orders@riakoob.com

What is dropshipping? How does it work in 2023?


Dropshipping is a fulfillment model that allows entrepreneurs to outsource handling and shipping products to a third party. This fulfillment method can appeal to entrepreneurs seeking efficiency and low overhead, but it has trade-offs.

 

What is dropshipping?

Dropshipping is an order fulfillment option that allows ecommerce businesses to outsource the processes of procuring, storing, and shipping products to a third party—typically a supplier.

This fulfillment model commonly appeals to entrepreneurs seeking efficiency and low overhead, but it can come at a cost—especially when it comes to customer experience. This guide will cover what dropshipping is and explore how this fulfillment method can work. We’ll also look at a few dropshipping alternatives that can potentially save you time, lower your overhead, or simplify your business.

What is a dropshipping business model?

In a dropshipping business model, you promote products and provide an online storefront. When a customer places an order, you send the order to the dropshipper and inform customers the products are on the way.

The rest of the physical fulfillment 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 fulfillment.

How does dropshipping work?

The exact logistics of dropshipping depend on your arrangement, but typically the dropshipping process follows this general sequence:
  1. Seller signs agreement with dropshipper.
  2. Customer orders online.
  3. Seller receives order.
  4. Customer receives an order confirmation.
  5. Seller forwards the order to dropshipper.
  6. Dropshipper ships the order.
  7. Customer receives their product.
How Dropshipping Works
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

Let’s unpack some of the key players and their roles in detail, starting with the seller of record—in other words, your business.

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.

For Amazon sellers, using a dropshipping service is generally allowed by Amazon dropshipping policy, as long as you’re the seller of record and identify yourself as such.

Manufacturers

Manufacturers make products to sell to wholesalers and retailers. You can purchase goods from manufacturers, but the bulk purchase amounts they may require can potentially be a barrier to starting or scaling your business. Some manufacturers may offer dropshipping services.

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.
Potential limitations for dropshipping include:
  • 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.

Fulfillment by Amazon: A dropshipping alternative with added perks

Fulfillment by Amazon (FBA) offers similar benefits to dropshipping while giving you more control over your brand experience. You don’t need to sell products in the Amazon store to use FBA—although with an audience of 200 million unique visitors each month, Amazon is a selling channel worth considering.

With FBA, you store products in an Amazon fulfillment center, and we:
  • Offer quick delivery with Prime Shipping
  • Manage customer service
  • Take care of returns
  • Notify you when you need to restock products
How FBA works
  • You decide the products and quantities you’d like to fulfill and send them our way.
  • We receive products into our network and store them in Amazon fulfillment centers.
  • As orders arrive, we pick, pack, and ship the products on your behalf.
  • Amazon manages customer service and returns on these orders.

Is dropshipping right for you?

It depends on your business. Here are a few questions to ask yourself if you’re considering dropshipping.

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.
illustration of man looking at customer reviews on mobile device

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.

How much capital do you have access to?

In some cases, the dropshipping business model allows you to hold off on product procurement until customers actually place orders. This can make dropshipping attractive to entrepreneurs who want to get a business up and running with limited inventory investment. Some alternatives like third-party fulfillment also allow you to launch and run your business with less capital compared to sourcing, storing, and shipping products on your own.

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?

If you choose to use dropshipping, you may have little to no control over the supply chain. Delays in production might determine how many orders your dropshipper is able to fulfill. Having to disappoint your customers by informing them an item is out-of-stock is hopefully the exception and not the rule. Sourcing products through multiple dropshipping services is one way to avoid running low on product inventory. When one supplier is out of a needed product, you can rely on another. However, working with multiple suppliers adds complexity to logistics and fulfillment, which may defeat the purpose of a dropshipping strategy.

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?
Optimize each of these touchpoints to create a positive customer experience, which can help you earn positive reviews and build brand loyalty.

How to build a dropshipping business in 2023

Have you run another internet business? Starting a dropshipping business might share similarities with your experience. Here are some recommendations and steps to take:
  • 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 Amazon, 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?
Reach out to the dropshipping supplier and ask the following questions:
  • What are your policies for handling returns and damaged goods?
  • What’s your order fulfillment speed from sale to final delivery?
  • Is insurance provided for orders?
  • Is fraud protection available?
  • Do you supply tracking numbers for shipments?
  • What’s the billing process?
  • What terms are included in the dropshipping agreement contract?
  • How much do you charge per sale?
  • Is there a handling fee? Are there any other fees?
Your investment in starting a dropshipping business will typically be a lot lower than other ecommerce models because you don’t have to pay for inventory up front. However, you might have other business startup fees to take into account, such as:
  • Website domain: Varies depending on where you purchase, but can run from about $5 to $25 or more per year.
  • Website hosting: Varies depending on the hosting provider, but can range from roughly $5 and upwards of $80 per month.
  • Advertising costs: You decide how much you spend daily, weekly, or monthly. Rates will vary based on the search term you’re targeting. (The higher the competition, the higher the rate per click.)
  • Sample orders: The cost to order samples is typically lower than full price, but can range widely depending on the type of product (e.g., T-shirts compared to electric razors).
  • Tools: Using product sourcing software and keyword discovery tools can help give you competitive advantage, and range from $10 to $200 per month or more.
The profit potential for a dropshipping business is limitless but it depends on the demand and competition for your niche. Focus on excellent marketing and advertising for a high-demand, low-competition niche to improve your chances of earning more.

Some dropshipping companies are earning hundreds of thousands per year, while others are earning much less. It’s impossible to guarantee the amount you’ll earn when starting out, since your marketing methods, the economy, and other factors can play a big role in outcomes.

You can also review profit margins to get an idea of the profitability potential.

Alternatives to dropshipping

If dropshipping is not right for your ecommerce business, there are alternatives. Here are a few options if your goal is to outsource fulfillment.

Outsource storing and shipping products with third-party fulfillment

As an alternative to dropshipping, some sellers purchase products in bulk, then enlist the help of a third-party fulfillment service to store items, pick and pack orders, and handle the shipping to customers.

This approach allows you to procure products upfront, potentially at lower costs. You can also:
  • Assess the quality of items before they ship to the fulfillment center
  • Offer promotions and special offers on products
  • Offer product bundling or subscription services through some providers
If you would like to outsource fulfillment while maintaining control over product quality, learn about FBA.

Create your own branded products

At some point in the life of your business, you may require specialty products featuring your own branding. Selling branded products can help your business grow by helping you:
  • Differentiate your business from other ecommerce brands
  • Earn customer loyalty by building a unique online experience
  • Building a memorable ecommerce brand identity
  • Building brand recognition to help you launch future products
  • Build an asset, your brand identity
Some sellers find a dropshipping supplier to add individualized touches like special packaging and branding and create branded products or white label products.

Another option is to have a manufacturer produce branded products in bulk, then use FBA for distribution. This method lets you take advantage of Amazon’s fast Prime Shipping, helping you stand out in the crowded ecommerce market.

Focus on promotion and earn a commission through affiliate marketing

Affiliate marketing is a different business model altogether, but it’s worth considering if you’d prefer to avoid managing customers, orders, and returns entirely.

Affiliate marketers don’t sell any products at all. Instead, they promote products for an ecommerce retailer and collect a commission when a customer purchases through a unique referral link.

While affiliate marketing is an advertising business model as opposed to a retail solution, it can provide benefits such as minimizing startup or overhead costs while allowing you to build an audience and earn money when products you promote to your audience result in sales.

How affiliate marketing works

With affiliate marketing, you market a product online and include a link for customers to buy the item. The link takes customers to a website where they can place an order directly. You get paid when the customer uses your referral link and makes a purchase. The supplier handles the order confirmation, fulfillment, and shipping.

Affiliate marketing can be a way to jumpstart your ecommerce business or monetize an existing asset such as a blog or email list. Since you don’t stock, process, or ship the products, you may be able to operate with relatively low overhead costs. You can also:
  • Start an affiliate marketing business using your own website or social media accounts
  • Outsource customer management to your supplier, which then acts as the seller of record and handles customer communication
  • Outsource returns or order management to your supplier

 


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.