Dropshipping started gaining momentum as a profitable business model in 2006 when AliExpress began to gain popularity in the US. Since dropshipping wasn’t a popular business model, only a few entrepreneurs were able to take advantage of the low prices AliExpress offered to launch online stores.
However, dropshipping has grown, and it has really dominated the eCommerce industry in 2021. More than 30% of online stores use drop shipping as their fulfillment model. Many e-commerce giants such as Wayfair, Zappos, Fab, etc., have built profitable businesses through the dropshipping model.
What is dropshipping?
Dropshipping is a retail business model whereby you purchase products directly from third-party suppliers and ship them to your customers. The only distinction here is that you don’t own any inventory, so you depend on your suppliers to provide the supplies.
Dropshipping model of business means that you don’t have to deal with issues such as:
- Renting a warehouse.
- Managing inventory.
- Processing orders.
- Tracking inventory for accounting purposes.
- Handling inbound shipments and returns.
- Worrying about shipping directly.
- Constantly ordering products and managing stock levels.
Dropshipping is a very attractive business model. Unlike the standard retail business model, you need less capital to start because you don’t have to buy stock. It is also easier to start and scale-up, giving you more flexibility. What you need is an online store, laptop, and internet connection. You act as a middleman between the wholesalers and customers, saving you more costs of renting a business store, buying stock, and many operating costs associated with the standard retail businesses.
You may wonder if dropshipping is a legal business model. It is a legal business model, and many brands worldwide use it to build a successful business and drive customer satisfaction.
How dropshipping works
How does dropshipping work? It is a question that lingers in the minds of many enthusiastic entrepreneurs. Dropshipping involves a business partnership between a seller who owns an online store and a supplier who manufactures the products or warehouses the products. The retailer receives the orders on their online store, passes the order to the supplier who processes it, and ships the goods directly to the customer but in the retailer’s name. As an entrepreneur, you can dropship almost any product, but you have to look at the market and determine the most profitable products.
Staring an eCommerce store is a straightforward process. It involves three main processes; identify your niche, select a good platform and connect with the right drop shippers. You can venture into niches such as furniture, tech, jewelry, toys, beauty and health, smartphone covers, power tools, pet products, accessories, etc. As long as you select the right niche, dropshipping is very profitable.
But you need a reliable supplier, market your brand and products and satisfy your customers. The profit margins may range from 15-45% but for luxury products such as jewelry and electronics, you can reach profit margins of up to 100%. But like any other entrepreneurial endeavor, dropshipping comes with its downsides. It can take you several years to build a successful brand.
With the dropshipping business model, sales growth always comes with additional work regarding customer support, but it is easier to scale up, unlike the traditional business model.