What Is Dropshipping? A Definitive Guide

Updated August 8, 2022

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Dropshipping is an online retail strategy in which a business relies on a third party to fulfill its orders instead of stocking and selling its own inventory. It can be a partial strategy for larger companies or a complete business model for small business owners. Learning more about dropshipping can help you determine its use in your business.

In this article, we define dropshipping, review its benefits, explain how to start a dropshipping business and provide additional tips for starting a dropshipping business.

What is dropshipping?

Dropshipping is a business strategy or model, mostly used in online retail, in which a business sells products from third-party suppliers to its customers. Specifically, a customer places an order, and the business then uses dropshipping to purchase the products and quantity specified from the third-party supplier. Companies that use this strategy don't have their own inventory stock, and third-party suppliers do the shipping. The dropshipping business then splits profits from each individual sale with the third-party supplier. Larger companies sometimes partially employ this strategy to fulfill orders they don’t want to keep in inventory.

Related: How To Create a Retail Business Plan

What are the benefits of dropshipping?

Here are some examples of the benefits of dropshipping:

  • Allows you to sell a variety of different products: Through dropshipping, you have the opportunity to connect with suppliers that sell a variety of different products. Their extensive inventory can help you expand your product lines quickly compared with traditional retail models.

  • Gives you the opportunity to work from anywhere: Because dropshipping allows you to operate your business completely online and you don't have to operate warehouses or manufacturing facilities, you can operate your business from any location with internet access.

  • Limits your expenses related to inventory, storage or manufacturing: In a dropshipping model, manufacturing, storage and delivery is the responsibility of third-party vendors. Therefore, you rarely have the starting or overhead costs associated with more traditional retail models.

  • Provides you with insights into how to expand your business: Dropshipping has the potential to provide you with a low-cost business from which you can earn revenue, build a customer base and grow your business over time.

  • Lessens your risks associated with purchasing large product inventory: Because dropshipping businesses fulfill customer orders instead of buying large amounts of product inventory, this lessens potential risks encountered with traditional forms of retail models. For example, you don’t have to worry about changes in customer demands, costs of upfront purchase, costs of storage or loss of inventory quality. 

  • Helps you test which products your customers respond well to: Dropshipping can help you test market reaction to products, categories or brands with minimal risk. Because you don’t need to increase your inventory for these listings, you can try unique items or a large variety to help you refine your choices and increase your sales productivity. 

Related: What Is Inventory Turnover?

How to start a dropshipping business

Review these steps to determine how to start a dropshipping business:

1. Determine what types of products you want to sell

The first step to starting your own dropshipping business is to figure out what industries or niche markets you want to participate in, including the types of products you want to sell. This can help you guide your activities moving forward. For example, if you know you want to start a dropshipping business that sells outdoor or hiking products, you may decide to sell specific products like luxury tents, waterproof hiking boots, waterproof rain jackets and fire-starting kits.

Read more: 23 Product Research Tools That Dropshippers Can Use

2. Complete market research to finalize your decisions

After determining the niche market you want to pursue and the products you want to sell, you can benefit from completing market research. This involves completing online searches of each product to gauge competition, market saturation and other important considerations. Ultimately, the information you gather can help you narrow or change your product line to sell products that offer limited competition.

Related: Market Research: 5 Examples and Explanations

3. Create your own e-commerce website

You can create an e-commerce website for your dropshipping business by signing up for a third-party platform, using free website templates or hiring web development professionals to design a custom website.

Related: 11 Steps To Become a Retailer

4. Research product suppliers

Research wholesale suppliers that make the types of products you want to sell. This includes looking at pricing, product models, product quality and customer reviews to determine whether a product supplier has the types of products you want to sell.

Related: How To Conduct a Supplier Evaluation in 4 Steps

5. Contact effective suppliers

Once you've found a few effective suppliers, consider asking them about selling their products. You may need to fill out an application on the supplier's website or contact the supplier by phone or email to tell them about your dropshipping business and establish a supplier-vendor relationship.

Related: How To Write a Price Negotiation Letter To a Supplier

6. Advertise product lines for sale on your website

After establishing relationships with suppliers and getting permission to sell their products, you can start developing your website. Fill in your e-commerce site with product pages that include product descriptions, pricing, pictures and supplier details.

Read more: 15 Website Improvement Tips

7. Market your dropshipping business to consumers

You can create social media profiles for your dropshipping business to build your following and market your products to consumers. You can also pay for online advertising to display ads of your website to consumers who search for keywords relating to your products.

Read more: Dropship Marketing: Effective Tips To Boost Sales (Plus FAQs)

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Tips for starting a dropshipping business

Here are some tips to help you when starting a dropshipping business:

  • Start with a select few suppliers. Starting with one, two or three suppliers rather than a larger number can help you adjust to your business, gauge customer reactions and form meaningful relationships with supplier businesses before expanding your product offerings to include other suppliers.

  • Choose a niche product market that evokes passion while remaining competitive. Although it's important to choose a product niche you're passionate about, you should also consider the potential you have for success and whether your product niche has a lot of competition. By finding a balance between products you're passionate about and those that meet market opportunities, you can enhance your chances of success.

  • Use search operators to find quality suppliers. There  are a wide variety of search operator platforms that advertise helpful solutions for e-commerce websites and dropshipping businesses. After finding a platform that aligns with your needs, use their website to find suppliers that may be a match for you.

  • Regularly review sales data to determine the profitability of a current product or supplier. Once you start your dropshipping business, it's important to regularly review sales data for different products and suppliers. This can help you determine where you need to focus your marketing efforts or whether you need to change your product offerings.

  • Don't be afraid to alter your dropshipping niche. Although it's important to build your brand identity as a dropshipping business, don't be afraid to change your product offerings or market niche if you notice low engagement from consumers. This can help you adjust your business and better prepare you for success.

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