Guide

Dropshipping 101: How to launch a business without holding inventory

Dropshipping is a form of online selling without managing inventory. See how to start your own dropshipping business.

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September 2023 | Published by Xero

What is dropshipping?

Dropshipping is a sales method where an online store sells products without ever holding stock. When a customer orders something through your website, your store sends the order to the supplier, who ships the product directly to your customer.

Dropshipping means you don’t have to hold inventory or handle logistics around shipping – that’s the supplier’s job. This means you can focus on managing your online store, marketing, tracking your metrics, and processing orders.

Dropshipping is growing fast. The global market is expected to hit US $476 billion by 2026, according to Statista.

While startup costs are low and it’s easy to get started, the competition can be fierce and profit margins are often tight.

How does dropshipping work?

1. You find your suppliers

Not all suppliers work with dropshippers – but once you’ve found a supplier, make sure they have quality products, competitive prices, and reliable shipping.

Start your relationship well by establishing clear terms for pricing, return policies, and restocking fees. The clearer the terms, the fewer misunderstandings later on.

If you can, find suppliers with:

  • A white-labelling service – they’ll add your branding to the product and packaging instead of theirs to give customers the impression the product came from your store
  • Dedicated systems to streamline the ordering process, like automated integration with your store, dedicated dashboards, or partner-specific email addresses

2. You list products on your online store

Add products to your store with detailed descriptions, high-quality images, and accurate product specs. Your supplier might give you these, or you can create your own branded versions.

Set your prices carefully, factoring in a markup for your profit margins. Customers can compare prices online in seconds, so keep prices competitive. Be sure to account for hidden costs, like platform fees and transaction charges, when calculating your final price.

3. A customer places an order

When a customer orders something, the payment is made directly to you, the dropshipper.

You’re now in charge of the transaction, so it’s your responsibility to manage refunds and resolve disputes.

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.

The dropshipping process in six steps, from selecting a supplier, to fulfilling an order, and pocketing the balance.

Dropshipping vs traditional retail

There are three main differences between dropshipping and traditional retail:

  • Inventory management: Dropshippers don’t hold or store stock unlike traditional retailers who must manage stock and store it securely.
  • Initial investment: While traditional retailers must invest in inventory and storage facilities up front, dropshippers don’t have to, lowering their startup costs.
  • Operational risks: Dropshipping eliminates the risk of unsold stock but relies heavily on suppliers for quality and quick shipping. Traditional retail instead faces risks like unsold stock, changes in demand, and losses from theft or damage.

With these in mind, some products are better suited to dropshipping than traditional retail. Here are some dropshipping examples of products.

  • Niche products: Trial new or niche products (such as eco-friendly cleaning supplies or vegan skincare) by dropshipping without committing to large stock orders.
  • High-value items: With dropshipping, there’s no need to buy expensive inventory (like designer bags or luxury watches) upfront, and you won’t need to securely store and insure them either.
  • Trendy or seasonal items: Dropshipping is great for items like fashion accessories, heated blankets, or Christmas ornaments as it minimises the risk of unsold stock.

Dropshipping business models

There are several dropshipping business models, each with their own pros and cons depending on your business and its goals.

  • Wholesale dropshipping: Here, you partner with wholesalers to source and ship products directly to your customers. Wholesalers stock wide product ranges, so you can test different products with minimal risk.
  • Print on demand dropshipping: You produce items only after a customer has ordered them. This model works well for standard products with custom designs, like t-shirts, mugs, and phone cases, so you can test different designs without investing in big print runs. But since products are made only after the order, shipping times can be longer.
  • Retail dropshipping: Retail dropshippers source products from retailers like Amazon and ship them directly to customers. This provides a huge range of readily-available products, but squeezes profits as you’re buying products at retail prices. White-labelling isn’t an option, either. Still, it’s a useful short-term strategy to test product demand or exploit price arbitrage (buying a product at a lower price and selling it for a higher price).

Dropshipping pros and cons

Let’s look at dropshipping benefits and drawbacks.

Dropshipping benefits

Scalability

Because you’re outsourcing your inventory and logistics to suppliers, it’s easier to scale your product range, marketing, website optimisation, and customer service because you don’t have to worry about inventory and logistics.

Run your business from anywhere

With no physical storefront or dedicated warehouse, you can run your dropshipping business from anywhere in the world. All you need is an internet connection to monitor sales, process orders, and coordinate with suppliers.

Lower costs

Dropshipping eliminates large investments in inventory. Instead, you pay your supplier only after you’ve made a sale, reducing financial risk.

Overhead costs are lower for dropshippers too. Because you don’t store or handle goods, you have fewer retail cost overheads, like warehousing.

Lower costs help your business become profitable more quickly and make dropshipping super-accessible, even if you’re short on startup funds.

Improved cash flow

You only pay your dropshipping suppliers after receiving customer payments, so you aren’t tying up funds in inventory. This boosts your cash flow and therefore your finances.

Lower environmental impact

Dropshipping is a more sustainable approach for eco-conscious entrepreneurs – there’s less waste from unsold stock and lower emissions thanks to fewer transportation steps.

Dropshipping drawbacks

Dropshipping isn’t a perfect business model, though. Here are some potential downsides.

Complex shipping arrangements

Dropshippers often have multiple suppliers, so it’s hard to give customers exact delivery times. Customers might even receive items from the same order separately.

International orders may bring delays and fees that can hurt your reputation.

Lower profit margins

Because you’re buying each item from the supplier as it’s ordered, you can’t take advantage of bulk buying or the wholesale discounts associated with it. Some suppliers might even charge you extra for processing smaller orders.

Dropshipping profit margins are notoriously tight, so you’ll have a smaller budget for marketing and growing your store.

Intense competition

The low barriers to entry attract plenty of sellers, so competition is fierce. Price wars with your competitors can squeeze profit margins even further.

This means you’ll need to work harder to stand out – by offering something unique, strengthening your brand, and delivering exceptional customer service.

Dependence on suppliers

Dropshippers are at the mercy of suppliers. Customers may blame you for inconsistent quality, shipping delays, poor communication, and damaged packaging.

Branding limitations

Building a strong brand – to create memorable experiences for customers and earn their loyalty – is harder for dropshippers. Many suppliers don’t offer white-labelling services, which creates a disconnect for customers who buy from your branded ecommerce dropshipping store but receive their orders in generic packaging.

How to start dropshipping

Starting a dropshipping business is straightforward, but takes careful planning and execution. Here’s a guide to get you started.

Find your market niche

Choosing a market segment you love makes the dropshipping process more fun. So find a niche that matches your interests and meets market demand.

Use tools like Google Trends to spot growing trends, and search on platforms like Amazon or eBay for in-demand products. It’ll help you stand out if you can sell unique, hard-to-find items.

Choose reliable suppliers

You want a supplier who delivers quality products smoothly and efficiently. Look for suppliers with the right location, reputation, prices, and fees. Check their minimum order requirements, packaging quality, and dispatch times.

Platforms like Spocket, Modelyst, and DSers help connect your online store with proven suppliers by letting you:

  • Browse supplier catalogues
  • Import products directly to your store with auto-filled descriptions and images
  • Customise product details to fit your brand voice

Create your online store

Build a user-friendly online store for customers to browse and purchase products.

  • Choose a platform like WooCommerce, Shopify, BigCommerce, or Wix
  • Pick a payment processor such as Stripe or PayPal
  • Add your products and include detailed descriptions, clear images, and accurate specs
  • Customise your branding by incorporating your branding into the site’s design for a cohesive look

Plan your marketing strategy

Effective marketing will grow your dropshipping business. Here are a few tips:

  • Set up social media profiles: Choose platforms that align with your audience – for example, TikTok for younger customers. Post regularly to showcase products, lifestyle benefits, and create tutorials.
  • Use digital advertising: Run PPC campaigns on Google, Facebook, and Instagram to attract customers. Target interests to reach your ideal customer.
  • Encourage customer reviews: Reviews are proven to build trust and drive sales. Offer small discounts for reviews, and display positive reviews on your website. Apply feedback to improve your service.

Top 5 dropshipping tips

The advantages of dropshipping are flexibility and agility – but like any business, it takes innovation and attention to detail to succeed.

Here are five tips to help your dropshipping startup succeed.

1. Know your customer

You’ll stand out from the crowd if customers feel you know them. So earn their loyalty by catering to their specific needs and aim to be the store they immediately think of when they need products in your area.

2. Be trustworthy and responsive

Customers who trust you give you repeat business. So answer enquiries promptly, have clear return policies, and handle complaints professionally.

3. Go with suppliers that deliver quality

Since you don’t handle inventory directly, you have less control over the quality of delivered products. So only work with reliable suppliers – request samples, monitor customer feedback, and make sure they resolve issues quickly.

4. Stay organised

Keep accurate financial records, manage your cash flow, and stay on top of your taxes to keep operations running smoothly.

5. Be passionate

Passion keeps you motivated and committed during tough times – and customers love a store owner who’s enthusiastic about their products.

FAQs on dropshipping

Can I start dropshipping with no money?

Starting a dropshipping business with no money at all is unrealistic. Although startup costs are low, you’ll still need funds for essentials like a domain name and web hosting, as well as marketing.

How much do dropshippers make?

It depends. Dropshippers can earn from a few hundred to tens of thousands per month. It all depends on your market niche and variables like market demand, profit margins, and your competition.

What is the best dropshipping platform?

The best platform for you depends on your business needs. Popular platforms are:

  • Sprocket connects you with US and European suppliers that offer fast shipping
  • Modalyst has a wide range of products, including unique brands and print-on-demand options
  • DSers is an official AliExpress partner for low-price suppliers and bulk orders

Streamline your dropshipping business with Xero

Xero’s accounting software makes dropshipping much easier. It integrates with ecommerce platforms, forecasts cash flow in real time, and supports multiple currencies for international sales. And when you’re ready, there are more tools for your business in the Xero App Store.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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