-based wholesale suppliers that offer more than 600,000 products. While you don't need to register to search and shop the site, signing up (for free) gives you additional perks. 

Pros:

• Free for buyers

• Wholesale Central reviews and screens all suppliers

• 1000+ U.S.-based wholesale suppliers included in the directory

• Over 400k products

• Join the Wholesale Central Buyers Network for free and gain perks like preferred access to trusted suppliers and a product locator service 

Cons:

• Some suppliers are suspected to be retailers, selling to the public at wholesale prices, so you'll need to use discretion

• Shipping terms depend on the supplier

2. SaleHoo

SaleHoo provides a paid directory of third-party suppliers along with a powerful research tool and an online community. It serves the United States, UK, and Australian markets.

Pros:

• 8000+ suppliers in the directory

• Over 2.5 million products

• Award-winning customer support 

• All suppliers are vetted by the SaleHoo team

• Get access to the Market Research Labs tools, a members forum, and personal email support

• 60-day money-back guarantee

Cons:

• Fee for access

• The learning curve can be steep

• Not available in all markets

3. DSers

DSer is an app can help you scale your dropshipping business thanks to reliable sourcing and quick shipping from AliExpress. It serves the US, UK, Canadian, and European markets. DSers makes it easy to optimize your suppliers and find cheaper, better ones selling high quality products.

Pros:

• Manage multiple Shopify stores in one account

• Place 100s of orders with one click in a few seconds

• Automatically track order & package status

• Dedicated support team

Cons:

• Not available in all markets

4. AliExpress

AliExpress is a marketplace based in China that mostly connects Chinese suppliers with international buyers in over 200 countries. 

Pros:

• Over 100 million products

• Majority of merchants based in China source products from the region

• Ships to 200+ countries

• Good for all levels from beginner to advanced

• Product prices are competitive

Cons:

• Shipping time averages 15-45 working days because it's coming from China

• Premium shipping costs are higher and still averages 7-15 working days

• Most AliExpress suppliers don't offer returns because the shipping turnaround is too long, so sellers have to cover returns

• Must vet suppliers carefully to avoid scams and ensure quality

How do I find a profitable dropshipping niche?

When you're choosing your niche, you'll want to ask the following questions:

• What products are you most excited about selling?

• Which audience do you want to reach, and what are their pain points?

• What do you think will be most profitable?

• Is there a niche that isn't being served that you could fill a need for?

Let's take a look at a few different factors that should help you determine your ideal niche.

1. Choosing a niche based on added value to your customers

Do you have something valuable to add to a specific niche? Let's say that you sell comic books, for example. You have casual readers who enjoy coming to your site, finding the latest edition of their favorite superhero, and then purchasing. Comic book enthusiasts, however, might be more high-value, and if you can attract them with collector's edition vintage comic books and action figures or signed memorabilia, you could be offering something much more unique.

If you can add value or offer something new, that's a great place to start, even if the industry, in general, is heavily oversaturated. Think alternative bouquets for weddings, like paper flowers or wooden flowers: these are much more difficult to find for brides, but increasing in popularity. You can even sell matching wooden bowties to increase add-on purchases. 

2. Choosing a niche based on competition levels

If you're able to find a niche that's either underserved or isn't being served at all, that could be a great place to start. This could simply be from high demand, or you could see that there's a segment of an audience who may have trouble finding what they're looking for. If a market is oversaturated, you either need a strong value proposition or unique products to stand out; it may be easier to simply choose another niche. 

3. Choosing a niche based on prosperity

If you're basing your entire business around a single niche, make sure you're considering a niche's long-term appeal.

Start your dropshipping store today

Dropshipping is a great business idea with minimal overhead and financial risk. 

It's low cost, which minimizes your personal and professional risk. If something doesn't quite work out, you can always pivot, changing up your entire product line or even starting a new business relatively quickly.

Dropshipping is a great way to expand your overall product offerings, after all, so the sky is the limit.  Following the steps discussed in this post will help you create and elevate your brand to connect with your target audience, differentiate yourself from your competitors, and help your business begin to thrive. It's hard to say no to that!