Dropshipping: Fastest Growing Business Model of the 21st Century

Dropshipping is one of the fastest-growing e-commerce businesses of this century. Since COVID-19, the E-commerce industry (especially dropshipping) has grown exponentially in the past 1–2 years. Dropshipping market size is around 200 billion $ by 2022 and is expected to get doubled by 2025. Let’s understand what’s it is and how does it work?

What’s Dropshipping & How does it work

Dropshipping is an e-commerce method in which the seller takes orders on behalf of a third party, typically a manufacturer, distributor, or supplier. Then, when a customer buys the product, the seller uses their third party to fulfill those sales.

Drop shippers often shift the sold goods as their own and it doesn’t make the consumer aware that the goods came directly from the manufacturer. We favored this practice on e-commerce sites like Amazon, eBay, and Shopify.

This may sound somewhat complex, so to help you get a better handle on how it works and how you can start your dropshipping business in 2022, we’ve broken it down into points with images shared below.

1. Seller signs agreement with the drop shipper.

2. Customer orders online.

3. The seller receives the order.

4. Customer receives an order confirmation.

5. Seller forwards the order to drop shipper.

6. The Drop shipper ships the order.

7. Customer receives their product.

Key players in the dropshipping model

Let’s understand the key players in dropshipping along with their roles.

Seller of record

The dropshipping process starts with the drop shipper. As the seller of record (SOR), the drop shipper is the individual identified as selling the product to the end consumer. He sets the price, records the purchase as revenue, and assumes the sales tax on a particular sale. Even when a third party stocks and ships the items, the drop shipper is the seller of record because he owns the products before they’re shipped to the customer.

For Amazon sellers, using a dropshipping service is generally allowed by Amazon dropshipping policy, as long as the drop shipper is the seller of record and identifies himself as such.

Manufacturers

Manufacturers make products to be sold to wholesalers and retailers. Drop shipping business owners can purchase products from the manufacturer, but the huge 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 product supply chain model, wholesalers buy from manufacturers and sell to retailers adding to their profit margin. They function as the middlemen; they do not directly sell to the end consumers but may provide drop shipping services to retailers.

Potential Pros and Cons

As in life, there are advantages and disadvantages to any fulfillment approach same goes for any e-commerce model like dropshipping. Whether the gains are worth it, or the pain, largely depends on the drop shipper’s goals and business situation. Some potential pros and cons to consider as a drop shipper before starting your e-commerce business.

Let’s just see some of the potential benefits or pros:

· Overhead costs: Since drop shippers neither keep the products at their warehouse nor ship them, the dropshipping model has the power to lower overhead costs, such as maintaining a storage facility or sending products to customers.

· Starting costs: Entrepreneurs looking to start their online store with minimal investment may turn to dropshipping, as they don’t need to invest in facilities or resources to process orders.

· Multi-channel selling: Dropshipping can be used while you’re selling on your own store, via a store like Amazon, or through social media channels — all the above.

· Operating location: Dropshipping model allows drop shipper to fulfill their orders to any place he wants to regardless of their operating location, which gives them the luxury to work from anywhere in the world.

Now let’s view some of the potential limitations or cons:

· Competition: Given the minimum investment and negligible cost to get started, dropshipping is a highly competitive field.

· Product quality: Dropshipping model minimizes the business owner’s involvement in order fulfillment, thus reducing their ability to ensure product quality.

· Branding: Because the products drop shipper sells may not be unique or distinguishable from similar offerings by other sellers, chances of generating less competitive sales also diminish.

· Profit margins: Little product differentiators mean drop shipping business owners might finish competing aggressively on the price tag. Selling at minimal prices can eat up the drop shipper’s profit margin.

· Fulfillment timeline: When an external party handles the fulfillment process of the drop shipper’s order, the drop shipper does not have control over order shipment.

· Range of offers: Because the drop shipper doesn’t handle order fulfillment by himself, he won’t be able to give the special offers and promotions one can run, such as bundling or free shipping.

Is the dropshipping business profitable?

Dropshipping is an easy business model to start, yet it’s difficult to master if one wants to make significant money online.

Margins for a drop shipper are so low, so he can make a significant profit at scale by selling a bunch of different products, driving down his costs, and making sure that his dropshipping listings are dynamically priced and optimized.

Meanwhile, drop shipper also has to make sure that their inventory counts and product descriptions are always accurate to prevent their account from getting banned. As result, a drop shipper can’t do any of this by hand and he will have to rely on software to manage operations.

Here’s what he needs to automate in order to have a chance of making a good profit.

· Purchase Order Creation — When an order comes in, the drop shipper have to automatically send it to his supplier for fulfillment.

· Re-pricing — Because online store prices fluctuate constantly, the drop shipper has to make sure he owns the buy box. Otherwise, he won’t make any sales.

· Inventory Listing Management — When the drop shipper goes out of stock, he needs to make sure to deactivate his listing to prevent unfulfillable sales.

· Product Data Syncing — The products being shipped by the drop shipper’s supplier must exactly match his store product listing.

· Order Tracking — Drop shipper’s supplier must electronically provide shipping and tracking information which he must send to Amazon or eBay, wherever he is running his e-commerce store. We must be completely automated to handle the volume of orders drop shipper will receive.

Conclusion

Hopefully, reading this blog has gotten you excited to start your dropshipping business. But, if you need more inspiration, check out Amazon’s seller report; it’s full of helpful insights.

If you have additional questions related to dropshipping on Amazon, eBay, or any other e-commerce platform, you can let me know in the comments.

Learn more about other E-commerce businesses by viewing this article.

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