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Dropshipping is one of the best forms of retail business for small and budding e-commerce stores. It mainly involves sellers accepting a customer’s orders without having the stock on hand. It is almost akin to supply chain management, where the seller sends the order details and the shipment details to the wholesaler, the manufacturer, a fulfillment house, or a retailer, who takes care of the shipment of the goods to the customer’s doorstep.
In dropshipping, the retailer only handles the marketing and selling of the product, but has almost no control over product storage, quality, inventory management, and even shipping. These are all in the hands of the dropshipper, and are quite a lucrative option for newcomers in e-commerce because they cut down on the maintenance and operational costs required to run a warehouse.
What is Dropshipping Business?
In e-commerce, dropshipping business models do not require the existence of a specific store where the business operations take place. It can either be combined with an order fulfillment business model or wholly omitted.
One common practice amongst dropshipping retailers is that they don’t disclose the practice or the source of the wholesale products they offer to the retailers. This is mainly carried out in two forms – “blind shipping”, which is shipping goods to the seller without a return address, or “private label shipping”, which is shipping goods to the seller with a customized return address. A dropshipping fulfillment house is also often utilized.
Dropshipping can even be availed as a business model by small retailers who usually sell their products in small amounts to the general public, especially when they receive a single large order for their product. In such rare cases, retailers arrange for the goods to be directly shipped to the customer’s doorstep from the distributor or the manufacturer. Retailers selling online on auction sites like eBay also use dropshipping for product distribution without handling inventory and stocking items.
Dropshipping Guide: How Does Dropshipping Work?
In the dropshipping fulfillment process, sellers can better focus on their marketing strategy and even cut down on additional warehousing and inventory management costs. The only thing they are responsible for in fulfillment is accepting customers’ orders and directly processing them from the supplier.
Here’s an example: if you are an e-commerce retailer dealing with stationery items, you are not required to store an inventory of these items. Instead, if you avail the services of a supplier who takes care of delivering the order directly to the customer, you are a dropshipper.
Customer Places the Order
E-commerce retailers require a website or an online store where the customers can place their orders for the desired products and quantity. The retailer generates the order.
Retailer Places the Order with the Supplier
The retailer counts the total amount of orders and the amount of time needed to ship the order, then sends it to the third-party supplier who is the wholesaler or manufacturer.
Supplier does the Packaging and Shipment of the Order
This third-party supplier receives the orders in bulk, packs and then ships them with reliable couriers or shipping partners.
Supplier Shares the Tracking Details with Retailer
The tracking details containing the order details and the estimated delivery date are shared with the retailer by the supplier.
Retailer Shares the Order and Tracking Info with the Customer
Finally, the order details along with the tracking information are shared by the retailer with the customer.
Dropshipping Order Fulfillment Benefits
Dropshipping has become one of the most successful and convenient business models for modern e-commerce retailers, and is advantageous to those just starting out in a business. Dropshipping is quite commonly availed for the following significant advantages listed below:
Low Startup Costs
As mentioned before, e-commerce retailers who opt for dropshipping as a strategy save a lot on expenses because they are not required to invest capital in fulfillment processes like acquiring inventory, storage and warehouse management.
Lesser Inventory Management
Businesses adopting dropshipping need not maintain a physical inventory. This exponentially reduces the workload required to manage inventory, tracking, and shipping.
Scalability
A dropshipping retailer can easily and quickly scale because their order fulfillment does not depend on the size of any physical location or how many workers are required for shipping orders.
Broader Product Offerings
Dropshipping gives retailers more product opportunities where they can provide their customers with more comprehensive products without worrying about storage.
Flexibility
Dropshipping helps retail businesses gain flexibility in certain aspects. A company can operate in any place with many product types and even change products.
Pros and Cons of Dropshipping
In this digitally-driven era, the internet has given business owners multiple opportunities for doing business. Dropshipping has made it more accessible to everyone. However, it is no stranger to problems. Below are some issues faced in dropshipping:
1. Building One's Brand Despite Selling Third-Party Products
Many dropshippers launch limited-time stores or one-product stores that are transient and close down once the products go out of trend. However, with social media advertising becoming more expensive, losing clients can make the business incur significant losses. It is essential to invest in the birth of a private brand to become successful. However, when it comes to dropshipping, you rarely come in contact with your products, and this is one of the significant challenges in dropshipping.
2. Finding Reliable Suppliers
It is hard to find a good and reliable supplier for dropshipping and it can be a challenging and time-consuming process. Not all dropshippers you come across will be at par with your expected quality standard and finances.
3. Build Customer Trust with High-Quality Products
Another major challenge for dropshipping is finding a supplier who provides good quality products. Good products are a good marketing strategy in itself because it increases demand for it and its popularity through word of mouth. The better your products are, the more customers will come.
4. Handling Processing and Shipping Time
Dropshipping takes comparatively longer shipping time than robust retailers like Amazon, which promise one-day deliveries. With the need to handle processing and shipping, order fulfillment time gradually increases. The best way to solve this problem is to be completely honest with your customers, telling them the estimated shipping time.
5. Dealing with Returns from Customers
Dropshipping has returns policies that greatly rely on the suppliers, and the majority of them fail to offer any return services. Make sure, as a retailer, you first get in touch with your supplier of choice and thoroughly understand how they operate the return service for their products. A policy on returns should also be made on your dropshipping store, so you can provide your customers with a pleasant and foolproof shopping experience with you, keeping customers’ complaints to a bare minimum.
6. Coping with a Ban on Facebook, Shopify, and PayPal
Many retailers like to launch their dropshipping stores via online social media sites like Facebook. Shopify and PayPal also come quite in handy because customers and dropshipping entrepreneurs use these tools to run their businesses. However, you will be required to follow these platforms’ rules and regulations strictly. In any instance where multiple clients are left unsatisfied, your account might get banned. Therefore, make sure you strictly abide by the guidelines provided by your platform of choice, and negate any probability of being blocked. Be truthful to your clients, provide accurate information about your products, and avoid over-promoting them.
7. Going Out of Stock
This is also one of the biggest challenges retailers can face in dropshipping. It commonly occurs during busy periods, like during festivals, Christmas and New Year’s holidays. It is always ideal to stay prepared beforehand, and keep your best-selling items in stock, so your order fulfillment goes smoothly.
What is an Order Fulfillment Company?
An order fulfillment company is entirely in the fulfillment process of a customer’s order. This includes operations related to order fulfillment, such as picking, packaging, shipment, storage, and handling return requests of products.
A reliable order fulfillment service is crucial for leading a business to success, because a retailer cannot function without it. In merchant fulfillment, the order fulfillment system is entirely handled in-house by the seller, who takes care of every step of the fulfillment process, including warehousing.
Dropshipping vs. Order Fulfillment Companies: Which One To Choose?
It can be pretty confusing what to decide as a retailer: order fulfillment or dropshipping? Below is a list of tips to help you make your choice, depending on what is best suited to your business:
Depending on your Products and Suppliers
Not all manufacturers and distributors dropship products directly to customers. Therefore, dropshipping is not ideal for every kind of order because sellers might often use multiple distributors or manufacturers. In such cases, dropshipping every single order is not a feasible option. When it comes to worthwhile suppliers, it becomes even more difficult.
Similarly, not all dropshipping fulfillment providers will be viable for the products you sell. In this case, the choice of both fulfillment and dropshipping companies depends on the product/s you are selling. Sellers who opt for dropshipping have less to zero flexibility for saving inventory costs.
Depending on your Customers
The choice between dropshipping and order fulfillment also depends on your customer’s location. You need to do some research and find out where most of your customers are located, and if your customers are grouped in a specific area. It also depends on whether your customers are from national and international markets.
Customer location is also a concern when opting for a fulfillment company. It is ideal for the dropshipper or fulfillment house of your choice to be close to your customers for faster shipment and delivery.
Depending on the Technology
In many instances, online sellers avail back-end technology for order processing and shipment. Manufacturers and distributors are well-equipped to fulfill large B2B (business to business) orders that handle shipments for delivering to a lesser number of commercial addresses than individual small-scale orders of one customer. This type of order fulfillment differs significantly from direct-to-consumer e-commerce fulfillment, which frequently deals with smaller orders from multiple channels that require quick handling and delivery. You will need to discuss these with dropshipping fulfillment companies and dropshippers about their turnaround time, and how they handle your online shopping cart and/or do their order management.
Ideally, most of these companies have the necessary software to automatically communicate with your software for processing orders and viewing inventory and shipments.
Depending on the Margins
You need to consider your profit margins every time you choose between order fulfillment and dropshipping. Order fulfillments require many extra charges for inventory storage and management. On the other hand, dropshipping helps you manage your storage virtually without managing a vast inventory. This often makes dropshipping a preferred choice of business model.
Sometimes, sellers pay manufacturers a large retail amount for dropshipping a colossal order, to lower their profit margins. You will need to weigh out your options between dropshipping and order fulfillments to see which one will yield a more significant margin for your business, considering factors like facilities and labor, production costs, inventory costs, shipping and fulfillments expenses.
Dropshipping with a Fulfillment Company
There is no ideal approach for making sure your products reach your customers, and it’s all a matter of preference and convenience. Many online sellers even choose to mix their business models with order fulfillments and dropshipping, which can be carried out either by outsourcing, internal processing, or by combining the two.
Online sellers often choose a dropshipper offering products that fall under their chosen industry. These products are further offered to the customers on their own website or on an online marketplace like Amazon. Once the order is made, the seller processes the orders and sends them directly to the dropshipper, who packages and directly ships from the warehouse to the customer.
This method is quite convenient and appealing for sellers because a large part of the shipping logistics is already handled for them, and they are not required to bear any additional costs of owning and maintaining a warehouse, purchasing supplies, and bargaining with delivery companies.
However, dropshipping comes with certain drawbacks as well. Sellers must address and navigate through specific difficulties faced in dropshipping to create a foolproof buying experience for the customers. This is key to ensuring customers’ loyalty to the brand and creating brand advocates.
This is where fulfillment companies come in when it concerns dropshipping. Sellers often choose fulfillment companies that help them streamline the entire process of dropshipping, and eliminate hassles for both the seller and the buyer. A solid plan that handles every standard dropshipping limitation can help businesses multiply without any unnecessary challenges.
Dropshipping vs. Third-Party Fulfillment: Which One To Choose?
Third-party fulfillment companies provide outsourced fulfillment services, where a service company is hired to store merchandise, pick and pack orders, and handle the logistics of shipping to the customers on behalf of the seller. They are pretty different compared to dropshipping companies. Here are some of the significant differences between third-party and dropshipping fulfillment:
Relationship With The Seller
There is no relationship with the seller in third-party fulfillment. The only clue that customers have is the return address on their parcels. However, in dropshipping, there is a tradeoff between profit margin and capital outlay for each sale the seller makes.
Upfront cash is not required in a dropshipping arrangement between manufacturers or distributors. However, with a third-party fulfillment provider, you will have to purchase inventory before putting them up for sale to customers. Buying inventory upfront is cheaper and leaves room for a higher profit margin.
Purpose
The business purpose of your partner is another point of difference between dropshippers and 3PLs (third party fulfillment companies). In a dropshipping arrangement, the manufacturer is also the fulfillment provider, and the retailer is the marketer of goods owned by the manufacturer. The seller gets a price portion of each order shipped by the manufacturer in exchange for customer service and marketing.
However, a third-party fulfillment company handles its inventory and manages to store and deliver the retailer’s products. Third-party fulfillment providers also provide additional services, like processing returns and customer service. Sellers relying on dropshipping arrangements do not have these options.
Inventory
3PL warehouses store the merchandise that an e-commerce retailer owns. Businesses with a dropshipping fulfillment model do not hold any stock of the products they offer for sale online.
Shipper
In dropshipping, product manufacturers or distributors send individual orders to the customers’ doorstep directly. 3PLs let fulfillment warehouses handle orders’ shipment to the customers because they only manage the packing and shipping of orders.
What is the Difference Between Dropshipping and Regular Shipping?
Dropshipping is a business model where a seller need not keep stock of the products they sell. Every order placed with them is directly shipped from their dropshipping partner to the customer on behalf of the brand.
Shipping, in layman’s terms, is the process of transporting products to customers, be it a consumer, retailer, or distributor. Logistics, order fulfillment, and shipping are the critical components of supply chain management.
Conclusion
With all things considered, we can easily conclude that dropshipping is one of the best business models for small-scale businesses or newcomers to retail, especially e-commerce. It does not require a high investment like an order fulfillment company, since the wholesaler or manufacturer handles the inventory entirely. It is known to be one of the most flexible models that give retailers and online sellers the chance to test out new products and add them to their stores without spending a lot of money buying wholesale products that might not sell well among customers.
There are specific challenges faced by dropshippers as well. Opting for dropshipping will cost you more because you will not be getting a wholesale discount, and you will not know stock and inventory, leading to many hassles if the customer places an order for an out-of-stock product. As an e-commerce retailer, it is essential to keep every aspect and requirement that your business needs in your mind before making a choice.
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FAQs
Order fulfillment in dropshipping is the process where the dropshipper handles and ships the orders placed with the merchant.
Dropshipping is one of the best business models for new and small-scale businesses because it cuts down on many additional business costs, such as inventory management.
Dropshipping is completely legal and is quite commonly availed by various retailers and e-commerce sellers. It is a legitimate way to fulfill orders placed by customers.
Dropshipping’s definition includes selling products that are not purchased or stocked, as it’s all handled by the dropshipper.
In dropshipping, you do not have to bear additional costs like warehousing, inventory management and staff expenses, or even buying wholesale products. Therefore, the dropshipping business model is highly profitable.
A dropshipper is a retailer in an online business that does not keep the products they sell in stock. They search for suppliers selling a specific type of product and ship the products directly from the suppliers’ end.
Branded dropshipping is the process of selling non-branded products that sellers have purchased from their suppliers without storing any inventory