Dropshipping for Dummies: What Is It + How Does It Work?

Starting an online business can be thrilling. And with dropshipping, the low startup costs and barriers to entry make creating an eCommerce store even more enticing.

But even the most seasoned entrepreneurs may have questions about how dropshipping works.

In the eCommerce industry, it’s challenging to source and store inventory. Not to mention dealing with customer returns, shipping times and product development.

With dropshipping, you don’t have to worry about any of the above — only choosing products, advertising and some negotiating.

Related content: How to start a dropshipping business

What is dropshipping?

Dropshipping is an eCommerce model where a store sells products without holding inventory. When a customer orders, the store buys the item from a third-party supplier that ships it directly to the buyer. This approach reduces overhead and risk for the store owner, making it an appealing choice.

How does dropshipping work?

Step 1: You first need to establish an online store showcasing products.

Step2: Customers order products from your website.

Step 3: You forward customer orders to the supplier, who ships the product directly to the customer on your behalf.

Step 4: You get paid! You can calculate profit by subtracting the product cost and advertising cost from the customer’s payment, resulting in a profit.

In dropshipping, the retailer acts as a middleman between the supplier and the customer. The store owner doesn’t handle the product. The profit comes from the difference between the customer’s price and the cost of buying the product from the supplier.

For example, say you run a dropshipping store that sells eco-friendly products. You’ve partnered with a supplier, and you use its images for advertising on a website like Facebook.

A customer visits your website and orders a reusable water bottle for $30. For simplicity, let’s assume it costs $5 in ads to bring the customer to your website.

You forward the order to your supplier for order fulfillment. The supplier ships the water bottle directly to your customer. You pay your supplier $15, leaving you with $10 in profit.

Types of dropshipping

With the dropshipping business model, you can source products in several ways. Here are the three most common types of dropshipping. 

Type 1: Product reselling

Product reselling leads the list as the most common type. It includes subcategories like shipping from China, branding dropshipping products with logos and creating niche stores.

Product reselling has the most competition and the lowest barrier to entry. It’s also the most suitable type for beginners because of the light upfront costs.

Product reselling has the most competition and the lowest barrier to entry.

Type 2: Print-on-demand

Print-on-demand (POD) dropshipping specializes in customizing products with designs you or your customers provide. As orders come in, your POD supplier prints the designs on items like T-shirts, mugs and posters. Then, the supplier sends the finished products directly to your customers.

This model is popular among creative entrepreneurs who want to monetize their designs without worrying about inventory and shipping logistics. However, converting buyers to creative items is hard unless there’s a “wow” factor. So, you’ll need a higher budget to succeed.

Type 3: Wholesale dropshipping

Wholesale dropshipping involves partnering with a traditional retail business to sell its products at a higher price, earning a profit from the markup. In this model, you market and sell the products, while the wholesaler handles inventory and shipping.

This model is an excellent choice if you already have a relationship with a brick-and-mortar business. If not, getting started could be challenging since many wholesale dropshippers are already online.

Type 4: Custom product creation

In custom product creation dropshipping, the retailer collaborates with suppliers to design and create unique products. 

The retailer may provide specifications, branding, or design elements, and the supplier manufactures and ships the customized products directly to customers. 

This approach allows for a more unique product offering in the market while still leveraging the dropshipping model.

Type 5: Business extensions

Business extension involves expanding a brand’s product range by partnering with suppliers who offer complementary or related products. 

For example, if a business initially sells clothing and accessories, it might extend its product line to include beauty products or home goods through collaboration with different suppliers. 

This allows retailers to diversify their offerings without managing the entire product range themselves, enhancing the overall customer experience and market presence.

Key players in the dropshipping model

Key player 1: Seller of Record

The Seller of Record is the entity responsible for facilitating the sale, managing transactions, and ensuring compliance with legal and regulatory requirements. 

In the dropshipping model, the online retailer or store owner often assumes the role of the Seller of Record. They handle customer orders, payments, and overall customer experience, even though they don’t physically handle the products. 

The Seller of Record may also manage marketing, customer service, and returns.

Key player 2: Manufacturers

Manufacturers are the entities responsible for producing the actual products. 

Manufacturers collaborate with retailers to supply products directly to customers without the retailer having to stock inventory. 

Manufacturers play a crucial role in maintaining product quality, ensuring timely production, and often dropshipping products in bulk to retailers who, in turn, fulfill individual customer orders on demand.

Key player 3: Wholesalers

Wholesalers act as intermediaries between manufacturers and retailers in the dropshipping model. They purchase products in large quantities from manufacturers and then sell smaller quantities to retailers, often at a discounted price. 

Wholesalers enable retailers to access a wide range of products without having to deal directly with multiple manufacturers. 

In dropshipping, wholesalers may be involved in the supply chain by providing products to retailers who, in turn, use the dropshipping model to fulfill orders directly to customers.

Advantages of dropshipping

If you want to make your eCommerce dream a reality, dropshipping might be the best business model for you.

Here are the benefits of dropshipping:

Low startup costs

Traditional eCommerce stores often require significant investments in stock, employees and shipping infrastructure. With dropshipping, you don’t need to purchase inventory upfront or manage a warehouse, like with other fulfillment methods.

Instead, you can start your business with a minimal initial investment. According to Business.org, you can start a dropshipping store with around $500, depending on your state. And you can save thousands of dollars by avoiding the costs of carrying inventory.

No inventory management

Your supplier will handle product creation and inventory management, including shipping and handling. Meanwhile, you can allocate your time and resources to marketing and customer service to scale your business.

Imagine you own a clothing company and need to keep various colors, sizes and styles in stock. You’d have to manage the inventory yourself or outsource to a warehouse, which can be expensive.

But with a dropshipping clothing store, the supplier would stock and ship the product. This model saves you money on shipping because there are fewer transit points. And you can pass the shipping and handling costs to the customer. 

Wide product selection

Another unique advantage of dropshipping is the flexibility to test, scrap and launch new products without paying for inventory. As a result, you can experiment with multiple niches and trends without financial risk.

For example, you can start a general store. This is like a mini-Amazon where you sell products across niches. You can test a wide variety of products to find your store’s winning items.

Another option is a niche store. Say you want to sell a face-washing device. You can create a beauty niche store around it and upsell complementary products, like makeup, brushes and cleansers. Plus, you can test other beauty products to see what interests your audience.

Flexibility and scalability

Dropshipping provides flexibility to adapt and scale your business quickly. You can easily expand or pivot your product offerings based on customer preferences or market trends.

You also can scale your business without worrying about increasing storage space or hiring additional staff. As a dropshipping entrepreneur, you can grow your business and revenue by adding new products and marketing channels.

Generally, you can scale your business horizontally by adding new ad variations, ad networks or marketing channels.

Or you can scale your business vertically by increasing the budget on existing ads or channels, allowing for more reach and higher sales.

Either way, the only major limiting factor is how much product your supplier can produce.

Disadvantages of dropshipping

Although this business model has some major advantages, there are some downsides. Here are the potential disadvantages of dropshipping.

Low profit margins

Dropshipping often results in low profit margins because of marketing and product costs.

When you start with cold ads, the algorithm needs time to target the right audience, which can be challenging and expensive.

Also, suppliers need to make a profit. Product and shipping costs can be high, especially when shipping from the USA.

To see your profit margin for a certain product, first add the costs of the product, shipping and marketing. Then subtract that number from your listing price. 

To mitigate these issues, focus on a market you know well. That can help you get a higher return on investment (ROI) on your marketing efforts and increase your profit margins. And if you can, negotiate with the supplier for lower product or shipping costs.

Inventory and supplier issues

Dropshipping businesses rely on suppliers, which introduces variables you can’t control. For example, suppliers may have production limits or require a minimum order quantity (MOQ) to fulfill orders.

Also, you don’t have full control over packaging. The product can get destroyed, not be what the customer ordered or never get to the customer. And when a customer is unsatisfied, the burden falls on you as the seller.

Working with high-quality suppliers who receive good reviews is essential to the product selection phase, which we’ll discuss later.

Limited control over shipping

When dropshipping, you have limited control over shipping times, especially when sourcing products from China. Shipping by freight can be expensive, so you’ll likely use sea shipping, which typically takes 14+ days.

That’s too long for many direct-to-consumer (DTC) websites. An Attest report found that 47% of buyers expect their DTC purchases to arrive in 3-5 days. And 22% want their packages in 6-8 days.

Two solutions to this challenge are:

1. Once you have a winning product, buy in bulk from China and rent warehouse space in the U.S. for faster shipping.
2. Source products from U.S. suppliers.

Also, be upfront about your shipping times to avoid potential customer service issues.

Customer service challenges

Dropshipping businesses may need help with customer service challenges because of shipping and product quality issues and refund requests. Long wait times, damaged or incorrect products and other unforeseen issues can lead to unhappy customers.

Consider addressing these issues preemptively before you scale your business. Once you start multiplying sales, the potential for customer service problems will increase.

Common misconceptions / myths about dropshipping

Dropshipping has gained popularity as an accessible way to start an online business, but some misconceptions persist. Here’s the truth about five misconceptions to help you understand what’s real and what’s not.

Myth: Dropshipping is a get-rich-quick scheme

As with any method to make money online, some sellers have quickly profited by making outrageous claims and promises. However, dropshipping is not a guaranteed path to instant wealth. It requires hard work, dedication and strategic planning to succeed — just like any other business.

Myth: It’s impossible to build a brand with dropshipping

Contrary to this belief, many successful dropshipping businesses have built strong brands. The key is to provide exceptional customer service and select high-quality products. Also, remember that dropshipping is just a business model, not your brand’s identity. You need to craft a unique identity to set your brand apart from the competition.

Myth: You don’t need to put in any effort

Dropshipping requires effort in areas such as product selection, marketing, customer support and supplier management. While it may be less labor-intensive than a traditional eCommerce business, you still need to invest time and energy into building and maintaining a successful business. Don’t expect to make millions on your first store with little effort.

Myth: Dropshipping guarantees high profit margins

The profit margins can be low due to supplier and marketing costs. Efficient marketing strategies, strong supplier relationships and high-quality products that resonate with your target audience are essential to achieving higher profits.

Myth: All dropshipping suppliers are reliable

Not all suppliers are equal. Working with unreliable suppliers can lead to issues with product quality, shipping times and customer satisfaction. It’s crucial to research and vet potential suppliers thoroughly to ensure they meet your standards.

Myth: No investment needed

While it’s true that inventory costs are lower compared to traditional retail models, expenses like website hosting, marketing, and product sourcing still require investment.

Myth: Dropshipping is illegal or unethical

Some people mistakenly believe that dropshipping is illegal or unethical. Dropshipping is 100% legal, and can be a legitimate business model when conducted properly, respecting legalities and ethical business practices.

Tips for successful dropshipping

Keep the following tips in mind to increase the chances of your dropshipping business succeeding.

Tip 1: Choose the right products

When starting a dropshipping business, product research can be a struggle for some. There is a tendency to overthink it or simply choose products that don’t sell.

When you’re searching for the perfect product for your dropshipping business, keep an eye out for products that:

• Solve a real problem.
• Have a “wow” factor.
• People feel passionate about.

Products that solve a problem tend to be the easiest to sell. For example, many people sit at a desk chair all day, resulting in poor posture. As a result, the dropshipping community recently had success selling a posture corrector.

This product was cheap to make and easy to ship and could sell at a decent price range of $20 to $30 plus shipping. It solves a problem, making it easy to market. Plus, it’s a product that someone could easily impulse buy.

Also, look for products with a unique twist. For example, the product below offers a “wow” factor that could cause people to buy it immediately.

This alarm clock jumps off a desk or nightstand, forcing the user to get out of bed and turn it off.

Lastly, look for products in niches that people are passionate about. Some examples include beauty, pet and garden products.

Tip 2: Select a platform with reliable, fast hosting

Your website’s loading speed and uptime can significantly impact your customer experience and your store’s conversion rate. According to Bidnamic, your website speed correlates with your conversion rate.

The study found that you can increase your conversion rate by 17% for each second you shave off your loading time.

With Bluehost’s WordPress Hosting, you can build a fast WordPress website with an eCommerce plugin. You can have full control over the design or choose from pre-built, winning eCommerce templates.

Tip 3: Find dependable suppliers

Dropshipping companies often supply products from either China or the USA. You’ll need to ensure your supplier offers high-quality products regardless of which source you choose.

Here are some common websites to explore third-party suppliers:

• Alibaba (China and USA).
• AliExpress (China).
• Spocket (USA).

Look for shippers with solid reviews, fast shipping times and quick response times. Once you’ve made your choice, contact your supplier and build a relationship. You will be business partners, after all.

And because it’s mutually beneficial, you can often negotiate prices on product cost at scale.

Tip 4: Create an appealing online store

When building an online store that converts visitors into customers, you’ll need to optimize these factors:

First, you need to ensure your brand aesthetic matches the products you offer. For example, a beauty store benefits from colors like white, light pink or light orange.

Conversely, a sleep store benefits from soothing shades of blue, purple and white.

Next, focus on positioning your products as the go-to, best-in-class options available. Because many sellers use the same supply chain, your marketing and positioning must differentiate your brand. Maybe it’s your brand story or a unique marketing angle — find a way to stand out.

Pro tip: Highlight the benefits, not the features, on your product pages. If you’re selling a posture corrector, don’t say it will straighten their back. Focus on how the customer will feel more confident once they achieve perfect posture. This distinction separates good copywriting from great copywriting.

Tip 5: Craft effective marketing strategies

Your marketing strategies will make or break your business. They will set your brand apart from the competition while driving targeted traffic. And when done properly, they can help you scale to extraordinary heights.

First, choose an ad platform: TikTok, Facebook/Instagram or Google. This choice depends on your target audience. Try to guess where they spend the most time and where they’d most likely purchase.

Each platform has different formats. For TikTok, you likely need to film yourself or an actor with the products. However, you simply need text for Google.

As for filming or designing the ads, you want to hone in on the first two seconds.

In essence, the first two seconds should communicate why the viewer should stop and watch your ad.

In essence, the first two seconds should communicate why the viewer should stop and watch your ad.

It could be a surprising benefit or fact, a compelling visual or an intriguing question.

Finally, focus on your ad’s copywriting, including the script for your video and the text that goes along with it. Your copy should be clear and concise and invoke an emotional response.

Final thoughts: What is dropshipping, & how does it work?

Dropshipping offers aspiring online entrepreneurs a unique and enticing business model. It eliminates many of the traditional barriers to entry, like inventory and shipping costs. That allows you to focus on building your brand, connecting with customers and finding the best products possible.

To succeed in your new dropshipping venture, a reliable and efficient online store platform is essential.

Bluehost provides an all-in-one WordPress website-building solution for your online store that integrates with popular dropshipping apps and plugins, like WooCommerce. With Bluehost, you can launch your dropshipping business and grow it to new heights with reliable, fast hosting.

Learn about our web hosting products, including WooCommerce hosting, today.

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