How Does Dropshipping Work?
No longer a new concept, rather the standard setup for new e-commerce businesses and work from home online retailers, but what is dropshipping and how does it work?
Dropshipping was new back in 2005, when I first came across the term. But a full 12 years later, from eBay and Amazon sellers to Shopify and even bespoke e-commerce site owners, it’s the business model of choice for new small businesses selling online.
The reasons are simple; dropshipping is risk free. You don’t need to buy any stock upfront — and that leaves you with much more budget to sink into marketing and building a good site.
It’s also pretty efficient now, and often not too expensive. There are a number of services like Doba which are set up to facilitate the running of an online drop-shipping business. Communication between the online shop owner and suppliers is much better and so are the delivery systems and pricing terms.
For those who are not sure, dropshipping is an arrangement between an e-commerce store owner and a supplier who has no minimum order (there are any more of these than you would expect).
The e-commerce store owner sets up a site and lists their products for sale. Let’s say they sell fountain pens, and they cost $50 each.
Whenever someone buys a pen for $50, the store owner contacts their dropshipper and buys the pen from them — one at a time, the store owner never holds or manages any stock. Let’s say the pen costs the store owner $25.
The store owner passes on their customer’s details to the dropshipper, and pays the $25, and then the dropshipper sends the pen directly to the customer.
The store owner never has to invest upfront in any stock — they only buy the pen, or whatever it is they sell, when someone buys it from them. They are the middleman — and there is virtually no upfront investment, which is whey its such a popular business method.
There are only two potential downsides, and they are:
- buying in bulk is cheaper than buying single units, so the profit margins can be smaller
- You need to find a good and reliable dropshipper