What is dropshipping? How does it work?

Dropshipping is a fulfillment method that lets sellers outsource product storage and shipping to a third-party supplier. This e-commerce model appeals to entrepreneurs seeking efficiency and low overhead, but it has trade-offs.

Want to sell online without managing physical inventory, warehousing, or shipping? Drop shipping might be for you. Without the need for upfront product purchases or storage, it’s ideal for entrepreneurs, e-commerce beginners, and those looking to start or scale with minimal investment. However, it comes with downsides, such as limited control over product quality, packaging, and shipping timelines.

This guide will explain what is dropshipping, help you evaluate if it’s right for your business, avoid common pitfalls, and explore alternatives to save time or lower overhead.

Table of contents:

1. 1. What Is dropshipping?
   2. What Is a dropshipper?
   3. What’s a dropshipping business model?
   4. How does dropshipping work?
   5. Dropshipping process overview.
   6. Is dropshipping legal?
   7. Is dropshipping worth it and profitable?
   8. Dropshipping pros and cons.
   9. How to build a dropshipping business.
   10. 5 dropshipping alternatives.

What Is dropshipping?

Dropshipping meaning refers to a method of selling products without handling inventory, storage, or shipping. Instead, you partner with one or more third-party suppliers who ship products directly to customers on your behalf. This is a form of e-commerce fulfillment, one of many ways to get online orders to customers.

What Is a dropshipper?

A dropship seller lists products online and coordinates with a third-party supplier to fulfill orders. The dropshipping supplier could be a manufacturer or wholesaler who maintains inventory and ships products directly to customers.

What’s a dropshipping business model?

The dropshipping business model allows an e-commerce business to partner with a supplier who ships products directly to customers. This frees up the e-commerce business to focus on selecting and promoting the products they want to sell.

How does dropshipping work?

Here’s how drop ship operations work in three basic steps:
When a customer places an order online, the seller forwards the order details to a supplier.
The supplier packs and ships the order.
The seller informs customers of shipment and provides customer service as needed.

Some dropshipping suppliers provide customer service, but others don’t interact directly with customers, leaving returns, refunds, and exchanges to the seller.

Dropshipping process overview

The exact process varies by arrangement, but here’s a general sequence:

1. Seller signs agreement with supplier.
2. Customer orders online.
3. Seller receives order.
4. Customer receives order confirmation.
5. Seller forwards the order to supplier.
6. Supplier ships order.
7. Customer receives product.

As the seller of record, you technically own the products before purchase, setting prices, recording revenue, and handling sales tax.

Is dropshipping legal?

Yes, is dropshipping legal — it is, as long as you comply with applicable laws in your selling regions and adhere to supplier, retailer, or third-party policies.

Is dropshipping worth it and profitable?

Is dropshipping worth it? Many entrepreneurs find it is, thanks to its low startup costs and flexibility. With the right strategy, marketing, and product selection, dropshipping can be highly profitable.

Dropshipping pros and cons

Like other fulfillment methods, dropshipping has advantages and disadvantages depending on your business goals, logistics, and other factors. Here’s an overview of considerations.

Potential benefits of dropshipping

1. Low startup costs: No need to buy products or storage space means lower initial investment and financial risk.
2. Less overhead: Lower operational costs as you avoid managing inventory, storage, and fulfillment.
3. More variety: Access a wide product range from existing catalogs without transport or storage concerns.
4. Greater flexibility: Easily test products and suppliers without inventory investment. Fulfill orders remotely.
5. Ability to scale: Easily scale your drop shipping business by accepting more orders without straining resources or procuring additional inventory.

Potential dropshipping drawbacks

1. Product differentiation: Products may lack uniqueness compared to competitors.
2. Intense competition: Low startup costs mean intense competition.
3. Slim margins: Crowded markets often require lower prices, leading to slim profit margins.
4. Lower quality: Limited to generic products with little ability to assess or guarantee quality.
5. Limited control: Lack of control over product quality, fulfillment, and shipping. Long delivery times can deter customers, and supplier reliance creates supply chain vulnerabilities.
6. Reputational harm: Supplier errors (e.g., poor packaging, missing items) reflect on your business, as you are responsible for customer satisfaction.

Consider these complexities before deciding if dropshipping is right for your business. Depending on your business model, amazon dropshipping can also be an effective way to reach a broader audience and access Prime customers.

How to build a dropshipping business

Here’s how to start dropshipping and scale step by step:

1. Select products and your niche.
2. Vet suppliers.
3. Request product samples.
4. Consider logistics from end to end.
5. Calculate your margins.
6. Create your online presence.
7. Analyze customer service.

1. Select products and your niche

Choosing the right products is crucial when learning how to start a dropshipping business.
Here are a few ways to choose products:

1. Brainstorm product ideas, then find suppliers.
2. Research suppliers, browse catalogs, and choose products.
3. Analyze competitors to identify gaps in the market.

Specializing in a smaller niche can help you sidestep competition and build authority. Data tools like Amazon’s Product Opportunity Explorer can help you discover lucrative niches.

2. Vet suppliers

To find reliable suppliers and avoid issues like late shipments and missing orders, thoroughly research any third parties you’re considering. Choose reputable dropship suppliers with a strong track record of accurate, on-time deliveries and high-quality products.

3. Order product samples

When vetting suppliers, order samples to test product quality. This step is essential to any dropshipping business because it ensures your customers get consistent quality and reliable delivery.

4. Consider logistics from end to end

Walk through the entire customer journey and analyze each step. Pay close attention to how you coordinate with your drop ship supplier throughout the process to ensure efficiency and customer satisfaction.

5. Calculate your margins

Your investment in a drop shipping business is typically lower than other e-commerce models, but you may have additional expenses like hosting, advertising, and automation tools. Calculate your margins to ensure profitability.

6. Create your online presence

To connect customers with your products, build a store or use platforms like Shopify or Amazon. This step is vital when learning how to start dropshipping effectively and building long-term customer trust.

7. Analyze customer service

Customer service in dropshipping can be complex. Ensure clear agreements with your suppliers, as great support is key to running a successful dropshipping business and maintaining positive reviews.

5 dropshipping alternatives

Here are five alternatives to dropshipping:

1. Fulfillment by Amazon (FBA): Send inventory to Amazon’s centers — they manage shipping and returns.
2. Print on Demand (POD): Sell custom-designed items without holding inventory.
3. Affiliate Marketing: Earn commissions by promoting products online.
4. Third-Party Logistics (3PL): Outsource fulfillment while maintaining product control.
5. Build a Brand: Combine branding with dropshipping meaning principles to grow customer loyalty over time.