What Is Drop Shipping: Meaning and Definition

Tamia Tutson
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    More and more entrepreneurs are choosing dropshipping when they learn how to start an eCommerce business and start coming up with dropshipping business ideas.

    Download our FREE Dropshipping eBook

    So, what is dropshipping, and why are so many types of eCommerce businesses using the dropshipping model?

    Keep reading to learn what dropshipping is, how it impacts businesses, how to dropship, and how to start a dropshipping business.

    What Is Dropshipping? 

    Dropshipping is an order fulfillment method where products are shipped directly from the supplier to the customer without the seller ever handling them. This model eliminates the need for warehousing, reduces costs, and lets new businesses grow more quickly.

    What drop shipping means to businesses is an opportunity to increase wholesale sales without increasing associated overhead expenses and the inventory carrying cost. This is key when looking at how to make money dropshipping.

    Like our shipping blog posts? You may also love our warehouse content. Check out our warehouse management eBook here.

    What Is Dropshipping Business?

    A dropshipping business is a business that sells products that it doesn't own or stock. They essentially operate a storefront that lists and markets products on behalf of another company, much like consignment inventory. However, unlike consignment, these products are never touched by the reseller.

    Drop shipping businesses only pay for products from their suppliers at the time a customer places a purchase. This keeps inventory costs low and these businesses don't have to deal with issues like shrinkage or the bullwhip effect in supply chain.

    Benefits of Dropshipping

    So, is dropshipping worth it? Well, the dropshipping business model has many advantages, both for the business and the customer. These benefits offer many incentives for many business owners to start new ventures using the model.

    Benefits of Dropshipping

    Here are four benefits of drop shipping to include in your drop shipping business plan:

    1. Low Startup Costs

    The biggest benefit of drop shipping, and the reason so many startups choose the model, is the low cost to start. With dropshipping, you don't have to invest in warehousing or inventory (see what is inventory), and maybe even eliminate some warehouse jobs (see what is warehouse job) and create some dropshipping jobs. Instead, you can focus all of your effort and money on setting up a headless eCommerce storefront or using an online marketplace and start sourcing products to sell. This low cost also means low risk, so it's easier than ever to work on starting an eCommerce business.

    1. Wide Product Selection

    Since you won't be investing in any inventory, you can seek out and sell a wider selection of products. This makes the model ideal for most eCommerce business ideas. It also allows you to build a storefront with ample opportunity for cross selling and upselling a broad range of the best dropshipping products, further increasing your revenue. All you have to do is learn how to find vendors and get some wholesale items to sell.

    1. Minimal Overhead Cost

    Dropshipping businesses aren't just cheap to start; they're inexpensive to operate. Overhead expenses don't grow as quickly as in the traditional model since you don't have to deal with increasing utilities and staff costs. Many successful drop shipping businesses are run as home-based stores well beyond the first few months. If you can afford a laptop, web hosting, dropshipping ads, and a few other costs you can sell baked goods online, selling food online, sell clothes, and more.

    1. Easy to Scale

    Traditional business growth is limited by their ability to handle order fulfillment (see order fulfillment meaning) and buy and store inventory. So, if you don't have to do any of those, it stands to reason that growth is much easier. Dropshipping businesses can invest their time and money into eCommerce marketing to increase eCommerce sales without many limitations. As long as their supplier has the product and the ability to fill large orders, growth is nearly unlimited.

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    Disadvantages of Dropshipping

    Unfortunately, drop shipping isn't all upside. There are a few disadvantages to the dropshipping model that make it not feasible for all businesses and a few dropshipping beginner mistakes to be wary of. Remember, you won’t have your own safety stock available in case something goes wrong.

    Here are four disadvantages of dropshipping:

    1. No Control Over Inventory

    The biggest drawback of not owning the inventory you sell is that you cannot enforce inventory control and inventory management measures. Manufacturing problems, increased lead time, poor decoupling inventory planning, and more are in the hands of your suppliers.

    This means your ability to meet demand relies entirely upon the quality and skill of your vendors, not your own demand planning or inventory forecasting. Make sure to do thorough research and maintain a strong relationship with yours to stay on top of issues as they happen.

    1. Low-Profit Margins

    Though costs are low in the dropshipping model, so are dropshipping profit margin (see markup vs margin). This is particularly true if you operate in highly competitive and congested dropshipping niches like clothing. Most dropshippers also choose to sell lower-quality products in large quantities, further exacerbating the issue. This has even led some to ask, "is dropshipping dead?" and "is dropshipping legal"?

    Try to focus on providing superior service, invest in a quality dropshipping website builder, and find a niche market with more room for growth like DTC food. You can also look into drop surfing or reverse dropshipping to maximize the amount of money you can make from your offerings.

    Like our shipping blog posts? You may also love our warehouse content. Check out our warehouse management eBook here.
    1. Limited Branding Opportunities

    Since the products you sell aren't your own, you have limited opportunity to offer customization or branding on the eCommerce packaging. Most products will be picked, packed, and shipped by the supplier with their branding. This is convenient because you don't need to learn how to ship a package.

    Work with yours to see if they'll be willing to include a branded packing slip in the shipments to maintain some recognition for you. You can also look into kitting to put your company logo on packing materials, which will significantly increase your costs. You should also look at other dropshipping websites to see how they overcome this hurdle and check out the differences between affiliate marketing vs dropshipping to get more insight into the model.

    1. Complex Shipping

    Supplier relationship management is key to a successful dropshipping business. You need to know how to find dropshipping suppliers that are reliable and provide quality products at a reasonable price.

    Very few dropshippers get all of their products through a single supplier. This means your customers' orders will need to be fulfilled by multiple suppliers in separate shipments. This complicates and increases shipping issues and costs since bundling isn't available.

    You also can't pass these costs along to your customers, or you'll likely scare them away when they see such high prices. Invest in the right eCommerce software for automated dropshipping to automatically calculate shipping costs, pass a certain amount on to the customer, and track individual shipments for your customer service for dropshipping team.

    What Is a Drop Shipper?

    A drop shipper is a company that manufactures or distributes products and ships them directly to retailers, bypassing the middleman. This allows retailers to sell products without carrying any inventory, saving them much money.

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    Frequently Asked Questions About Drop Shipping

    How Much Can You Make In Dropshipping?

    Dropshippers typically make between 20% and 30% profit from each sale. So, if you're selling products for $100, you can expect to profit between $20 and $30. Of course, this will vary depending on your margins and the costs of the products you're selling.

    If you're able to sell high-priced items or have a large volume of sales, your profits can really start to add up. For example, if you're selling $500 items and making a 20% profit, that's $100 in profit per sale. If you can sell just 10 of those daily, that's $1,000 in daily profits!

    Of course, it takes time and effort to reach those kinds of sales numbers. But the potential is there for anyone willing to do the work. So, if you're wondering how much money you can make in dropshipping, the answer is: it depends on you. The sky's the limit!

    Who Is the Richest Dropshipper?

    There are many successful dropshippers out there, but who is the richest? This question doesn't have a definitive answer, as many factors exist. However, we can take a look at the owners of the most successful dropshipping companies:

    However, we can take a look at the owners of the most successful dropshipping companies:

    • Jeff Bezos
    • Jack Ma
    • Irwin Dominguez

    Is Dropshipping a Legitimate Business?

    Yes, dropshipping is a legitimate business model. There are, however, a few things you need to be aware of before starting a dropshipping business. First, make sure you have a Dropshipping Agreement Contract (DAC) in place with your supplier. This will protect you in case anything goes wrong with an order.

    Second, be aware that some suppliers may not be as reliable as others. It’s important to do your research and only work with suppliers that you can trust.

    Overall, dropshipping is a perfectly legal and viable way to run an online business. Just be sure to do your research and protect yourself with a contract.

    Stop, Drop, and Sell

    Dropshipping is a unique business model with low costs and great growth potential. It's an easy entry-point for many entrepreneurs and requires little experience or capital to get running. For more information, check out our free drop shipping for dummies guide or try reading dropshipping books and taking dropshipping courses.

    Now that you know about dropshipping, you can decide if it's the right model for you or if you should look into another model like cross docking or the subscription box business model, just make sure to find the right subscription box suppliers.

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