DROPSHIPPING: A BRIEF GUIDE
In this article we will talk about how dropshipping works, the different participants in the process and the possible advantages and disadvantages of using dropshipping as a delivery method for companies in the e-commerce sector. With all this information at your disposal, you can more accurately assess whether or not this model adapts to the needs of your e-commerce business.
Introduction to dropshipping
The growth of the e-commerce sector has triggered the emergence of a multitude of related businesses, including dropshipping. This consists of a business model in which order fulfilment, i.e. the process of storing, packaging, shipping and delivering the products to customers, is outsourced to a third party: the dropshipper.
Dropshipping allows sellers to sell products without the need to purchase them in advance, organise their warehouse, carry out stock-taking or guarantee the correct delivery of the purchased items to customers.
This option can be very appealing, especially for those who have just started out in the world of e-commerce, as one of the potential advantages of dropshipping is that it requires very low initial capital or overheads.
In addition, since dropshippers usually have products in stock, sellers are able to offer a wider range of products to their customers. This in turn leads to greater convenience, since it provides the opportunity to purchase products that are not readily available in the buyers' local market. In addition, the seller is able to make attractive offers by eliminating these additional costs.
Although many sellers choose dropshipping as the right solution for their e-commerce business, it's worth knowing the ins and outs of this service in order to make a more informed decision about whether it's right for you.
In short, dropshipping is a way of shipping and delivering orders for retailers that does not require the seller or company to have the products in storage. When the seller sells an item, they buy it from a third party who ships it directly to the end customer. As a result, the seller sees or handles the product in question.
In this system, the seller is in charge of order management and invoicing, but they do not have to deal with the storage, packaging or shipping of the products.
Dropshipping allows sellers to sell products without the need to purchase them in advance, organise their warehouse, carry out stock-taking or guarantee the correct delivery of the purchased items to customers.
This option can be very appealing, especially for those who have just started out in the world of e-commerce, as one of the potential advantages of dropshipping is that it requires very low initial capital or overheads.
In addition, since dropshippers usually have products in stock, sellers are able to offer a wider range of products to their customers. This in turn leads to greater convenience, since it provides the opportunity to purchase products that are not readily available in the buyers' local market. In addition, the seller is able to make attractive offers by eliminating these additional costs.
Although many sellers choose dropshipping as the right solution for their e-commerce business, it's worth knowing the ins and outs of this service in order to make a more informed decision about whether it's right for you.
In short, dropshipping is a way of shipping and delivering orders for retailers that does not require the seller or company to have the products in storage. When the seller sells an item, they buy it from a third party who ships it directly to the end customer. As a result, the seller sees or handles the product in question.
In this system, the seller is in charge of order management and invoicing, but they do not have to deal with the storage, packaging or shipping of the products.
How dropshipping works
In dropshipping, since the seller does not have their own stock of products, they use a third party to organise the sale of the products in their store. This distributor can be either the manufacturer of the product itself, a retailer or a wholesaler. The difference between them lies in the volume of stock you have of the products in question.
In general, the dropshipping process depends on the agreement reached between the seller and the third party responsible for managing the fulfilment process on their behalf.
In many cases, the dropshipping process usually begins when a customer purchases a product from a seller by placing an online order on the seller's own website for the e-commerce store in question or on the website they have chosen to market their products.
In the typical dropshipping process, once the customer has placed the order, the seller receives confirmation about the details of the order, including the number of items purchased, the delivery address, etc. The seller then shares the order details with the chosen dropshipper.
Once the order has been received, the dropshipper prepares the necessary number of items from the warehouse and organises the delivery of the products to the address indicated by the seller. The process ends once the customer has received the product.
Sellers can also make use of certain automated solutions that can take care of sending pre-designed messages to customers at each stage of the fulfilment process, such as messages confirming that the order has been received, that the product has been shipped (by the dropshipper) and a final confirmation once the product has been delivered to the chosen address.
These are just some examples to illustrate how dropshipping could work; it's not always essential that all processes follow that order exactly. It all depends on the dropshipper chosen and the services agreed between both parties.
In general, the dropshipping process depends on the agreement reached between the seller and the third party responsible for managing the fulfilment process on their behalf.
In many cases, the dropshipping process usually begins when a customer purchases a product from a seller by placing an online order on the seller's own website for the e-commerce store in question or on the website they have chosen to market their products.
In the typical dropshipping process, once the customer has placed the order, the seller receives confirmation about the details of the order, including the number of items purchased, the delivery address, etc. The seller then shares the order details with the chosen dropshipper.
Once the order has been received, the dropshipper prepares the necessary number of items from the warehouse and organises the delivery of the products to the address indicated by the seller. The process ends once the customer has received the product.
Sellers can also make use of certain automated solutions that can take care of sending pre-designed messages to customers at each stage of the fulfilment process, such as messages confirming that the order has been received, that the product has been shipped (by the dropshipper) and a final confirmation once the product has been delivered to the chosen address.
These are just some examples to illustrate how dropshipping could work; it's not always essential that all processes follow that order exactly. It all depends on the dropshipper chosen and the services agreed between both parties.
Important considerations for the seller, manufacturer and wholesaler
In the e-commerce sector, anyone can become a seller: a freelancer, a small company or even a large company; anyone can sell products online. However, when talking about dropshipping, the term "seller" usually refers to a person who only sells products to an end customer.
The seller is the one who chooses which products to sell and at what price, and is the one who receives the final payment and undertakes to pay the taxes or fees required by local regulations. Even if the seller is not responsible for storage, packaging, shipping or delivery, they are still the owner of the products being sold, which makes them the official seller, so they are also the party who is legally responsible.
The manufacturer, who can be a self-employed person or a company, is the one who manufactures the products. Products are usually sold in bulk to a wholesaler or retailer, rather than individually and directly to the end customer. As a seller, it's possible to buy products in bulk directly from a manufacturer, although many manufacturers don't sell small batches of products.
Instead, they seek to sell them in bulk and usually set a minimum quantity of products that must be purchased. For entrepreneurs or individual sellers who are just starting out, buying so many products at once can be problematic, both financially and from a storage point of view. Therefore, delegating this part of the process to a third party can have its advantages.
Wholesalers are those who usually buy products in bulk from manufacturers and then resell them (usually with an added margin) to retailers, such as stores or other sellers. Wholesalers can also offer dropshipping services to retailers or sellers who buy their products.
Therefore, in a typical supply chain, a manufacturer or wholesaler does not sell products directly to an end customer. This is usually done by a seller, after purchasing these products from a retailer, wholesaler or manufacturer. Normally, the seller is also responsible for storing the products and delivering them to the customer.
However, sellers can opt for dropshipping to avoid having to store the products, either in their own facilities or in a rented warehouse, and then arrange delivery of the products to the end customer.
The seller is the one who chooses which products to sell and at what price, and is the one who receives the final payment and undertakes to pay the taxes or fees required by local regulations. Even if the seller is not responsible for storage, packaging, shipping or delivery, they are still the owner of the products being sold, which makes them the official seller, so they are also the party who is legally responsible.
The manufacturer, who can be a self-employed person or a company, is the one who manufactures the products. Products are usually sold in bulk to a wholesaler or retailer, rather than individually and directly to the end customer. As a seller, it's possible to buy products in bulk directly from a manufacturer, although many manufacturers don't sell small batches of products.
Instead, they seek to sell them in bulk and usually set a minimum quantity of products that must be purchased. For entrepreneurs or individual sellers who are just starting out, buying so many products at once can be problematic, both financially and from a storage point of view. Therefore, delegating this part of the process to a third party can have its advantages.
Wholesalers are those who usually buy products in bulk from manufacturers and then resell them (usually with an added margin) to retailers, such as stores or other sellers. Wholesalers can also offer dropshipping services to retailers or sellers who buy their products.
Therefore, in a typical supply chain, a manufacturer or wholesaler does not sell products directly to an end customer. This is usually done by a seller, after purchasing these products from a retailer, wholesaler or manufacturer. Normally, the seller is also responsible for storing the products and delivering them to the customer.
However, sellers can opt for dropshipping to avoid having to store the products, either in their own facilities or in a rented warehouse, and then arrange delivery of the products to the end customer.
Potential Benefits of Dropshipping
Dropshipping is a very interesting method since it significantly reduces risk and provides greater business flexibility. Here are some of its advantages:
- Low initial costs: Whether you open an online store or a physical store, the initial costs can be very high. These include supply, warehousing, inventory management, personnel management, opening multiple points of sale, marketing to attract new customers, etc. Because dropshipping allows you to outsource many of these elements, it can potentially reduce your overhead costs.
- Low initial investment: By using a dropshipper or an external distribution service, the purchasing, storage, inventory and shipping can be managed by a third party, so that you only have to wait for the direct delivery of your products to end customers. This means that there is the possibility of reducing your initial investment costs.
- No need to rent a warehouse: Normally, regardless of whether you sell online or in a physical shop, the seller or shop owner would need to store the items in a rented or owned warehouse. Along with the investment for storage and handling, you may also need staff to place, identify and collect the goods on the shelves. Since the dropshipper is responsible for the storage and preparation of orders, this can lead to a reduction in fixed costs for your e-commerce business.
- Great flexibility regarding the business location: In reality, since there is no physical inventory, you only need an Internet connection to manage sales. This allows you to locate your business in places where renting a warehouse can be very expensive, thus reducing costs.
- Wide range of products: Since you don't have to have a physical inventory of products, it is possible to have a wider catalogue than that of a seller who does not use dropshipping. As the expectations, tastes and needs of customers are constantly changing, it can be expensive for a seller to try out new product lines and see which ones are most successful. However, dropshipping, especially with multiple suppliers to choose from, allows you to test products in small quantities and then, if the customer response is low, stop offering those products.
Potential disadvantages of dropshipping
Although the advantages of dropshipping are numerous, it is also important to know the potential drawbacks, such as:
- Lower profit margin: By not selling the products directly, it is the supplier or dropshipper who sets the margin.
- High level of competition: Since the investment costs and risks of creating an e-commerce store using dropshipping are so low, this business model is becoming increasingly popular, leading to limited brand differentiation and increased competition. This can be especially true if it involves selling very popular or fashionable products. Therefore, you may have to work harder to stand out from the competition.
- Lack of suppliers: Sometimes, when marketing a product that is very on-trend and also taking the previous point into consideration, you are likely to share dropshippers with many of your competitors, so there could be a lack of stock, delays in supply, etc.
- Possible lack of control: By using a dropshipping supplier, you will be selling products that a third party is responsible for storing, packaging and shipping. This means that you could have a lack of control over several aspects of the fulfilment process, such as controlling the quality of the storage, inventory management, the quality of the packaging used, the reliability of delivery mechanisms, etc.
- Volume discounts: Large retailers often buy large volumes from manufacturers or wholesalers, allowing them to negotiate "volume discounts". This could allow them to pass the benefit on to customers, in the form of reduced prices and offers. However, if your e-commerce business doesn't require buying and storing such a large volume of products, you might not be able to get these volume discounts.
- Disconnected orders and deliveries: In your e-commerce store you can advertise a wide variety of products, which can be fully managed by different dropshipping suppliers. Therefore, if a customer orders different products, it is possible that each of them will be delivered separately, since they are all stored in different places.
If you take all this into account, it may turn out that, in your specific case, the disadvantages of dropshipping outweigh the positives. However, in those cases, there are other alternatives that can be considered, such as the affiliate marketing model or subscribing to Fulfilment by Amazon.
The first model we mentioned, affiliate marketing, consists of a completely different business model from dropshipping, since it is a business model based on promoting products or services from other companies (or businesses) in exchange for a commission for each sale achieved. This promotion is usually carried out through blog posts, social media, advertising banners on websites that redirect to the purchase link of the product in question, etc.
The commission obtained can be a percentage of the product's selling price or a fixed price agreed between the affiliate in question and the seller. In short, it is a results-based model: the higher the number of sales, the higher the commission. Therefore, it presents no risks for the seller and does not need prior investment.
For affiliates, it can be a way to monetise the time spent writing and publishing posts on blogs or social media. For the seller, it only involves a commission in exchange for advertising.
However, if you want your business to grow quickly, the most effective solution is to customise your products and entrust storage and shipping to a reliable and reputable company like Amazon. Next, we'll take a closer look at how their Fulfilment by Amazon service works and how you can benefit from all the possibilities it offers.
The first model we mentioned, affiliate marketing, consists of a completely different business model from dropshipping, since it is a business model based on promoting products or services from other companies (or businesses) in exchange for a commission for each sale achieved. This promotion is usually carried out through blog posts, social media, advertising banners on websites that redirect to the purchase link of the product in question, etc.
The commission obtained can be a percentage of the product's selling price or a fixed price agreed between the affiliate in question and the seller. In short, it is a results-based model: the higher the number of sales, the higher the commission. Therefore, it presents no risks for the seller and does not need prior investment.
For affiliates, it can be a way to monetise the time spent writing and publishing posts on blogs or social media. For the seller, it only involves a commission in exchange for advertising.
However, if you want your business to grow quickly, the most effective solution is to customise your products and entrust storage and shipping to a reliable and reputable company like Amazon. Next, we'll take a closer look at how their Fulfilment by Amazon service works and how you can benefit from all the possibilities it offers.
Alternatives to dropshipping: Fulfilment by Amazon
If, having read all of the above, you're still not convinced that dropshipping the needs of your e-commerce business, we recommend you keep reading. If you're looking for alternatives to dropshipping, let us explain How to grow your business with Fulfilment by Amazon, one of the most advanced fulfilment networks in the world.
With FBA, Amazon takes care of storing and delivering the products that you sell. However, before you can start selling your products through Fulfilment by Amazon (FBA), you must package the selected products to make use of this service in accordance with Amazon's packaging guidelines and, following the established shipping requirements, send them to a nearby Amazon fulfilment centre.
Once the products are stored in the distribution centre, they will appear as available for your customers to purchase through your online store. This is one of the great advantages of becoming a seller on Amazon and using FBA to deliver your products to customers.
Once this process has been carried out, every time a customer orders a product, Amazon will take care of the collection, packaging, shipping and delivery. Amazon will also deal with all requests related to customer service, as well as any returns requested by the customer.
As you know, selling on Amazon has significant advantages. Because their service is highly reliable and has hundreds of millions of active customer accounts and millions of visitors every month, many brands have experienced explosive growth when switching to Amazon.
If you want to start working with FBA, the first thing you should do is open a seller account on Amazon. The site offers two types of plans: the Individual plan and the Professional plan. The first plan is recommended for individuals who sell fewer than 40 items per month. The second is for companies that expect to sell more than 40 items per month.
The Individual plan is priced at €0.99 per item sold, while the Professional plan costs €39 per month, regardless of the number of items you sell through Amazon.
You can then access the FBA service, which takes care of the preparation, packaging and shipping of orders. It also manages returns and customer service, and allows you to benefit from the advantages of Prime delivery, which offers free delivery within two days.
To use this service, you'll first have to decide which products you want to register. Please note that some products may not meet the requirements of this programme. For these cases, FBA also offers different programmes for products with specific requirements, such as:
With FBA, Amazon takes care of storing and delivering the products that you sell. However, before you can start selling your products through Fulfilment by Amazon (FBA), you must package the selected products to make use of this service in accordance with Amazon's packaging guidelines and, following the established shipping requirements, send them to a nearby Amazon fulfilment centre.
Once the products are stored in the distribution centre, they will appear as available for your customers to purchase through your online store. This is one of the great advantages of becoming a seller on Amazon and using FBA to deliver your products to customers.
Once this process has been carried out, every time a customer orders a product, Amazon will take care of the collection, packaging, shipping and delivery. Amazon will also deal with all requests related to customer service, as well as any returns requested by the customer.
As you know, selling on Amazon has significant advantages. Because their service is highly reliable and has hundreds of millions of active customer accounts and millions of visitors every month, many brands have experienced explosive growth when switching to Amazon.
If you want to start working with FBA, the first thing you should do is open a seller account on Amazon. The site offers two types of plans: the Individual plan and the Professional plan. The first plan is recommended for individuals who sell fewer than 40 items per month. The second is for companies that expect to sell more than 40 items per month.
The Individual plan is priced at €0.99 per item sold, while the Professional plan costs €39 per month, regardless of the number of items you sell through Amazon.
You can then access the FBA service, which takes care of the preparation, packaging and shipping of orders. It also manages returns and customer service, and allows you to benefit from the advantages of Prime delivery, which offers free delivery within two days.
To use this service, you'll first have to decide which products you want to register. Please note that some products may not meet the requirements of this programme. For these cases, FBA also offers different programmes for products with specific requirements, such as:
- FBA Small and Light: This is a programme that offers a reduction in the fulfilment management costs of eligible products, allowing you to provide discounts to customers. These requirements are: They must have a price equal to or less than €12 and meet certain package or envelope size dimensions. You can check the requirements in detail by following the link in the title.
- Subscribe & Save: This Amazon programme offers discounted pricing, free shipping and the convenience of regularly scheduled shipping on products that meet certain requirements. While the customer benefits from better prices, the seller gets more sales and stronger customer loyalty through regular purchases.
- Multi-Channel Fulfilment: This programme allows you to make fast and hassle-free deliveries by giving you access to a first-class fulfilment management network, operational expertise and reliable shipping options from Amazon, both for sales from your Amazon store and for purchases made by your customers on other sales channels.
- FBA Heavy and Bulky: When it comes to heavy and bulky products, it is very important for the customer that the delivery is satisfactory. With the FBA programme for these types of large items, you would be able to ensure that the customer experience during delivery is positive thanks to scheduled or arranged deliveries. For the seller, avoiding failed deliveries also means big savings. Find out more information about the programme here.
As you can see, Amazon has different programmes that will help you depending on your circumstances and the needs of your e-commerce store.
Is dropshipping the right option for you?
Now that you know more about dropshipping, here are some potential factors to consider to help you make a decision about what's best for your online business.
- Brand identity: Whenever you sell any product, the look, feel and design of your products can be a decisive factor in making customers choose you over the competition. For various reasons, dropshipping only allows you partial control over these aspects. If you're unable to find a dropshipping supplier that can customise the products the way you want, this could be a potential drawback.
- Product quality control: Once again, since you have limited visibility over the actual items that your dropshipping supplier buys and stores, you have limited control over the quality of the product. If the final products aren't of the promised quality, this could result in customers moving away from your products as their preferred option and looking for another seller.
- Delivery times: Since the delivery and fulfilment process is in the hands of your dropshipping supplier, you should ensure that they have a good track record when it comes to timely shipping. Services like Fulfilment by Amazon (FBA) can help you deliver products faster; some of them may even be eligible for free two-day delivery with the Amazon Prime programme, as long as they meet certain requirements and conditions.
- Financing: If you have less capital to start with, dropshipping and some other alternatives can allow you to reduce the costs of sourcing, purchasing and storing products before you start selling them. Therefore, if this is the case for you, dropshipping is your best option.
Thinking about these points will bring you closer to making a decision about whether you want to use dropshipping as a fulfilment method for your e-commerce business.
Conclusion
As we've seen in this article, the main reason dropshipping is so popular is because of how easy it is to access. It is a business model that can suit many sellers and has allowed some of them to build a sustainable and very profitable business. However, we must take the disadvantages of dropshipping into account, including limited flexibility in terms of product quality and shipping, and a highly competitive environment.
Now that you know the fundamentals of dropshipping and its alternatives, as well as their potential advantages and disadvantages, you can choose the option that best suits the needs of your e-commerce business in order to optimise your sales and maximise your profits.
Ultimately, how you decide to handle the process of delivering the products sold in your online store depends on you and the needs of your business. As we've explained, not having to store, package and ship your own orders has its advantages, but outsourcing all of these services to a third party can also pose problems and challenges.
Now that you know the fundamentals of dropshipping and its alternatives, as well as their potential advantages and disadvantages, you can choose the option that best suits the needs of your e-commerce business in order to optimise your sales and maximise your profits.
Ultimately, how you decide to handle the process of delivering the products sold in your online store depends on you and the needs of your business. As we've explained, not having to store, package and ship your own orders has its advantages, but outsourcing all of these services to a third party can also pose problems and challenges.
FAQs
What is dropshipping?
Dropshipping is one way in which a seller can outsource the process of storing, packaging and delivering products to customers through a third party.
Is it essential to use dropshipping to supply my products?
No, it's not mandatory to use dropshipping. As we mentioned in the article and depending on the needs of your e-commerce business, there are several alternatives to dropshipping, including Fulfilment by Amazon.
Is dropshipping allowed on Amazon?
You must follow Amazon's dropshipping policy if you intend to place Amazon orders through a dropshipper.
Does using dropshipping increase my costs?
Comparatively, sellers face lower overheads when using dropshipping to complete the fulfilment process. However, each individual case is different, as it depends on who you sign up with and what they supply you.
Is it necessary to have a physical store and an e-commerce store?
No, it's not mandatory to have a physical store if you have an e-commerce business.
Do I have to purchase the items in advance?
If you use a dropshipper, they usually also take care of the purchase of the products (although it depends on the exact contract you signed). If you use Amazon FBA, then you need to purchase the items in advance and ship them to your nearest Amazon warehouse before you can start offering those products for sale online.
How profitable is dropshipping for my business?
The profitability of your business will depend on the dropshipping supplier you choose, as well as the product sales strategy you choose, since some items offer a higher profit margin than others.
Can I sell products worldwide using dropshipping?
Yes. Dropshipping companies will ship your items internationally to maximise your reach.
Do I need to register my business to use a dropshipping supplier?
Yes. You'll need to take all the legal steps to register your business, despite using a dropshipping supplier that will take care of distributing your products for you.
What are the main challenges of using a dropshipping business?
The main challenge when you delegate that part of your business to a dropshipping supplier is that you depend on their efficiency to ensure customer satisfaction. When delegating part of the work, some of it is out of your hands.
What are the alternatives to dropshipping if I want to have more control over my inventory?
Instead of hiring the services of a dropshipping supplier, you can take care of that part of the business yourself. You will have full control over your inventory, but it will also require you to have a warehouse with all the products for sale in stock, and you will also need to take care of the packaging and shipping for the items sold.
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