What is Dropshipping? Understanding the Modern Ecommerce Business Model
If you’re reading this article, you’ve probably recently asked, ”What is Dropshipping?”
Dropshipping is one of the fastest-growing business models due to its low cost and simplicity in getting started. Once you understand the concept, you will see why it’s becoming such a popular way of doing business online.
What Is a Dropship Business?
A dropship business typically refers to an online store selling products that are not owned or purchased by the store owner until after they have received an order from their customer. This is unlike the traditional retail model in which you purchase products in bulk from a wholesale distributor to stock on your shelves directly, and then pick, pack and ship out those items yourself to your customer.
In a dropship retail business, the items you list on your site are stored by a wholesale distributor in their warehouse. When you get an order for the item, instead of taking the product from your own warehouse or off your retail store’s shelf, your wholesaler ships that order directly to your customer on your behalf, with your name and store details on the package.
The benefit of the dropship model compared to the traditional retail model is you do not have to purchase large quantities of expensive inventory upfront and store it while you try to sell your products.
When you use dropshipping, you simply partner with a dropshipping supplier and list their merchandise for sale. When you get an order, you forward it to the supplier for fulfillment. Your customer typically doesn’t know the difference and the fact it is being shipped through your dropshipping supplier.
What Are the Benefits of Dropshipping?
- Cheaper to Start and Less Risk: With dropshipping, you don’t need to invest thousands of dollars in inventory or find a way to store it all. Instead, you only purchase a product when you have an existing order to fill. If you do not sell products at the volume you want, you can easily change to a new supplier and you won’t get stuck with inventory that you have to try to unload at a loss.
- More Products to Offer: When you don’t have to pre-buy everything you sell, you can offer a significantly larger number of products to your customers on your dropship website or dropship eBay or Amazon account. The term “endless aisle” has been coined because of a dropship retailer’s ability to provide hundreds of thousands of products to their customer with relative ease at little to no risk.
- Flexible Work and Independence: Because you don’t have to worry about fulfillment or running a warehouse, it’s possible to run a dropshipping business from anywhere with a laptop and an internet connection. You can just as easily work from an office, home, or even while on vacation.
Is a Dropship Business Profitable?
Like all businesses, success and profitability rely on a number of factors. However, when done right, it is very possible to create a highly profitable online business with dropship products. If you just want to put a product on a website and sit back waiting for sales to come in, you might need to wait a long time.
To be successful at selling dropship products, you need to dedicate time and effort to differentiate your business and compete in the market like any other business. However, unlike many other business models, it is financially very “low risk” and a great model for those who are looking to learn how to build an online business for the first time.
Traditional retail will always have more profit margin per product vs. dropship retail because you get discounts for buying products in bulk. However, traditional retail also has higher costs and risks because you have to have a place to store those items, and you might get stuck with inventory you are unable to sell.
As you sell more products over time, you can often go back to your dropship supplier for better pricing on some of your items. So even if you don’t order a single item in bulk, over time, your total order volume from your supplier can still help you to get better pricing and improve your profit margins. A good strategy for retailers to increase their margin is to test many products with dropship and then purchase these products wholesale to maximize their profit once they know they can generate sales.
One more tip for success: be unique, not like the rest. Take the time to build out your brand and it will pay off in the long run.
What Is the Typical Profit Margin on Dropship Products?
The profit margins on your dropship product sales will depend a great deal on the types of products you sell. For example, expensive electronics, such as computers and big-screen televisions, have smaller margins than say fragrances or household goods.
In general, if an item is either more expensive or sells in high volume, you can see dropship margins in a pretty low range of 10-20 percent. This is because the item already has built-in demand and there is little room for you as a retailer to add value in selling an item that is being fulfilled directly from the supplier. This holds true for in-store retail sales as well as online. However, high volume, low margin businesses can make more sense in the online world vs. in-store sales because you can keep your operating expenses pretty low. If you can automate the listing and fulfillment of highly demanded products, your operating and marketing expenses are almost non-existent, making this a more than viable business model.
The other approach is finding dropship products with a higher margin that might be in less demand or in a specialty niche. With the right supplier relationship and products, you can see dropship product margins in the 30-50 percent range- you just need to put time into supplier relationships and product sourcing. It’s worth noting that your margin isn’t always simply anchored by the cost of the item, it also dependent on you as a business. If you can find ways to offer value and build trust with your customers, you can typically charge a premium compared to other online sellers.
Where Can You Sell Dropship Products?
Dropship products are sold almost anywhere traditional products are sold. If you have shopped from Amazon, you have likely purchased an item that has been dropshipped and you didn’t even know it.
People even sell dropship items from phone or catalog sales, and copious amounts can be found on marketplaces like eBay, Amazon, Walmart, and more. When you visit a website selling products, it is very possible they are dropshipping products and using an online store or “shopping cart” platform such as Shopify, BigCommerce, WooCommerce, 3dcart, OpenCart, Magento, Volusion, etc. to do so.
Even large box retail chains sell dropship products from their websites including Walmart, Home Depot, Sears, and others. Their reasoning is the same as the smaller retail websites- dropship allows them to offer a wide range of products with less risk and cost compared to trying to maintain that same product assortment in stock. Many successful online merchants (big and small) use a combination of both dropship and traditional wholesale purchasing for their ecommerce stores.