What Is Dropshipping?

By Oleg Mikhailenko
Published in Solutions
March 11, 2022
4 min read
What Is Dropshipping?

When people want to start a business online, sooner or later they stumble across the concept of dropshipping. And it’s no wonder why: dropshipping is frequently presented as an entrepreneurial opportunity with a low barrier to entry, easy for any beginner to jump right in and immediately begin turning a profit. It all seems simple and intuitive enough. Instead of designing, developing, testing, manufacturing, and fulfilling a product or set of products all by yourself, you can find a product from a wholesaler instead. Dropshipping seems like the low-price option. The cost-benefit ratio of being a middleman, where you only have to pay for marketing and the maintenance of an online shop, can seem much better.

But what exactly is dropshipping? How does it work? Is it as good of an arrangement as it seems, or are there hidden drawbacks? And most importantly, is dropshipping the right business model for you?

What is dropshipping?

The idea of dropshipping is fairly simple to wrap your head around. Unlike direct shipping, where products are dispatched by the company listing them for sale, dropshipping is a fulfillment method that works a bit differently. In this case, the company promoting, marketing, and selling the products never actually lays a hand on them. The seller doesn’t own the inventory at all. Instead, when you order from a marketplace that utilizes dropshipping, the company you buy from effectively acts as the middleman and puts your order through to a manufacturer, wholesaler, or secondary retailer who is then responsible for the fulfillment and shipping of the product to your door.

Aliexpress, Home Depot, and Taobao are all common sources for dropship stock which are then distributed through alternative sites. Although many people have a specific image of such retailers in mind, these days there are many examples of stores that utilize dropshipping. Historically, this tactic was used by mail-order companies like J.C. Penney’s and IKEA. Now, the e-commerce landscape is awash with dropshipping merchants, from small, independent Alibaba resellers who primarily market on Instagram or TikTok, to interior design e-commerce giant Wayfair. Most of all, though, Shopify is the platform of choice for today’s dropshipper. It even offers built-in apps that allow aspiring merchants to search for unique products on Alibaba which can then be uploaded and sold through the user’s own storefront.

What about reverse dropshipping?

Reverse dropshipping is the same concept. However, instead of purchasing products from countries with lower manufacturing costs in order to sell them to countries which import lots of goods, merchants do the opposite. High-quality products are exported from places such as North America and Europe and dropshipped around the world.

What are the drawbacks?

Getting started seems almost too easy. In theory, all you need to do is create a website, find some quality products you want to host in your storefront, and set aside some costs for marketing. However, there can be a lot of hidden costs and difficulties. First of all, for an established brand, it can be very difficult to get sales at first. No matter how clean and professional your site looks, in order to drive traffic, you have to spend at least a few hundred dollars on advertising costs at first. Once you’ve gotten enough hits on your site to receive your first few orders, though, you’re still not in the clear. Should your chosen source deliver late, incorrect, or poor-quality products, the bad reviews from your first customers can sink your business before it even starts. Although in many cases the packaging of dropshipped products represents the brand of the brand or site the customer ordered through, everything else is out of the merchant’s control. Should your source unexpectedly sell all their stock or deliver something that’s below par, you’re left to manage customer service, deliver apologies, and issue refunds for quality control issues and inventory management struggles that aren’t your fault.

Even setting all that aside, the customs costs involved in dropshipping can be enough to drive you crazy, strongly eating into your profit margin should you cover it, or discouraging your customers from purchasing from you again if you don’t. Your profit margin can further dwindle away as you try to keep your prices competitive with other, more established retailers. Many people give up before they truly have the chance to succeed because they choose such a competitive niche that the profit margin they’re forced to take isn’t enough to make their effort worth their time. This is why, despite being one of the biggest e-commerce platforms in the world for dropshipping merchants, Shopify’s stock is dropping.

So why do people do it?

There are many benefits of dropshipping. First of all, the up-front costs are indeed a lot less than direct shipping from Amazon or the like. Marketing is generally the largest expense in any dropshipping endeavor, and although it certainly scales with the size of the business, as your customer base grows so does the rate of organic growth through word-of-mouth. What’s more, with the correct programs and management software, running a dropshipping business can take only a few hours per day. When done correctly, with appropriate expectations as to how quickly it takes to become successful and a healthy knowledge or willingness to research the correct way to manage orders, dropshipping can be an incredibly worthwhile and profitable business model. This goes double if you select a niche or a market that isn’t heavily populated, so you don’t feel forced to shave down your profit margin to razor-thin levels in order to keep your prices competitive. Reading testimonials from other successful merchants and being willing to put in the time and effort is often the deciding factor between success and defeat. If you add the use of specialized tools such as Shopify’s native apps, multi-channel management software, and automatic inventory management widgets, building a scalable business with comparatively little up-front investment becomes a very viable option.

In conclusion

Dropshipping is a way for the beginner or veteran online merchant to get their foot in the door on a new business idea by offloading the cost of product development and fulfillment onto a pre-existing wholesaler and manufacturer. Although it can take some trial and error to find an excellent, high-quality source with products you’re proud to sell, with an eye for curation, a dedicated niche, and the willingness to spend a few hours and a few hundred marketing dollars up front, there’s absolutely no reason why you can’t succeed in building a profitable and scalable e-commerce business. For further information and assistance in making the best business decisions for you, we here at P2Pseller are happy to offer our unique fulfillment services through the power of a democratic and shared marketplace economy. Whether you use a direct ship, dropship, or other business model, we’re almost certain to be able to help you scale your infrastructure and help your business grow, with zero stress and zero phone calls.


Tags

#dropshipping#benefits#inventory#packaging#fulfillment#business#marketplace
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Oleg Mikhailenko

Co-Founder, CEO P2Pseller

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