What is dropshipping? How it works and how to start

Published Tuesday 24 March 2026

Table of contents

• What is dropshipping?
• How does dropshipping work?
• Dropshipping vs traditional retail
• Dropshipping pros and cons
• Dropshipping business models
• How to start dropshipping
• Top five dropshipping tips
• Streamline your dropshipping business with Xero
• FAQs on dropshipping

Key takeaways

• Research and vet suppliers carefully before partnering with them, as your business reputation depends entirely on their product quality, shipping reliability, and customer service performance.
• Choose a specific niche market that matches your interests and has proven demand, rather than trying to sell everything, to stand out from intense competition and build customer loyalty.
• Plan for tight profit margins by factoring in all costs including platform fees, transaction charges, and supplier payments when setting your prices, and focus on volume sales rather than high individual profits.
• Treat dropshipping as a real business requiring consistent effort in marketing, customer service, and financial management, rather than expecting quick profits with minimal work.

What is dropshipping?

Dropshipping is an ecommerce business model where you sell products online without holding inventory. When a customer places an order, your supplier ships the product directly to them.

You never touch the stock. Instead, you focus on running your online store, marketing your products, tracking your metrics, and processing orders.

The global dropshipping market is expected to hit US$476 billion in 2026. While startup costs are low, competition is fierce and profit margins are often tight.

How does dropshipping work?

Here's how the dropshipping process works, from finding suppliers to collecting your profit.

1. You find your suppliers

Finding the right supplier is critical to your success. Not all suppliers work with dropshippers, so look for partners with quality products, competitive prices, and reliable shipping.

Establish clear terms upfront for pricing, return policies, and restocking fees. If your business has fewer than 100 employees or under $10 million in turnover, your supplier agreements may qualify as a small business contract, offering you protection from unfair terms. The clearer your agreement, the fewer misunderstandings later.

Look for suppliers that offer:

• White-labelling services: your branding on products and packaging, so customers think orders came from your store
• Automated integration: dedicated dashboards, partner-specific email addresses, or direct connection to your online store

2. You list products on your online store

List your products with detailed descriptions, high-quality images, and accurate specs. Your supplier might provide these, or you can create branded versions.

Set your prices carefully, factoring in your profit margin. Customers compare prices online in seconds, so stay competitive.

Account for hidden costs like platform fees and transaction charges when calculating your final price.

3. A customer places an order

Payment goes directly to you, the dropshipper. You're responsible for managing the transaction, including refunds and dispute resolution.

4. You forward the order to your supplier

Send the order details to your supplier, including the customer's address, product specifications (size, colour, and so on), and any special requests.

5. The supplier ships the product to your customer

The supplier packages and ships the product directly to your customer.

6. You pay the supplier and pocket the balance

Pay the supplier the agreed wholesale cost and any shipping fees. The difference between what the customer paid and your costs is your profit.

Dropshipping vs traditional retail

Dropshipping differs from traditional retail in three key ways:

• Inventory management: dropshippers never hold or store stock, while traditional retailers must manage and secure inventory
• Initial investment: dropshippers avoid upfront costs for inventory and storage, while traditional retailers must invest heavily before selling
• Operational risks: dropshippers eliminate unsold stock risk but depend on suppliers for quality and shipping, while traditional retailers face theft, damage, and demand fluctuations

Some products suit dropshipping better than traditional retail:

• Niche products: test eco-friendly cleaning supplies or vegan skincare without committing to large stock orders
• High-value items: sell designer bags or luxury watches without buying, storing, or insuring expensive inventory upfront
• Trendy or seasonal items: offer fashion accessories, heated blankets, or Christmas ornaments without risking unsold stock

Dropshipping pros and cons

Let's look at dropshipping benefits and drawbacks.

Dropshipping benefits

Dropshipping offers several advantages for new business owners.

Scalability

Outsourcing inventory and logistics to suppliers frees you to scale faster. You can expand your product range, ramp up marketing, and improve customer service without warehouse constraints.

Run your business from anywhere

No storefront or warehouse means you can work from anywhere with an internet connection. Monitor sales, process orders, and coordinate with suppliers from wherever you are.

Lower costs

You only pay suppliers after making a sale, eliminating large upfront inventory investments. This reduces financial risk and helps you reach profitability faster.

Overhead costs are lower too. Without warehousing, storage, or stock handling, you avoid many traditional retail expenses. This makes dropshipping accessible even with limited startup funds.

Improved cash flow

You pay suppliers only after customers pay you, so you're not tying up funds in unsold stock. This keeps cash flowing and gives you more flexibility to invest in growth.

Lower environmental impact

Dropshipping reduces waste from unsold stock and can lower emissions by cutting out warehouse-to-store transportation steps. This appeals to eco-conscious customers and aligns with sustainable business practices.

Dropshipping drawbacks

Complex shipping arrangements

Working with multiple suppliers makes it hard to give customers exact delivery times. Items from the same order might arrive separately, and international orders can bring unexpected delays and fees. Learn more about shipping for small business.

Lower profit margins

Dropshipping margins are notoriously tight. You're buying items individually rather than in bulk, so you miss out on wholesale discounts. Some suppliers charge extra for processing smaller orders.

This leaves a smaller budget for marketing and growth, so you'll need to be strategic about where you spend.

Intense competition

Low barriers to entry attract many sellers, making competition fierce. Price wars squeeze margins further. To stand out, you'll need to offer something unique, build a strong brand, and deliver exceptional customer service.

Dependence on suppliers

Your reputation depends on your suppliers' performance. Customers will blame you for inconsistent quality, shipping delays, and damaged packaging, even though you don't control fulfilment. Vetting suppliers carefully and monitoring customer feedback helps reduce this risk.

Branding limitations

Building a strong brand is harder when you don't control the product experience. Many suppliers don't offer white-labelling, so customers who buy from your branded store receive orders in generic packaging. This disconnect can weaken customer loyalty.

Dropshipping business models

Dropshipping business models vary based on how you source products. Each has trade-offs depending on your goals.

• Wholesale dropshipping: partner with wholesalers who ship products directly to your customers. You can test a wide product range with minimal risk, though you'll need to establish supplier relationships.
• Print on demand: products are created only after a customer orders. This works well for custom designs on t-shirts, mugs, and phone cases. You can test designs without big print runs, but shipping times are longer.
• Retail dropshipping: source products from retailers like Amazon and ship to customers. You get access to a huge range of readily available products, but profit margins are tight since you're buying at retail prices. White-labelling isn't an option. This model works best for testing product demand or exploiting price differences between markets.

How to start dropshipping

Starting a dropshipping business is straightforward with careful planning. Follow these steps to get started.

1. Find your market niche

Choose a niche that matches your interests and meets market demand. Passion keeps you motivated, and market demand keeps you profitable.

Use Google Trends to spot growing trends and search Amazon or eBay for in-demand products. Selling unique, hard-to-find items helps you stand out from competitors.

Here's guidance on market research.

2. Choose reliable suppliers

Look for suppliers with a strong reputation, competitive prices, and reliable dispatch times. Check their minimum order requirements and packaging quality.

Platforms like Spocket, Modalyst, and DSers connect your store with vetted suppliers. These tools let you:

• browse supplier catalogues
• import products with auto-filled descriptions and images
• customise product details to match your brand

3. Create your online store

Build a user-friendly store where customers can browse and buy. Here's what you'll need:

• choose a platform like WooCommerce, Shopify, BigCommerce, or Wix
• select a payment processor such as Stripe or PayPal
• add products with detailed descriptions, clear images, and accurate specs
• incorporate your branding into the site design for a cohesive look

4. Plan your marketing strategy

Effective marketing drives growth. Focus on these key tactics:

• Social media: choose platforms that match your audience (TikTok for younger customers, Instagram for visual products) and post regularly to showcase products and tutorials
• Digital advertising: run pay-per-click (PPC) campaigns on Google, Facebook, and Instagram, targeting interests that match your ideal customer
• Customer reviews: offer small discounts for reviews, display positive feedback on your website, and use criticism to improve your service

Top five dropshipping tips

Follow these tips to build a successful dropshipping business.

Know your customer

Earn loyalty by catering to specific needs. Aim to be the store customers think of first when they need products in your niche.

Be trustworthy and responsive

Answer enquiries promptly, maintain clear return policies, and handle complaints professionally. Customers who trust you become repeat buyers.

Choose suppliers that deliver quality

You don't control the products customers receive, so vet suppliers carefully. Request samples, monitor customer feedback, and ensure they resolve issues quickly.

Stay organised

Keep accurate financial records, manage your cash flow, and stay on top of your taxes. An Australian Taxation Office (ATO) program revealed a 90 per cent correlation between small businesses paying tax correctly and on time and their use of accounting software. Good accounting software helps you track everything in one place.

Be passionate

Passion keeps you motivated during tough times. Customers can tell when a store owner genuinely cares about their products.

Streamline your dropshipping business with Xero

Dropshipping means juggling supplier payments, tracking margins across products, and managing cash flow without holding stock. Xero's accounting software simplifies all of this.

You can integrate with ecommerce platforms, forecast cash flow in real time, and manage multiple currencies for international sales. You can get one month free to see how it works for your business. When you're ready to expand, explore more tools in the Xero App Store.

FAQs on dropshipping

Here are answers to common questions about starting and running a dropshipping business.

Is dropshipping legal in Australia?

Yes, dropshipping is legal in Australia. You must comply with Australian Consumer Law, including accurate product descriptions and fair refund policies. You're also responsible for Goods and Services Tax (GST) if your turnover exceeds the threshold, even if your suppliers are overseas. However, according to the ATO, goods imported in consignments valued at A$1,000 or less generally do not have GST payable at import.

Why do 90% of dropshippers fail?

Most dropshippers fail because they underestimate the work involved. Common reasons include choosing oversaturated niches, poor supplier vetting, weak marketing, and giving up too quickly when profits don't come immediately. Success requires treating dropshipping as a real business, not a get-rich-quick scheme.

Can I start dropshipping with no money?

No. While startup costs are low compared to traditional retail, you'll still need funds for a domain name, web hosting, and marketing.

How much do dropshippers make?

Earnings vary widely, from a few hundred to tens of thousands of dollars per month. Your income depends on your niche, profit margins, market demand, and competition.

What is the best dropshipping platform?

The best platform depends on your business needs. Popular options include:

• Spocket: connects you with US and European suppliers offering fast shipping
• Modalyst: offers a wide product range including unique brands and print-on-demand options
• DSers: an official AliExpress partner for low-price suppliers and bulk orders