1. What is dropshipping?
Dropshipping is an order fulfillment method that does not require a store to keep products in stock. Instead, the store sells the product, forwards the order to a third-party supplier, who then has it packed and shipped to the customer.
2. How does dropshipping work?
To help you have the clearest understanding of how it works, I will illustrate the flow by taking an example of CatBuddie, a store selling cat products.
2.1. Step 1: Order placement
Let’s say you are looking for a cat bowl for your cute kitten. After shopping around online for a while, you stop by CatBuddie and place an order of a ceramic cat bowl from here. A second after your order has been successfully placed, you receive an order confirmation email including your shipment and payment information.
2.2. Step 2: Order fulfillment
The order fulfillment process will start immediately when the order information is forwarded from CatBuddie to its supplier.
Once the supplier receives your order details, it will start sourcing, packing, and delivering the ceramic cat bowl to your address. Your order will come with a tracking number that will keep both you and CatBuddie updated with its shipping status.
The dropshipping process is completed when the bowl successfully arrives at your location.
3. Pros & Cons of dropshipping
- Low initial investment & No overhead costs: Unlike selling in a brick-and-mortar store, dropshipping sellers don’t have to put in too much money in the beginning and pay for overheads to maintain their business. Consequently, it allows people who have a tight budget to start selling right away.
- Easy to test & scale: Dropshipping allows sellers to easily test and scale up/down their business. When the sellers want to test the prospect of product A, just put it on their store and track customers’ responses. If customers like it, import thousands more to sell more. If they don’t, just take it down. No cost required.
- Flexible time and location: It is an online business, so sellers do not have to work at a fixed place. They can work wherever they want, as long as that place has stable access to the Internet. So, dropshipping is very suitable for freelancers, parents working at home, and employees wanting to have a side gig to supplement their income.
- Difficult to control product quality: Dropshipping products do not go through the seller’s hands but go directly from suppliers to customers. Therefore, sellers cannot control product quality.
- Highly competitive market: The dropshipping market is very competitive because of 2 reasons. First, the entry barrier is low. Second, products are not as unique as they are supplied by the same manufacturers.
- Hard to ensure customer satisfaction & retention: It is quite challenging to ensure customer satisfaction and retention. They almost depend on product quality and shipping times, which are out of sellers’ control.