How Does Dropshipping Work: A Beginner’s Guide

Introduction to dropshipping

If you are looking for an online business idea, you may want to consider dropshipping. “How does dropshipping work?” you might ask. 

The process is actually pretty simple:

• Find products you like from suppliers who will ship them directly to buyers.
• Create a website and feature the products for sale.
• Price the products higher than what the supplier will charge you.
• Pay the supplier once you receive funds from the buyer.
• After you pay the supplier, the product is shipped to the buyer.

Definition and benefits

Dropshipping is a retail fulfillment method used by online stores that makes it unnecessary to buy, store, or ship inventory. Basically, you sell a supplier’s product before you pay for it. Once you receive funds from the buyer, you pay the supplier, and they ship those products directly to customers.

The dropshipping model has a number of benefits that make it preferable to opening a retail store. Since you aren’t buying inventory up front, dropshipping is a low-risk business model. Startup costs and overhead are minimal. Plus, it’s an online business that’s easy to start, and you can manage it from practically anywhere.

How does dropshipping differ from traditional retail?

Traditional retail requires you to buy inventory and sell it in a brick-and-mortar store. Dropshipping is an ecommerce business, so you need no physical property. 

Also, you don’t need to purchase any inventory in advance because your suppliers ship their inventory directly to your buyers. You don’t have to pay for any of it until after the buyers pay you.

Setting up your dropshipping business

It’s not very difficult, risky, or expensive to start a dropshipping business. There is no reason for you to purchase inventory in advance for dropshipping or to keep your own inventory. However, you still have to do a bit of inventory management by keeping accurate records of what you’ve sold.

Each step of the dropshipping process is explained in detail below, so you can see the entire process is quite simple.

Choosing a niche

As any ecommerce retailer can tell you, one of the most important steps for succeeding online is to choose the niche that’s right for you. While the dropshipping order fulfillment method is far easier than traditional retail, you do still need to devote a significant amount of time to your business.

That will be a lot easier to stick with if you remain enthusiastic about your niche. Also, the easiest customers to sell to are those who are passionate about the niche you selected.

Creating your online store

You will need an online store to sell products you plan to dropship. Your ecommerce store can be on your own website. However, you may find it a lot easier to host a store on a ready-made ecommerce platform. This is because all the sales, record-keeping, and inventory management tools are already built-in.

Registering your business

If you sell products on your own website, you can use a PayPal account to accept payments. Buyers may use it to pay with credit cards. If you want to accept credit card payments directly, you will need a merchant account with a payment processor. A vast majority of them require you to have a business license.

Many small businesses choose to register their business as a limited liability company. This type of business is far less complicated and less expensive than creating a corporation. Since you will sell products online, you will need to check the sales tax regulations where you are located.

Finding dropshipping suppliers

Once you have chosen your niche, created your online storefront, and registered your business, you will need to start looking at products offered by dropshipping suppliers. Bookmark your favorite products on each supplier’s website for future reference.

It will also save you a great deal of time and effort if you make a list of product information from each third-party supplier. Then, you can just copy and paste product numbers, prices, descriptions, and more when you are ready to order.

Identifying reliable suppliers

There are a number of ways for you to identify a reliable supplier:

• Visit their website; it should have contact information at the very least.
• Check customer reviews.
• Order sample products to check out product quality and shipping speed.
• Contact the supplier’s customer service to find out if it’s satisfactory.

Using dropshipping directories

Dropshipping directories are a great way to quickly find lots of dropshipping companies. They’re also good for brainstorming niches and product ideas. Here is a list of popular free directories for dropshipping businesses in the US, UK, and China.

United States:

• TopTenWholesale
• Inventory Source
• Wholesale Central
• Wholesale2B

UK:

• eSources
• The Wholesaler

China:

• Alibaba
• Global Sources

Researching potential suppliers

Make a list of questions to ask each potential supplier and record the answers from each one. 

Here are some of the most important ones you should include:

• What is your billing process?
• How much are the fees for shipping and handling?
• Are there any other fees?
• How long is the return window?
• What is the policy for returns or damaged goods?
• What are the average shipping times?
• What is the average time for order fulfillment from sale to delivery?
• Are tracking numbers supplied for shipments?
• Is it possible to get fraud protection?
• Do you provide insurance for orders?
• What terms does your dropshipping agreement contract include?

Selecting products for your store

After you find dropshipping suppliers, there are some very important criteria for choosing which products to sell in your store. The most important thing is to stick with products that fit your niche. 

Some of the most popular ecommerce niches are:

• Phone accessories
• Electronics
• Fitness products
• Yoga-related items
• Beauty products
• Fashion

You should also try to stay away from high-maintenance products because they come with additional costs that can have a significant impact on your profit margins. For example, fragile products may need more expensive packaging or extra insurance, while very large or heavy products may have extra storage or shipping costs. 

Evaluating product demand and profit margins

Obviously, you want to sell products that a great many people want to buy. The easiest way to evaluate current demand for your product is to use Google’s free Keyword Tool. Enter your products to find out how many searches for them were performed in the last month. The more searches, the more demand.

Pre-orders are another way to determine how strong the demand is for your product. If pre-orders are weak, maybe you should give that space on your website to a more deserving product.

Dropshipping profit margins below 5-10% are considered low – they should preferably be between 15% and 20%. The formula used to calculate a net profit margin is [(Revenue – Cost) / Revenue] * 100. 

Your revenue for each product is the number of orders x its sale price. Cost includes things like operational and marketing expenses, cost of goods sold, debt and one-time payments, shipping costs, and sales taxes.

If you sold 10 orders of a $100 product, your revenue is $1,000.

If your cost for each unit is $90, then 10 orders x 90 is a cost of $900.

Revenue of $1,000 – $900 in costs is $100. Divide that $100 by revenue of $1,000, and you get 0.1. Multiply 0.1 x 100, and your profit margin is 10%, which is low.

Two ways to increase your dropshipping profit margins

Profit margin is particularly important to a small business like a dropshipper. The easiest way to increase your profit margin is to use software that can help you with upselling and automating operations. Whether you are using your own website or an ecommerce platform, there should be a tool for cross-selling and upselling related products. 

Also, check your email and spreadsheet programs for ways to automate some of your operations. Spending less time with your inbox and record-keeping will allow you to spend more time generating revenue. 

Ensuring product quality

Returns and refunds are costly for dropshippers. If they become too frequent due to poor product quality of a specific product or products from a specific supplier, then you should remove them from your online store.

You can ensure better product quality in three ways:

• Read as many reviews as you can of each supplier and each product before you try to sell them.
• Order a sample of a product if you are unsure about its quality.
• Keep a record of the percentage of returns for each product. Go on alert if one rises above others.

Comparing product prices across suppliers

Getting the best price on products you plan to dropship is a key factor in improving your profit margins and bottom line. Fortunately, dropshipper directories such as Wholesale2B often have a product database that allows you to compare prices among vendors. Even better, you can also compare dropship supplier information, product descriptions, and much more.

Managing orders and fulfillment

There are a variety of dropshipping services to help you manage the processing and fulfillment of your orders.

Supply chain optimization

Some companies make it possible to streamline supply chains by delivering orders to customers from outsourced suppliers, bypassing their own distribution centers. Others may segregate orders by geography to make their supply chains more efficient. This allows them to deliver products from the nearest port of entry or manufacturing location.

Additional services

Dropshipping companies will sometimes offer lists of trending products you could search by keywords, uniform resource locators (URLs), or stock-keeping units (SKUs) to help with product sourcing. Other services, such as print on demand or custom packaging, may also be available.

Handling customer orders

The customer experience is a major factor in generating repeat business. It’s imperative that customer orders be processed as efficiently as possible. 

Here are a few ways to help you achieve that:

• Only use the most reliable suppliers you can find.
• Maintain efficient communication with your suppliers.
• Remain up-to-date on inventory availability.
• Provide effective customer support.
• Make sure product descriptions are thorough and accurate.

Communicating with suppliers

You might think that developing productive relationships with your dropshipping suppliers can be a bit tricky. But if you want them to take great care with your company’s customer purchases and ship products in a timely manner, it’s crucial that you maintain clear channels of communication. 

You should always:

• Be thorough when asking questions on initial contact.
• Make sure you are on the same page when managing expectations.
• Remain polite and professional, particularly when offering feedback.
• Consider their recommendations carefully.
• Keep messages short and clear.
• Be patient; vendors are very busy and may not be able to respond as quickly as you’d like.

Managing product returns and refunds

The way you handle returns and refunds for dropshipped products can make the difference between keeping and losing a good customer. Try to keep the entire process as pleasant and smooth as possible.

Make sure you look at all possibilities when processing customer returns. Dropshipping suppliers may have restocking fees and charge for return shipping. Sometimes it’s actually cheaper to just let a customer keep the original product and send a new one.

Marketing your dropshipping business

We’ve answered the question, “How does dropshipping work?” Now we’ll move on to explaining how to make your dropshipping business successful. The key to that is effective marketing.

Naturally, you will want your products to rank highly with search engines. It’s one of the best ways to reach potential customers. However, it’s not enough to just attract visitors to your product pages. You want to convert them into buyers once they get there.

Developing a marketing plan

For the development of a marketing plan you should focus on the following:

• Create an effective marketing plan using market research and A/B testing.
• Use cross-marketing and upselling on product pages.
• Publish genuine customer ratings and reviews.
• Send emails for both product promotion and recovering abandoned carts.

Utilizing social media and influencer marketing

Go where your customers are online and interact with them sincerely. You can use social media accounts for customer support. Pay influencers in your product niche to create sponsored posts — this should increase awareness and sales among their followers.

Leveraging SEO and content marketing

Regular, fresh, useful content is one of the best ways to rise organically in search engine rankings. However, creating it is very time-consuming, and employing effective SEO takes skill and experience. Fortunately, there are many talented freelance writers available.

Scaling your dropshipping business

As your dropshipping business grows, you will need to take careful steps to scale successfully:

• Outsource and automate as many operations as possible to have more time for generating revenue.
• Increase your customer support investment as necessary.
• Maintain your market strategy.
• Reduce refunds and returns with more detailed and accurate product descriptions.

Expanding your product line

It is easier to expand your product line than it was to create one when you started dropshipping because now you have historical data and a customer base. So you can poll your customers to find out what they think about new products you’re considering.

However, you may also choose to expand your target audience. In which case you will want to analyze product demand from the new demographic.

Outsourcing tasks and hiring employees

Your business will hopefully reach a point where it is too much for you to handle alone. It is more cost-effective to outsource tasks until you need a full-time employee. Once you do, a remote employee may be the best option since your business is online.

Investing in marketing and advertising

You will probably find that a combination of content marketing funnels and paid advertising campaigns achieves the best results for your dropshipping business. Both will require judicious investment, but not necessarily at the same time. So don’t neglect to keep them in your budget.