What Is Dropshipping? Learn How It Works

If you're thinking about starting an online store, you're in good company. According to Statistica, the UK has one of the most advanced ecommerce store markets in Europe, with nearly 60-million ecommerce business users, that's huge!

Now, a simple way to do this is to start a dropshipping business. The dropshipping business model is essentially when your store makes a sale and forwarding it to a dropshipping supplier, who then handles the delivery of your brilliant products to your customers.

Want to know more? Then stick with us. This complete guide will tell you everything you need to know. We'll answer:

• What is dropshipping?
• How does dropshipping work?
• Who are the key players in your dropshipping business?

Plus, we'll even answer some commonly asked questions such as: Is dropshipping legal? How can your retail POS system help streamline your dropshipping operations? And more general tips. 

Let's get started!

Explaining the dropshipping definition

Dropshipping is a retail method where an online store doesn't stock its own products. Instead, when a customer orders something (usually online) the store sends that order and payment to a dropshipping supplier. The supplier then ships that product directly to the customer.

Many business owners like dropshipping because it lets suppliers handle order fulfilment process. This means stores don’t need to invest in warehouse space or worry about unsold inventory and inventory management. As a result, businesses can focus more on other things to better their ecommerce business, like marketing, loyalty programs, and other activities.

The dropshipping market is valued at $301.11 billion as of this year. That's a 23.7% increase from 2023.

Meaning of dropshippers

As a business owner considering dropshipping, you might have heard the term 'dropshippers' thrown around. This term refers to the business owner who accepts customer orders and then passes them on to the supplier.

This would basically be you! The owner of the online store that sells products to customers.

Let’s say you own an online dropshipping store that sells clothing items. When a customer places an order (one of your trendy dresses, for example) you, the dropshipper, will forward the order to your supplier. They've got the warehouse full of clothing items.

Let's now take a look at some of the other key players in a dropshipping business model:

Dropshipping suppliers

First up, we've got the dropshipping suppliers. These are the people (and companies) that handle the orders placed by retailers (like yourself) for their customers. They store the products, pack them up, and ship them straight to the customer’s door.

You can team up with a single third-party supplier or use a platform like AliExpress that lists lots of different suppliers. Sometimes, even manufacturers act as dropshipping suppliers.

For example, say you want to start an online store that sells pet products. Your customers will come to your website and order a product like a cat collar. You then send that cat collar to your supplier, who will pack it up and send it to the customer.

Manufacturers

Your manufacturers are the people that make the products. They typically sell the products they've created in bulk to either a wholesaler or a retailer, rather than selling them individually directly to the end customer.

As a seller, you could buy products in bulk directly from a manufacturer, but many manufacturers don't offer small batches of products. Instead, they prefer to sell them in bulk and might have a minimum quantity requirement for purchases.

For entrepreneurs or individual sellers just starting out, buying a large quantity of products at once might be challenging (we're talking both financially and in terms of storage space.) That's why having someone else handle this part of the dropshipping process could be a plus.

Wholesalers

Wholesale suppliers don't play a role in the dropshipping process. Unlike dropshipping suppliers, wholesalers sell products in bulk to retailers, who then sell them on to their customers.

For example, if your online bakery buys a big batch of organic treats at a discounted price, stores them, and then sells them individually to customers, you're a traditional retailer working with a wholesaler.

How does dropshipping work?

Now that you've got a decent idea of what dropshipping is, and who is involved in the dropshipping process, let's go through a step-by-step breakdown of how it works:

Step 1: Partner with a dropshipping supplier

Find a dropshipping supplier (or multiple suppliers) that sells the products you want. Remember to research the highest profit margin products ahead of time, so you know what to sell. You'll also want to make sure that you're partnering with a reputable supplier. Look out for things like:

• Price transparency: How much are they charging for things like shipping costs and packaging? Are they open about this? Are their prices negotiable?
• Product quality: It goes without saying, but you wanna sell top-quality stuff. It’s important to check if their products pass the quality test. You don't wanna be dealing with unhappy customers because of shoddy goods.
• Shipping times: Make sure your supplier can get those products out the door and into your customers' hands pronto. Nobody likes waiting around for ages for their order to arrive.

After you sign an agreement with them, they'll take care of storing, packing, and shipping the items when your customers buy them. You can team up with a single business in your field, or you can use a dropshipping app that lets you sell products from various suppliers.

Step 2: Set up an online store

Now, create your online store. You'll list the products from your supplier at the prices you set. To keep your product listings up-to-date and make order processing easier, add a dropshipping app to your store.

TIP: Take your business online effortlessly with Epos Now Online. Our website builder lets you build an online presence with simple, intuitive, hassle-free software. Plus, we use Wix Stores to sync with your retail POS system, making it easy to sell, engage and communicate with your customers online as well as in store.

Step 3: Receive customer orders

When someone decides to splash some cash in your store, it's a little victory dance moment! Make sure your checkout process is smooth sailing so they can breeze through it without any headaches. Once they've hit that buy button, they'll get a confirmation email so they know everything's A-OK. Then it's just a waiting game until their goodies arrive. However, you can still keep them in the loop with updates and tracking info along the way using your POS software with integrated CRM functions.

You can simplify this process by using online store builders like Shopify or Wix. These platforms can be set up quickly and get you trading almost immediately. 

Step 4: Forward the order to the supplier

Now it's time to pass the baton to your dropshipping supplier. They need all the deets to make sure the order gets fulfilled just right. If you're using an app, this part usually happens in the blink of an eye – technology, right? But it never hurts to double-check and make sure everything's in order. Clear communication with your supplier is key to keeping the wheels turning smoothly and stop any supplier errors before they happen.

Step 5: Supplier prepares and ships the product

Once your supplier gets the lowdown on the order, it's go time. They'll grab the product, wrap it up nice and tight, and send it on its merry way to your customer. If you've picked a good, reputable supplier, they might even throw in some fancy packaging in their dropshipping services to really wow your customer. It's all about those little touches that make the shopping experience extra special, right?

Step 6: Customer receives the product

Ta-da! This is the moment of truth. Your customer gets their hands on your brilliant products. Make sure everything's tip-top because this is where it all comes together. If there are any issues, reach out to them quickly with some winning customer service. Happy customers mean repeat business and glowing Google reviews, so it's worth going the extra mile to keep them smiling.

Consider if dropshipping is the right choice for your business 

Let's now talk about whether dropshipping is the right move for your business.

First, consider your product offerings. Are they suitable for dropshipping? Some products, like custom-made or fragile items, might not be the best fit here. So if you're wanting to sell handmade glass items, then maybe steer clear.

Next, think about your profit margins. Are they compatible with the typically lower margins of dropshipping? It's important to crunch the numbers and make sure dropshipping won't eat into your profits too much.

Look into the advantages and disadvantages of starting a dropshipping business too. We've listed these below, so that you can get the full picture.

Lastly, reflect on your long-term goals. Does dropshipping align with your business vision? While it offers flexibility and low startup costs, it's essential to consider whether it fits into your broader strategy for growth and sustainability.

By carefully weighing these factors, you can determine whether dropshipping is the right choice for your business.

Advantages of dropshipping

Dropshipping is a popular way for new business owners to make money online because it has a ton of key advantages. Here are some of the main benefits of dropshipping:

• Low barrier to entry: You don’t need a lot of money to start a dropshipping business. Once you sell a product, the supplier handles the order fulfilment method and shipping. However, you do need strong promotion and branding skills, especially in a crowded market. If you're not confident in these skills, you can take free (or affordable) online marketing courses on sites like Udemy.
• Flexibility: Dropshipping isn’t a 9-to-5 job. You can sell as many or as few products as you want. This scalable model lets you work whenever and wherever you like.
• Simple testing: With order fulfilment and shipping handled by the supplier, your main focus is testing which products sell best. This makes dropshipping a great way to learn about ecommerce marketing.

Disadvantages of dropshipping

Unfortunately, it's not all sunshine and rainbows. There are some cons that you'll need to consider before you start dropshipping. Here's the main disadvantages of this business model:

• Narrow profit margins: While the perk has minimal overhead costs since you don't deal with inventory management or storage, it also means your returns are modest. You're investing less upfront, but you're not reaping big rewards. This situation requires a constant flow of business just to keep things running smoothly, let alone make a profit, especially considering a significant chunk of your revenue goes to the supplier. With such slim margins, it's tough to cover all your expenses, from marketing and maintaining your website to managing sales orders and handling customer inquiries during office hours.
• High competition: Some entrepreneurs get caught up in the allure of low overhead costs and overlook the harsh truth. With dropshipping requiring minimal capital to start, it's become a crowded arena, especially in popular markets. The big players can slash prices to the bone, leaving smaller businesses struggling to keep up. To add insult to injury, you probably don't have an exclusive deal with your suppliers. This means your rivals could be selling the exact same products as you. And if you're just starting out, the big fish with years of experience have the upper hand, making it hard for you to compete on price.
• Limited control over the supply chain: In traditional e-commerce, if customers have complaints about product quality or shipping issues, you have the power to fix them yourself. However, in dropshipping, you're at the mercy of your supplier, while still being the one who has to face your customers. It's like being stuck in the middle, trying to juggle both ends.