What is dropshipping? How it works and how to start

Published Saturday 7 March 2026

Table of contents

• What is dropshipping?
• Here's how dropshipping works
• Dropshipping vs traditional retail
• Dropshipping pros and cons
• Dropshipping business models
• How to start dropshipping
• Top five dropshipping tips
• Simplify your dropshipping business with Xero
• FAQs on dropshipping

Key takeaways

• Evaluate suppliers carefully on product quality, pricing, shipping reliability, and clear terms before partnering with them, as your reputation depends entirely on their performance and you have no control over inventory or fulfillment.
• Focus on finding a specific market niche that matches your interests and has proven demand, rather than trying to compete in oversaturated markets where profit margins get squeezed by intense price competition.
• Budget for hidden costs like platform fees, transaction charges, and marketing expenses when setting your prices, as these can significantly impact your already thin profit margins in the dropshipping model.
• Plan for a 3-6 month timeline before seeing consistent profits, and keep reserve funds available for unexpected costs while you optimize your store and marketing based on customer feedback.

What is dropshipping?

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

This means you skip warehousing and logistics entirely. Instead, you focus on running your store, marketing your products, and tracking your metrics.

The dropshipping market is growing fast, with global sales expected to reach US $476 billion by 2026. Startup costs are low and it's easy to begin, but competition is fierce and profit margins can be tight.

Here's how dropshipping works

1. You find your suppliers

Not all suppliers work with dropshippers. Once you've found a supplier, evaluate them on these criteria:

• Product quality: Confirm samples meet your standards before listing
• Pricing: Ensure wholesale costs leave room for your markup
• Shipping reliability: Check average delivery times and tracking options
• Clear terms: Establish pricing, return policies, and restocking fees upfront

Look for suppliers who offer:

• White-labelling: They add your branding to products and packaging
• Automated integration: Systems that connect directly to your store for streamlined ordering

2. You list products on your online store

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

Set your prices with markup for profit, but stay competitive. Customers compare prices in seconds. Factor in hidden costs like platform fees and transaction charges when calculating your final price.

3. A customer places an order

When a customer orders, payment goes directly to you. You're the seller of record, so you handle refunds and resolve any disputes.

4. You forward the order to your supplier

Forward these details to your supplier:

• the customer's shipping address
• the product specifications (size, colour, quantity)
• any special requests or gift messaging

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

Once the order is fulfilled, complete the payment process.


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 hold no stock, while traditional retailers must store and secure inventory
• Initial investment: Dropshippers avoid upfront inventory costs, while traditional retailers invest heavily before selling
• Operational risks: Dropshippers depend on suppliers for quality and shipping, while traditional retailers face unsold stock, theft, and damage

Some products work better with dropshipping than traditional retail:

• Niche products: Test eco-friendly supplies or vegan skincare without committing to large stock orders
• High-value items: Sell designer bags or luxury watches without upfront inventory costs or insurance
• Trendy or seasonal items: Offer fashion accessories or holiday decor without risking unsold stock

Dropshipping pros and cons

Here are the benefits and drawbacks of dropshipping.

Dropshipping benefits

Scalability: Outsourcing inventory and logistics frees you to focus on expanding your product range, marketing, and customer service.

Location flexibility: Run your business from anywhere with an internet connection. Monitor sales, process orders, and coordinate with suppliers remotely.

Lower startup costs: You pay suppliers only after making a sale, eliminating large upfront inventory investments.

Reduced overheads: Without warehousing or stock handling, your ongoing costs stay low. This helps you reach profitability faster, even with limited startup funds.

Improved cash flow: You pay suppliers after customers pay you, so you're not tying up funds in unsold inventory.

Lower environmental impact: Less unsold inventory means less waste, and fewer transportation steps reduce emissions.

Dropshipping drawbacks

Complex shipping: Working with multiple suppliers makes it hard to give exact delivery times. Customers may receive items from the same order separately. International orders can bring delays and fees that hurt your reputation.

Lower profit margins: You buy items individually, missing bulk discounts. Some suppliers charge extra for small orders. Tight margins mean a smaller budget for marketing and growth.

Intense competition: Low barriers attract many sellers, leading to price wars that squeeze margins further. Stand out by offering unique products, building a strong brand, and delivering exceptional customer service.

Supplier dependence: Customers blame you for issues outside your control, including inconsistent quality, shipping delays, and damaged packaging.

Branding limitations: Many suppliers don't offer white-labelling, so customers receive generic packaging that doesn't match your branded store. This makes building customer loyalty harder.

Dropshipping business models

Dropshipping business models vary based on how you source products. Choose the approach that fits your goals:

• Wholesale dropshipping: Partner with wholesalers who ship directly to your customers. You get access to wide product ranges and can test items with minimal risk.
• Print on demand: Products are made after each order. This works well for custom designs on t-shirts, mugs, and phone cases. You avoid inventory costs, but shipping times are longer.
• Retail dropshipping: Source products from retailers like Amazon and resell them. You get instant access to available products, but margins are tight since you pay retail prices. White-labelling isn't possible. Use this to test demand or exploit price differences.

How to start dropshipping

Starting a dropshipping business requires you to plan, but the process is straightforward. Dropshipping is legal in Canada. You'll need to register your business, get a business number from the Canada Revenue Agency, and collect GST/HST if your revenue exceeds $30,000 annually. Taxable supplies in Canada are subject to GST at a rate of 5%, or HST at 13% in participating provinces.

Here's how to launch your store.

Find your market niche

Choose a niche that matches your interests and meets market demand. Research your options using:

• Google Trends: Spot growing product categories
• Amazon and eBay: Identify in-demand products
• Competitor analysis: Find gaps where you can offer unique items

Here's more guidance on market research.

Choose reliable suppliers

Evaluate potential suppliers on:

• Location: Closer suppliers mean faster shipping
• Reputation: Check reviews and ratings
• Pricing and fees: Confirm margins work for your business
• Minimum orders: Ensure requirements fit your volume
• Dispatch times: Verify they meet customer expectations

Platforms like Spocket, Modalyst, and DSers connect you with vetted suppliers. They let you browse catalogues, import products with auto-filled descriptions, and customize details to fit your brand.

Create your online store

Build a store where customers can easily browse and buy:

1. Choose a platform like Shopify, WooCommerce, BigCommerce, or Wix
2. Set up a payment processor such as Stripe or PayPal
3. Add products with detailed descriptions, clear images, and accurate specs
4. Customize your site design to reflect your brand

Plan your marketing strategy

Effective marketing grows your business. Focus on these channels:

• Build social media presence: Choose platforms that match your audience (TikTok for younger customers, Instagram for visual products). Post regularly to showcase products and share tutorials.
• Run digital ads: Use pay-per-click (PPC) campaigns on Google, Facebook, and Instagram. Target specific interests to reach your ideal customers.
• Collect customer reviews: Offer small discounts for reviews and display them on your site. Use feedback to improve your service.

Top five dropshipping tips

Dropshipping offers flexibility and agility, but success takes innovation and attention to detail. Here are five tips to help you succeed.

1. Know your customer: Earn loyalty by catering to specific needs. Become the store they think of first for products in your niche.
2. Be trustworthy and responsive: Answer enquiries promptly, maintain clear return policies, and handle complaints professionally.
3. Choose quality suppliers: Request samples before listing, monitor customer feedback, and ensure suppliers resolve issues quickly.
4. Stay organized: Keep accurate financial records, manage cash flow, and stay on top of your taxes.
5. Stay passionate: Enthusiasm keeps you motivated during tough times and customers notice when you genuinely care about your products.

Simplify your dropshipping business with Xero

Xero's accounting software makes managing your dropshipping finances easier:

• Integrates with e-commerce platforms
• Forecasts cash flow in real time
• Supports multiple currencies for international sales

Get one month free to see how Xero can simplify your dropshipping business. When you're ready to expand, find 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 Canada?

Yes, dropshipping is legal in Canada. Register your business, obtain a business number from the Canada Revenue Agency, and collect GST/HST on sales if your annual revenue exceeds $30,000. Check provincial requirements for any additional licensing.

Can I start dropshipping with $1,000?

Yes, $1,000 is enough to start a basic dropshipping business. Budget for a domain name ($15 to $20 per year), e-commerce platform subscription ($30 to $80 per month), and initial marketing ($200 to $500). Keep some funds in reserve for unexpected costs.

How much do dropshippers make?

Earnings range from a few hundred to tens of thousands of dollars per month. Your income depends on:

• your market niche and demand
• your profit margins per product
• your competition level
• your marketing effectiveness

What is the best dropshipping platform?

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

• Spocket: Connects you with US and European suppliers for fast shipping
• Modalyst: Offers wide product ranges including unique brands and print-on-demand
• DSers: Official AliExpress partner for low-cost suppliers and bulk orders

How long does it take to make money with dropshipping?

Most dropshippers take three to six months to see consistent profits. Your timeline depends on your niche selection, marketing budget, and how quickly you optimize your store based on customer feedback.