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Dropshipping Definition: How Does Dropping Shipping Work?

By
Joshua
on
Wednesday, October 21, 2020
Table of Contents

Are you looking to grow your business, but don't have the storage capacity for buffer inventory? Try dropshipping!

Dropshipping can cut costs for small businesses that only have storage space for cycle inventory—and allow you to sell and fulfill orders faster than you could otherwise. We'll run you through the basics of dropshipping, how to do it, and how to make it work for your business.

Dropshipping Definition

Dropshipping is a business model where you sell items from your supplier to your consumer without stocking it yourself. Unlike the standard inventory model, you do not own the stock you sell or ever come in contact with it. This method of sales eliminates costs associated with inventory purchasing, storage, and staff salaries. You also don’t need to merchandise inventory.

How to Dropship

To run a business with a dropshipping model, you first need to find a dropshipping supplier. Many suppliers offer dropshipping, so you'll have to find the one that works best for you.

Here are two things you should look for when picking a supplier. First, the supplier must regularly stock products you wish to sell. If your supplier is out of stock, you're the one the customer gets upset with. Second, they must be able to fulfill orders within a reasonable time frame.

How Does Dropshipping Work?

Droppshipping works by using a supplier to handle fulfillment of any orders you take through your storefront. You can use dropshipping as a supplementary source of product or as your sole source.This can easily be done through apps and software that connect you to various suppliers who participate in dropshipping. 

Dropshipping Model

The dropshipping business model consists of a store that purchases items from a third party who ships them directly to the customers. This model allows small businesses to avoid paying for inventory storage and focus solely on increasing sales.

Dropshipping Example

To help you understand how dropshipping works, here’s a quick step-by-step example. We’ll assume you’re just opening a new business and set up a storefront online.

  1. You reach out to various suppliers and find one that offers dropshipping on products you’d like to sell.
  2. You list these products on your storefront.
  3. A customer peruses your site and purchases an item they want.
  4. You receive their order from the site.
  5. You then pass that order on to the supplier.
  6. They pick and package the order and ship it to the customer.

You retain control of the product, which can make it lower risk than consignment inventory.

Is Dropshipping Dead?

No, in fact dropshipping is more popular than ever. Dropshipping profits were over $4 billion last year. The continual growth of ecommerce has led to more and more businesses using a full or partial-dropshipping model.Ecommerce platforms allow entrepreneurs to start businesses with little capital and use dropshipping suppliers to build their businesses quickly. This is why ecommerce dropshipping has been on the rise in recent years.

So, why the misconception that dropshipping is dead? In recent years, some unscrupulous people used dropshipping as a way to build fake businesses and quickly accrue capital without properly fulfilling orders. Big businesses like Amazon and Google began to treat dropship businesses warily. However, dropship businesses can still thrive as long as they run a business properly and provide superior customer service.

Dropship Inventory

Dropship inventory is inventory that you sell via a third party supplier who will ship directly to your customer. Though you don't own this inventory, you still have to manage and track it yourself if you want to ensure your business grows.

Dropshipping vs Inventory

Dropshipping lets you avoid storing product yourself while owned inventory lets you have full control over all products you sell. There are pros and cons to both inventory models.

Dropshipping keeps costs low and lets you focus on growing your business. This allows small businesses to grow faster than they could normally. However, dropshipping relies on suppliers to ship the correct products quickly.

Owned inventory can be controlled and quality checked by you (using ABC inventory analysis, for example). This means you can avoid customers receiving product that is damaged or expired. However, this comes with all the costs associated with maintaining a storage facility and purchasing the product. Only you can determine which inventory method is right for your business.

Using a Dropshipping Warehouse

A dropshipping warehouse, or third party warehouse, is a warehouse that holds and ships products on behalf of various businesses. All wholesalers/suppliers who participate in dropshipping will have a dropshipping warehouse. Some may even do double duty as a kitting warehouse. You will automatically be using one when you contract with a dropshipping supplier.

Inventory Order Management

Dropship order management is different from normal inventory order management, as you place your own orders with your supplier every time you sell something. In a normal business, orders with wholesalers are made for bulk inventory a few times a month and you slowly sell the inventory to customers. With dropshipping, each order you receive is passed on to the wholesaler, so there are more moving parts to track.

Depending on the supplier used, dropship orders can be passed on via email, order portals, apps, using an API/EDI call, or via phone. If software is used, these orders will be managed and tracked automatically. If not, create an Excel spreadsheet to ensure proper logging of every order passed through.

Dropshipped Order

A dropshipped order is similar to a normal order as it is sent from a warehouse directly to the customer. However, the dropship order process is different as it passes through an intermediary storefront.

There are a few issues that can complicate dropship ordering. First, if a product is out of stock or on backorder, the store may not discover it until after it has already accepted the order. Second, if the customer has problems with their order, coordinating returns and timely customer service can be more difficult.

Cross Docking vs Drop Shipping

Cross docking and drop shipping are very different inventory methods that both keep the inventory from sitting in your storage area. In cross docking, supplies are shipped to your warehouse, set to the side and sorted, then put onto other trucks to immediately go to their destinations. This minimizes the time they spend in your warehouse and saves you money. Drop shipping never comes to your warehouse, but is shipped directly from the supplier.

Cross docking is a more popular inventory management method because it gives the seller a chance to sort and inspect the product before it goes to the customers.

Advantages of Dropshipping

Dropshipping has many advantages particularly regarding costs associated with inventory storage and shipping.

Here are just a few:

  • Low startup costs. For small businesses and entrepreneurs, this is a major draw. Instead of purchasing inventory upfront for a large sum, you can sell as you go.
  • Low inventory costs. Storing product costs money, particularly when the products don't have a quick turnaround time. WIP inventory and raw materials inventory can eat through your budget. Dropshipping puts those costs on the supplier.
  • Low fulfillment costs. You don't have to pay a warehouse crew to pick and pack your orders with dropshipping. The supplier will eat those costs as well.
  • Can focus on sales. Since you aren't burdened with sitting inventory, you can quickly shift what you offer. Focusing on bestsellers is easier than ever and you can focus on maximizing sales and profits.

Using Dropshipping Software

Dropshipping software makes the process easier and there are many on the market today. These platforms let you have more insight into ordering and the best automate the process of passing your customers' orders to the supplier.

Here are some features you should look for in a dropshipping software:

  • Listing management. Make sure you can easily access and edit all product information. If this can be done in bulk, even better.
  • Order and fulfillment automation. We touched on this earlier, but having customer orders automatically go to the supplier makes the process more streamlined and less prone to mistakes.
  • Inventory automation. This means that inventory levels are reflected in your storefront so you aren't surprised when items are out of stock or backordered. Just in time inventory gets a lot easier this way.
  • Pricing automation. Some dropshipping software offers the ability to write pricing rules to set maximum and minimum price limits and automatically update your listings. This saves you hours of work.
  • Shipment tracking. This lets you provide superior customer service and maintain more control over shipments.
  • Robust reporting. You want software that can provide insight into sales trends, product issues, returns, and more. This data is paramount in maximizing sales.

Drop Everything

Now you know how dropshipping works and you can make an informed decision for your business. Dropshipping has many benefits that can lower your costs and increase your ability to sell.

If you pursue dropshipping, make sure to go with a supplier or software that provides you with all the tools to succeed. If you don't track and control your dropship inventory, you may not have happy customers.