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Dropshipping in 2022: What is dropshipping and how does it work?

This guide covers the definition of dropshipping, pros and cons, and alternatives to consider for ecommerce businesses

illustration of packages with Amazon Smile on pallets

Introduction to dropshipping

Dropshipping is an club fulfillment choice that allows ecommerce businesses to outsource procuring, storing, and shipping products to a 3rd political party. This order fulfillment method appeals to entrepreneurs seeking depression overhead and depression capital investments, simply it can come at a cost.

Ecommerce is competitive. Dropshipping may appeal to entrepreneurs looking to sell generic products, but it can limit opportunities to build a brand or differentiate products. Thus, businesses that use dropshipping may wind up competing on price, leading to depression margins.

If you are because dropshipping for your ecommerce concern, at that place are several factors you should review—including some variations and alternatives that offer similar benefits.

What is dropshipping?

Dropshipping allows you, the seller, to outsource the fulfillment process to a third political party, typically a supplier. The manufacturer or third-party supplier handles the production, storage, shipping, and delivery of products to the customer.

This business model appeals to some ecommerce sellers considering it can subtract overhead and operating costs. In some dropshipping agreements, yous handle marketing and client service, while the dropshipping service manages the physical goods and fulfillment.

How dropshipping works

When you work with a dropshipping supplier, yous pay them to fulfill products when a customer places an club. The verbal logistics of dropshipping depend on your arrangement, but typically the dropshipping process follows this general sequence:

Seller signs agreement with dropshipper.
Client orders online.
Seller receives club.
Customer receives an club confirmation.
Seller forwards the order to dropshipper.
Dropshipper ships the order.
Customer receives their product.

Usually, you send customer orders to the dropshipper, and so you inform customers the products are on the way, and the residual of the physical fulfillment process is out of your easily.

How Dropshipping Works

Key players in the dropshipping model

Let'due south unpack some of the central players and their roles in particular, starting with the seller of tape—in other words, your ecommerce business.

Seller of record

The dropshipping process starts with you. As the seller of record (SoR), y'all're the individual identified as selling the product to the end consumer. You fix the price, record the purchase every bit revenue, and assume responsibleness for the sales tax on a particular auction. Fifty-fifty when a third party stocks and ships the items, yous're the seller of record because you lot 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 equally such.

Manufacturers

Manufacturers brand products to sell to wholesalers and retailers. You tin purchase goods from manufacturers, but the bulk purchase amounts they may require tin 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 purchase from manufacturers and sell to retailers at a slight markup. They function as middlemen; mostly, they exercise not sell to the end consumers simply may provide dropshipping services to retailers.

Determine which dropshipping providers could exist right for y'all based on your business model and fulfillment requirements, among other factors.

Potential pros and cons of dropshipping

In ecommerce, as in life, in that location 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 ecommerce business.

Possible benefits of dropshipping include:

Overhead costs: Since you lot don't store or ship the products, dropshipping has the potential to lower overhead costs, such equally 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 resource to process orders.
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 higher up.
Operating location: Dropshipping allows yous 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.

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 interest in the order fulfillment process, curtailing your ability to monitor and guarantee product quality.
Branding: Because the products you lot sell may non be unique or distinguishable from like offerings by other sellers, yous could accept trouble differentiating your offering.
Profit margins: Little to no production differentiators means your business may cease upwardly competing more than aggressively on toll. 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: Upwardly-to-the-minute updates on what is bachelor in stock may non be possible. If a client places an order just to find the product is out of stock, this poor feel tin can discourage hereafter orders and damage your make.
Range of offers: Because you don't handle order fulfillment, you may be express in the special offers and promotions you can run, such every bit bundling or free shipping.

For some businesses, dropshipping limitations do not outweigh the potential benefits. Luckily, if you want to lower your inventory and club fulfillment costs, a service similar Fulfillment past Amazon may be an selection. For some sellers, FBA provides a happy medium, offering many of the benefits of dropshipping without the downsides.

Fulfillment by Amazon: A dropshipping alternative with added perks

Fulfillment by Amazon (FBA) offers similar benefits to dropshipping while giving you more command over your brand experience. Yous don't need to sell products in Amazon stores to use FBA—although with an audience of hundreds of millions of unique visitors each calendar 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 y'all when you need to restock products

You make up one's mind the products and quantities yous'd like to fulfill and send them our manner.
We receive products into our network and store them in Amazon fulfillment centers.
Equally orders arrive, nosotros pick, pack, and ship the products on your behalf.
Amazon manages client service and returns on these orders.

Is dropshipping right for yous?

It depends on your concern. Hither are a few questions to enquire yourself if you're considering dropshipping.

How practice you desire to build your brand?

Your make is the await and feel of customer-facing aspects of your business organisation. Building a memorable brand impression can assist abound customer loyalty.

While you may be able to create a branded online experience, dropshipping gives you less control over production quality, delivery experience, and the aesthetics of the final bundle. 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 command practice you want over product quality?

Product quality tin accept a big touch on on other aspects of your business concern such every bit customer acquisition, brand loyalty, and returns. While you lot may be able to audit the quality of products at the start of your dropshipping relationship, y'all will probable have limited control over the quality of the items you sell on an ongoing ground.

If the products neglect to meet client expectations, your business could receive negative client reviews.

illustration of man looking at customer reviews on mobile device

How chop-chop practice yous desire to ship products?

Ecommerce customers tend to expect quick shipping. In a contempo survey, most 84% of people surveyed regarded delivery equally an essential part of their online shopping experience.

Long aircraft times tin negatively impact your business concern. When working with a dropshipping supplier, review its standard shipping costs and delivery timeframes.

For sellers looking for fast order fulfillment services, a service similar FBA tin can be valuable.

Did you know?

During the 2019 U.South. holiday flavor, independent third-party sellers—mostly minor and medium-sized businesses—sold and shipped over 100 one thousand thousand items with Prime Gratuitous One-Day Delivery.

How much capital letter do you lot have access to?

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

What is your target profit margin?

Compared to other business organisation models, such equally owning a retail store or edifice 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 ordinarily able to offer products at depression prices because they've invested so little. If you use dropshipping for your business organization, you may earn low profit margins.

You might be able to overcome some of these issues if you lot 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 prepare to handle supply and inventory issues?

If you lot choose to use dropshipping, you may take 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 detail is out-of-stock is hopefully the exception and not the rule. Sourcing products through multiple dropshipping services is i style to avoid running low on product inventory. When one supplier is out of a needed production, you can rely on another. All the same, working with multiple suppliers adds complication 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 function of ecommerce business. Sometimes the return process can exist as unproblematic as a client contacting yous regarding an particular they would like to return. The customer sends dorsum the product, then you refund the client and contact the dropshipping supplier to credit or reimburse you. But this is not always the case.

Exist prepared for more complex return and replacement processes. Take the fourth dimension to understand how a dropshipping service handles returns before creating your refund and return policy.

Remember through the steps of the ecommerce transaction. Here are some examples of questions to inquire earlier 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?

Questions like these tin can assistance you empathise a dropshipping understanding and aid paint a clearer pic of the potential costs involved earlier you make changes to your business model.

illustration of seller answering customer questions via online chat

How will you manage customer fulfillment questions and concerns?

Even though you may not physically handle the products, you may still demand to reply to client questions and concerns about a shipment, commitment, or product quality.

A seemingly small miscommunication with your dropshipping supplier can upshot in negative reviews and poor customer feel. To avert this, consider the entire purchasing process from the customer'due south vantage indicate. Pay special attention to the post-obit aspects of the customer feel:

Afterward ordering, do customers go a shipping notification on when to await their orders?
Exercise packages arrive in the expected time frame?
Do products get in in proper condition?
Is the packaging a good reflection of your brand?

Optimize each of these touchpoints to create a positive client experience, which tin assist you lot earn positive reviews and build brand loyalty.

illustration of a fulfillment center, a support representative, and a package with return label

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 aircraft products with 3rd-party fulfillment

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

This approach allows you to procure products upfront, potentially at lower costs. Y'all can also:

Assess the quality of items before they ship to the fulfillment heart
Offer promotions and special offers on products
Offering production bundling or subscription services through some providers

If yous would like to outsource fulfillment while maintaining command over product quality, learn virtually FBA.

Create your own branded products

At some point in the life of your business organisation, you may require specialty products featuring your own branding. Selling branded products can help your business grow by helping you:

Differentiate your business organisation from other ecommerce brands
Earn customer loyalty by building a unique online experience
Edifice a memorable ecommerce make identity
Building brand recognition to aid you launch hereafter products
Build an asset, your brand identity

Some sellers find a dropshipping supplier to add individualized touches similar special packaging and branding and create branded products or white label products.

Some other option is to have a manufacturer produce branded products in bulk, and then apply FBA for distribution. This method lets you have 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 organisation model altogether, but information technology'due south worth because if you'd adopt to avert managing customers, orders, and returns entirely.

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

While affiliate marketing is an advertizement concern model equally opposed to a retail solution, it can provide benefits such every bit minimizing startup or overhead costs while allowing you to build an audition and earn money when products you promote to your audience issue in sales.

How chapter marketing works

With affiliate marketing, yous market a production online and include a link for customers to buy the item. The link takes customers to a website where they can place an social club straight. You lot get paid when the customer uses your referral link and makes a buy. The supplier handles the society confirmation, fulfillment, and shipping.

Affiliate marketing tin be a way to jumpstart your ecommerce business or monetize an existing nugget such equally a web log or email list. Since you don't stock, process, or ship the products, you may be able to operate with relatively depression overhead costs. You lot can besides:

Start an affiliate marketing business organization using your own website or social media accounts
Outsource client direction to your supplier, which then acts as the seller of record and handles customer communication
Outsource returns or order management to your supplier

Dissimilar dropshipping, if you lot utilise chapter marketing, your supplier handles returns for products. Thus, at that place may be a set window in which the supplier holds your commission payment, after which you become paid.

Did you lot know?

Amazon has an affiliate marketing plan

You tin earn a commission on orders customers brand from referral links on your website, email, or social media channels.

Determination

At the cease of the day, but y'all can decide whether dropshipping is right for your business or not.

While information technology may be appealing not to handle physical products, pay for warehouse space, ship orders, or manage stock levels, at that place are drawbacks as well. Weigh your options and goals in order to find the right online selling and fulfillment strategy to assistance you lot abound your ecommerce business concern.

Working toward the launch of your online store?

Get tips on starting your ecommerce business organisation and find out how independent sellers, startups, and established brands have flourished selling on Amazon.

Dropshipping FAQ

Is dropshipping legal?

Yeah, dropshipping is a legal method of order fulfillment.

Do your homework on possible dropshipping suppliers and thoroughly review any dropshipping contracts in an endeavour to avoid surprises and bad actors down the line.

Will dropshipping help brand my business profitable?

Not necessarily. Businesses that apply dropshipping services unremarkably operate on slim profit margins due to competition. Dropshipping may exist a viable possibility for your business concern, but you could observe yourself confronted with a tradeoff between low overhead and upfront costs versus lower turn a profit margins.

Is dropshipping allowed on Amazon?

Yes, as long as your business follows Amazon's dropshipping policy, you can use dropshipping for your business organisation on Amazon.

To utilize dropshipping services for your business organisation on Amazon, you must:

Be the seller of tape of your products
Identify yourself as the seller of your products on all packing slips, invoices, and external packaging
Be responsible for accepting and processing customer returns of your products

Does Amazon offering dropshipping services?

Fulfillment past Amazon (FBA) is an alternative to using a dropshipping supplier. You lot procure products from your supplier of option while Amazon handles the shipping, client service, and returns on your behalf.

Multi-channel fulfillment allows you to use FBA fifty-fifty when yous sell your products through your ain domain or other ecommerce channels.

What'south the difference between dropship manufacturers, wholesalers, and retailers?

With dropshipping, the seller of tape does not handle the product directly but instead uses a third party to source and shop products, and ship orders direct to customers. Whatsoever party in the supply concatenation tin can dropship, including manufacturers, wholesalers, and retailers. A manufacturer, wholesaler, or retailer's function doesn't modify based on the seller's fulfillment method. For more details on how manufacturers, wholesalers, and retailers fit into the dropshipping process, see key players in the dropshipping model.

What's the difference between dropshipping and retail arbitrage?

Retail arbitrage is the process of sourcing products from a retailer and selling the items at a higher toll. Essentially, a seller re-sells products already available to the public to make a profit.

Retail arbitrage can exist a labor-intensive venture as it requires you to consistently discover discounted items you tin can "flip" to make a profit. Sellers might observe it challenging to rely on retail arbitrage when combined with a dropshipping method of order fulfillment, especially if the business concern model already operates on slim margins.

Do I need to register my business to use a dropshipping supplier?

While it is possible to operate your online shop without a business license, you may be leaving yourself open to bug down the line. Registering as a Limited Liability Company (LLC) or another formal entity tin can reduce your liability and bear witness potential suppliers you're a legitimate business.

Do dropshipping companies ship internationally?

Yes, some do. Shipping rates, timeframes, and fees will vary between companies. If you lot want to reach customers worldwide, be sure to investigate the details of international order fulfillment as you lot research different dropshipping options.

Amazon operates fulfillment centers around the globe and FBA international programs tin help yous achieve customers in other countries.

Looking to simplify your inventory management and order fulfillment?