What is dropshipping? How does it work in 2023?

Dropshipping is an order fulfillment option that allows ecommerce businesses to outsource the processes of procuring, storing, and shipping products to a third party—typically a supplier. This fulfillment model commonly appeals to entrepreneurs seeking efficiency and low overhead, but it can come at a cost—especially when it comes to customer experience. This guide will cover what dropshipping is and explore how this fulfillment method can work. We’ll also look at a few dropshipping alternatives that can potentially save you time, lower your overhead, or simplify your business.

In a dropshipping business model, you promote products and provide an online storefront . When a customer places an order, you send the order to the dropshipper and inform customers the products are on the way.The rest of the physical fulfillment process is out of your hands. In some dropshipping agreements, you may also handle customer service, while the dropshipping service manages the physical goods and fulfillment

If you’re considering dropshipping for your ecommerce business , be sure to weigh several potential pros and cons—including some variations and alternatives, such as Fulfillment by Amazon , that offer similar benefits.

Dropshipping may appeal to entrepreneurs looking to sell generic products, but it can limit opportunities to build a brand and differentiate products. Businesses that use dropshipping may wind up competing on price, leading to low margins.Looking for other ways to start a business? Here are 38 online business ideas

The exact logistics of dropshipping depend on your arrangement, but typically the dropshipping process follows this general sequence:

In a typical product supply chain, wholesalers buy from manufacturers and sell to retailers at a slight markup. They function as middlemen; generally, they do not sell to the end consumers but may provide dropshipping services to retailers.Determine which dropshipping providers could be right for you based on your business model and fulfillment requirements, among other factors

Manufacturers make products to sell to wholesalers and retailers. You can purchase goods from manufacturers, but the bulk purchase amounts they may require can potentially be a barrier to starting or scaling your business. Some manufacturers may offer dropshipping services.

The dropshipping process starts with you. As the seller of record (SoR), you’re the individual identified as selling the product to the end consumer. You set the price, record the purchase as revenue, and assume responsibility for the sales tax on a particular sale. Even when a third party stocks and ships the items, you’re the seller of record because you own the products before they ship to the customer.For Amazon sellers, using a dropshipping service is generally allowed by Amazon dropshipping policy , as long as you’re the seller of record and identify yourself as such.

Let’s unpack some of the key players and their roles in detail, starting with the seller of record—in other words, your business.

For some businesses, dropshipping limitations do not outweigh the potential benefits. Luckily, if you want to lower your inventory management and order fulfillment costs, a service like Fulfillment by Amazon may be an option. For some sellers, FBA provides a happy medium, offering many of the benefits of dropshipping without the downsides.

In ecommerce, as in life, there are advantages and disadvantages to any fulfillment approach. Whether the gains are worth the pain largely depends on your goals and business situation. Here are potential pros and cons to consider when weighing whether dropshipping is right for your business. Possible benefits of dropshipping include:

Is dropshipping right for you?

It depends on your business. Here are a few questions to ask yourself if you’re considering dropshipping.

How do you want to build your brand?

Your brand is the look and feel of customer-facing aspects of your business. Building a memorable brand impression can help grow customer loyalty.

While you may be able to create a branded online experience, dropshipping gives you less control over product quality, delivery experience, and the aesthetics of the final package. If the products and packaging fall short of expectations, a customer may choose not to purchase from your brand again.

Dropshipping suppliers often offer little room for product customization. This limitation may make it difficult to set your brand apart from the competition.

How much control do you want over product quality?

Product quality can have a big impact on other aspects of your business such as customer acquisition, brand loyalty, and returns. While you may be able to inspect the quality of products at the start of your dropshipping relationship, you will likely have limited control over the quality of the items you sell on an ongoing basis.

If the products fail to meet customer expectations, your business could receive negative customer reviews.

How quickly do you want to ship products?

Long shipping times can negatively impact your business. When working with a dropshipping supplier, review its standard shipping costs and delivery timeframes.

For sellers looking for fast order fulfillment services, a service like

Ecommerce customers tend to expect quick shipping. In a recent survey, nearly 84% of people surveyed regarded delivery as an essential part of their online shopping experience.Long shipping times can negatively impact your business. When working with a dropshipping supplier, review its standard shipping costs and delivery timeframes.For sellers looking for fast order fulfillment services, a service like FBA can be valuable.

Did you know?

During the 2019 U.S. holiday season, independent third-party sellers—mostly small and medium-sized businesses—sold and shipped over 100 million items with Prime Free One-Day Delivery.

How much capital do you have access to?

In some cases, the dropshipping business model allows you to hold off on product procurement until customers actually place orders. This can make dropshipping attractive to entrepreneurs who want to get a business up and running with limited inventory investment. Some alternatives like third-party fulfillment also allow you to launch and run your business with less capital compared to sourcing, storing, and shipping products on your own.

What is your target profit margin?

Compared to other business models, such as owning a retail store or building your own order fulfillment center, dropshipping has a lower barrier to entry. Unfortunately, this can mean more competition for your business.

The playing field can be highly competitive for businesses that use dropshipping. Dropshipping sellers are commonly able to offer products at low prices because they’ve invested so little. If you use dropshipping for your business, you may earn low profit margins.

You might be able to overcome some of these issues if you position your business within a niche outside of any hyper-competitive field. Find potentially profitable or less competitive niches through market research, networking, and sales. Or invest in differentiating your brand.

Are you ready to handle supply and inventory issues?

If you choose to use dropshipping, you may have little to no control over the supply chain. Delays in production might determine how many orders your dropshipper is able to fulfill. Having to disappoint your customers by informing them an item is out-of-stock is hopefully the exception and not the rule. Sourcing products through multiple dropshipping services is one way to avoid running low on product inventory. When one supplier is out of a needed product, you can rely on another. However, working with multiple suppliers adds complexity to logistics and fulfillment, which may defeat the purpose of a dropshipping strategy.

How will you handle refunds, returns, and replacements?

Be prepared for more complex return and replacement processes. Take the time to understand how a dropshipping service handles returns before creating your refund and return policy.

Think through the steps of the ecommerce transaction. Here are some examples of questions to ask before signing on with a dropshipping supplier:

Returns are an inevitable part of ecommerce business . Sometimes the return process can be as simple as a customer contacting you regarding an item they would like to return. The customer sends back the product, then you refund the customer and contact the dropshipping supplier to credit or reimburse you. But this is not always the case.Be prepared for more complex return and replacement processes. Take the time to understand how a dropshipping service handles returns before creating your refund and return policy.Think through the steps of the ecommerce transaction. Here are some examples of questions to ask before signing on with a dropshipping supplier:

• Who is responsible for defects?
• Who covers return shipping fees for defective items?
• What are the supplier’s restocking fees?
• What is the return window for customers?

Questions like these can help you understand a dropshipping agreement and help paint a clearer picture of the potential costs involved before you make changes to your business model.

How will you manage customer fulfillment questions and concerns?

Even though you may not physically handle the products, you may still need to respond to customer questions and concerns about a shipment, delivery, or product quality.

A seemingly small miscommunication with your dropshipping supplier can result in negative reviews and poor customer experience. To avoid this, consider the entire purchasing process from the customer’s vantage point. Pay special attention to the following aspects of the customer experience:

• After ordering, do customers get a shipping notification on when to expect their orders?
• Do packages arrive in the expected time frame?
• Do products arrive in proper condition?
• Is the packaging a good reflection of your brand?

Optimize each of these touchpoints to create a positive customer experience, which can help you earn positive reviews and build brand loyalty.