What is dropshipping and how does it work? Pros and cons

Published Wednesday 22 April 2026

Table of contents

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

Key takeaways

• Recognize that dropshipping lets you sell products online without holding stock, as suppliers ship orders directly to your customers, which keeps startup costs low and removes the risk of unsold inventory.
• Prioritize finding reliable suppliers by vetting their product quality, shipping times, and return policies upfront, since your reputation depends entirely on their performance even though you have no control over fulfilment.
• Set your prices carefully to protect your profit margins, factoring in platform fees, transaction charges, and GST obligations, as competition is fierce and customers can compare prices instantly online.
• Stay organized with accurate financial records and accounting software to manage cash flow and meet your tax obligations, including registering for GST once your turnover reaches $75,000.

What is dropshipping?

Dropshipping is an e-commerce 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, leaving you free to 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. That growth attracts new sellers daily, which means competition is fierce and profit margins are often tight, especially once you account for obligations like the 10% goods and services tax (GST) on most goods sold in Australia.

How does dropshipping work?

The dropshipping process follows six steps, from finding suppliers to collecting your profit. Here's how each stage works.

1. You find your suppliers

Finding the right supplier matters most. 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.

Look for suppliers that offer:

• White-labelling services: adding your branding to products and packaging so customers think orders came from your store
• Automated integration: connecting through dedicated dashboards, partner-specific email addresses, or direct links 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, tax obligations like needing to register for GST once your turnover reaches $75,000, and hidden costs like platform fees and transaction charges. Customers compare prices online in seconds, so stay competitive while protecting your margins.

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 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: creating products 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: sourcing products from retailers like Amazon and shipping 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, making this model best for testing product demand or exploiting price differences between markets.

Dropshipping vs traditional retail

Dropshipping differs from traditional retail in three key ways:

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

Some products suit dropshipping better than traditional retail:

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

Dropshipping pros and cons

Dropshipping has clear advantages and disadvantages. Understanding both helps you decide if this model suits your goals.

Dropshipping benefits

Here are the main advantages of the dropshipping model.

Scalability

Scaling becomes easier when you outsource inventory and logistics to suppliers. You can expand your product range, ramp up marketing, and improve customer service without warehouse constraints. Learn more about outsourcing inventory management.

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 stay low because you avoid warehousing, storage, and stock handling 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

Consider these challenges before starting a dropshipping business.

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, as non-resident suppliers must include GST in the price of low-value imported goods under A$1,000. 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, leaving a smaller budget for marketing and growth.

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.

How to start dropshipping

Starting a dropshipping business takes four key steps. With careful planning, you can launch your first store and begin taking orders.

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.

1. 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

1. 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

1. Plan your marketing strategy

Effective marketing drives growth. Focus on these key tactics:

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

Top five dropshipping tips

Success in dropshipping requires more than just setting up a store. These five tips help you build a business that lasts.

1. 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.

1. Be trustworthy and responsive

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

1. 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.

1. Stay organised

Keep accurate financial records, manage your cash flow, and stay on top of your taxes. Good accounting software helps you track everything in one place, with Australian Taxation Office (ATO) data showing a 90 per cent correlation between small and medium enterprises (SMEs) calculating tax correctly and using accounting software alongside practitioner advice.

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 consumer protection laws, register for GST once your turnover reaches $75,000, and ensure your suppliers meet Australian product safety standards.

How much money do I need to start dropshipping?

You can start dropshipping with as little as a few hundred dollars. You'll need funds for your online store platform subscription, domain name, initial marketing, and any samples you want to test before listing products.

Can I dropship products from overseas suppliers?

Yes, you can work with international suppliers. Be aware that shipping times are longer, and you may need to account for GST on imported goods under A$1,000. Check customs requirements and ensure your suppliers comply with Australian regulations.

What's the best platform for dropshipping in Australia?

Popular platforms include Shopify, WooCommerce, and BigCommerce. Choose based on your technical skills, budget, and the features you need. Most platforms integrate with dropshipping apps that connect you to suppliers.

How do I handle returns and refunds with dropshipping?

Establish clear return policies with your suppliers before you start selling. You're responsible for managing customer refunds and complaints, even if the supplier handles the physical return. Make sure your return policy complies with Australian Consumer Law.