What is dropshipping?

If the opportunities of the eCommerce business world excite you, but you’d rather focus exclusively on the sales process, starting your own dropshipping business may be the right path for you.

Dropshipping businesses worldwide are expected to create a market worth £159 billion in 2024 and reach around £1,000 billion by 2030. Research also reveals that 30% of eCommerce businesses rely on dropshipping for order fulfilment. 

In the UK, dropshipping companies are also thriving. But to start a dropshipping business, you’ll need to know the ins and outs of this specific market. 

In the following sections, we cover:

• What is dropshipping?
• How does the dropshipping process work?
• What are the benefits and disadvantages of dropshipping? 
• What are the main challenges associated with dropshipping services?
• Is this model right for you, and should you start dropshipping?

Here’s everything you need to know.

What is dropshipping?

Dropshipping represents an order fulfilment model that enables a business owner to outsource various business steps to a drop-shipper.

This model allows you to sell products online without production, storage, packaging, inventory management, or shipping to customers. 

Rather than handling all of the components mentioned above when running a business, a store owner can work with dropshipping suppliers. It is a popular business model as it enables quick growth and scalability while guaranteeing less incremental work. 

In short, a dropshipping service helps you to successfully run an e-commerce store and sell online without worrying about managing inventory.

How does dropshipping work?

It’s essential to examine the workings thoroughly to understand how dropshipping operation models work. 

Dropshipping can take many different forms, based on the dropshipping agreement contract signed between the involved parties.

However, in most cases, the process includes:

• A seller signs an agreement with a selected drop shipper or third-party supplier;
• A customer places an order online via a dropshipping store;
• Once the customer orders online, the seller receives data on all placed customer orders;
• The customer is sent an order confirmation from the online store; 
• The online store (in this case, the seller) sends the placed orders to the dropshipping supplier;
• The dropshipper ships the products to the customer;
• The customer receives the ordered products. 

While this process is popular, it doesn’t mean that your dropshipping model must strictly follow these steps. 

The phases of running a dropshipping business can be negotiated between the involved parties, the seller, and single or multiple suppliers. 

There are three key types of dropshipping partners involved in the process:

• The seller (your business) – the brand or business that sells the products to the end consumer. This party is responsible for choosing what items to sell, establishing a sales price, recording revenue from purchases, and paying sales tax or other surcharges based on earnings; 
• Manufacturers – the party responsible for producing and selling products to wholesalers and eCommerce retail partners. Manufacturers usually sell in bulk and often work with minimum purchase quantities;
• Wholesalers – in the traditional supply chain world, wholesalers purchase from manufacturers and re-sell to retailers (acting as middlemen) with an added margin. A lot of wholesalers also offer dropshipping services to retailers.  

This breakdown demonstrates that manufacturers or wholesalers don’t sell directly to the final consumer. However, many sellers choose drop shipping to avoid paying for storage space and handling product deliveries.

Pros and cons of dropshipping

Like any other business model, dropshipping goes hand in hand with various pros and cons worth considering. 

Benefits of dropshipping

The dropshipping model has many benefits, which is why this business format is so popular today.  

Below, we offer an overview of the main advantages of this business format.

An affordable and easy start 

One of the most attractive reasons to look for an eCommerce website builder based on to create a profitable business without significant initial investments. 

The classic approach to operating an online store involves purchasing inventory, which leads to spending a significant amount of money that could otherwise be spent on growing your business. 

Even if online businesses don’t require investing in a physical store, you still need to own the products you’ll sell to consumers. 

With drop shipping, sellers aren’t obliged to purchase the product before selling it. Sometimes, the seller will buy the item and ship it to the customer once the sale is placed. However, some agreements exclude this step from the process, where the supplier handles the shipping process. 

It makes dropshipping an affordable, low-risk venture. 

In addition, the process is straightforward when compared to traditional business models. This predominantly stems from the fact that you won’t be in charge of physical products and everything associated with their management. 

Otherwise, as a seller, you won’t have to worry about investing in warehouse space, packing orders and shipping them to customers, monitoring inventory, handling returns, and controlling stock levels. 

It helps sellers achieve dramatic savings that would otherwise have to be spent on employees, technology, and other resources. 

Minimal overhead costs

The elimination of purchasing inventory from the equation or handling fulfilment centres also means that overhead costs are minimised. 

Most dropshipping businesses operate as home-based projects, requiring only a laptop with an Internet connection and a dedicated business owner. 

If you plan to grow and develop your dropshipping business, chances are that overhead costs will increase in the future. Even then, they’ll be much less than the ones associated with running a traditional business. 

Flexibility

As noted above, a dropshipping business isn’t limited by location. It creates an attractive flexibility that is tempting for most business enthusiasts. 

The model allows you to work from anywhere as long as you have a stable connection and can communicate successfully with your suppliers. 

With this flexible model, the only thing to worry about regarding location is any time differences between you and your suppliers.

However, these can easily be avoided with organisational skills and transparent communication.

Bigger selection of products to offer

Another great advantage of starting a dropshipping business is that you don’t have to limit your online store’s offering to a few products.

You can experiment with a wider selection because you won’t have to invest in them. It helps you achieve two essential things.

First, you can attract a wider audience. An online diverse product catalogue lets you cater to different buyer groups, ultimately generating more sales. 

Second, you can quickly grow in popularity as you won’t have to focus on a single niche at a time. Unsold inventory won’t be a challenge to think about, giving you the freedom to introduce new items on your online store.

Market research opportunities 

Running a dropshipping business is also advantageous for less experienced business enthusiasts or those looking to test new markets. 

Running a successful business often requires a lot of trial and error, especially if you’re starting from scratch and competing against well-established companies. 

This affordability model enables sellers to launch new dropshipping stores and test how consumers respond to specific products, themes, or categories. 

While dropshipping doesn’t require you to invest in purchasing inventory, it does provide access to the most critical type of data – consumer data.

With adequate eCommerce tools, you can track sales trends, consumer behaviour, and other components that will reveal valuable insights about the market.

This information can help you confidently establish profitable businesses in the future.

Scalability 

With dropshipping, scalability becomes more accessible than ever. 

In a traditional business model, scaling is usually associated with investing more in hiring new employees, improving your existing systems, and purchasing more inventory. 

On the other hand, the dropshipping business makes scaling affordable and seamless. You can entirely rely on dropshipping suppliers to handle a large portion of the tasks associated with business growth. 

This rewards you as a seller with the time and resources to invest in what matters most – attracting customers and generating sales. 

Disadvantages of dropshipping

Contrary to popular belief, dropshipping isn’t simply a get-rich-quick scheme. 

Although the benefits of dropshipping make this business model lucrative for most, there are certain disadvantages that you must be familiar with. 

Understanding the drawbacks of operating a dropshipping business will enable you to plan in advance and implement preventative practices that will help you maximise performance.

Limited profit margins 

While dropshipping provides exciting opportunities to start a business with a small investment, the business model is associated with its low-profit margins. 

Many new dropshipping businesses sell products at very low prices with tiny margins to quickly gain popularity and achieve a competitive edge. This approach attempts to achieve quick revenue growth. 

The fact that the initial investments are so low makes this an affordable option for sellers. 

However, it’s worth noting that these practices are often employed by less experienced sellers who don’t stand out with quality websites and outstanding customer service. This is one way to establish the differences between a successful dropshipping business and others. 

At the same time, end consumers will still compare your prices with theirs. This potentially creates a challenge for you as you’ll have to compete with others who are using their methods to bring down prices and profit margins for all. 

The good news is that these scenarios can be avoided by selecting the appropriate products and a niche suitable for the dropshipping business model.

Limited control 

Limited control in dropshipping could refer to many different parts of the business process.

It includes the following:

• Product quality;
• Shipping and deliveries;
• Packaging;
• Customer experience, and more. 

We dive into more detail on some of these limitations in the following sections.

Inventory challenges 

The fact that you’re outsourcing inventory management to a third-party supplier means that you won’t be able to manage inventory and control things like restocking. 

Put otherwise, there’s no way to guarantee that suppliers will have the purchased products available in your warehouses. 

This can potentially create risks associated with timely deliveries.

For example, if a customer purchases a product from your online store, you immediately send the order information to your supplier. However, in response, they inform you that they don’t have this specific product in stock.

In most cases, the consumer will hold you responsible for not being able to meet customer expectations. 

This could damage your brand reputation, negatively impact your loyal customer relationships, and cause losses for your business. 

To prevent this from happening, it’s fundamental to be completely synced with your existing suppliers. It can be achieved via a range of different software solutions and apps. 

Shipping problems

Working with more than one supplier is a common practice for drop shippers. This approach provides more flexibility and creates a wide range of growth opportunities.

However, it also means that your business is exposed to vulnerabilities associated with the supply chain.

Imagine a consumer buying four different products from your eCommerce store. These items are provided by different suppliers that you’ve partnered with.

In this case, you’ll need to send four separate orders to your suppliers, accumulating four shipping costs for each item. 

This situation creates two main challenges.

First, you could end up paying substantial shipping fees yourself to avoid increasing the price for your customer. If you decide to ask the consumer to pay for all of this shipping, you risk losing your competitive edge.

Second, monitoring and automating this process is extremely difficult, leading to internal complexities that can slow down overall business processes. 

Supplier errors

When working with external suppliers, you are inevitably exposed to supplier errors that are out of your control.

Even if you select your suppliers with precision and attention to detail, there are no guarantees that mistakes won’t occur. 

In dropshipping, you must understand that you are the connecting point between the end consumer and the supplier. In other words, if a supplier makes an error, you will be responsible for apologising to the consumer, communicating with them, explaining the situation, and offering a solution.

Some of the most common supplier errors include missing products from shipments, low-quality deliveries, packaging problems, and others. 

It’s worth considering these potential errors in advance and making strategic decisions on how you can tackle the situation in front of your customers.

Lack of control over branding

Alongside other challenges, the limitations regarding branding are also worth considering.

If you operate a dropshipping eCommerce shop, you won’t be able to offer personalised print-on-demand items, custom-made products, and branded goods. 

Some suppliers make exceptions and offer some of these features to drop shippers. However, in the majority of cases, the products that your customers can purchase are pre-made and ready to be shipped.

Timelines

As noted above, dropshipping goes hand in hand with a lack of control.

It is also essential to understand fulfilment timelines. 

If a dropshipping service manages fulfilment processes, you won’t be able to influence or improve order selection, packaging, and shipping times. 

This can sometimes mean your customers will receive their orders later than expected.

Inability to manage the customer experience 

Last but not least, the drawbacks mentioned above ultimately lead to one core challenge – the inability to manage the customer experience.

Customer experience is one of the most significant factors dictating the performance of any business. 

Happy customers are not only more likely to come back and repurchase items from your online store. They’re also inclined to refer your eCommerce store to their friends and family, enabling you to reach more potential customers. 

With this in mind, it’s essential to develop reliable solutions to this core challenge to make dropshipping profitable.

Is dropshipping right for you?

Understanding all of the above, it’s natural that one key question arises – is dropshipping a suitable option for you?

The right answer depends entirely on your expectations, requirements, and goals. 

When answering this question, it’s key to address all the benefits and drawbacks of running a dropshipping business. 

If you’re looking to experiment with different products and niches to find profitable opportunities, this business type is a great fit. 

It’s also suitable for those great at attracting online traffic and reaching consumers but would rather avoid all other business components (including inventory management, shipping, packaging, and others).

On the other hand, dropshipping might be more challenging if you’re a business owner enthusiastic about creating a personalised brand with custom-made offerings and full control over processes.

What to consider when starting a dropshipping business model?

There are many things to consider before starting your dropshipping business. Here are the most crucial factors you should not neglect.

Which is the best eCommerce payment solution?

The best eCommerce payment solution for you as a merchant will ultimately depend on your expectations, requirements, and the nature of your business. 

To make the right choice, make sure that you’re fully aware of your business and the payment solution features that are essential for day-to-day operations. 

Also, gain as much information as possible on the costs involved in implementing and using the eCommerce payment solution. Ensure that the product is within your budget. 

Some of the best solutions to research include:

• PayPal
• Stripe
• Braintree
• Venmo

And others. 

Potential suppliers to partner with

Among other important decisions on your journey to a profitable dropshipping business, choosing suppliers is vital. 

Considering that your suppliers will control most business processes, it’s fundamental that you partner with third parties that you can fully rely on.

One approach to finding suppliers is to explore a supplier database and evaluate potential options. 

Alternatively, you could rely on other drop shippers willing to share information on their suppliers. This is especially useful if you can trust your competitors, as they can suggest partners they’ve already tested. 

Another way to source suppliers is by using specific apps dedicated to the purpose. 

When making your choice, don’t forget to gain information on:

• Practices on processing customer returns – figure out how suppliers handle customer service and make sure their practices meet your expectations and requirements;
• How long does the journey from sale to delivery take – will customers have to wait for days to receive their orders;
• What customer support tools do they use, and are they reliable – a well-organised customer support system indicates that customer satisfaction is likely to be higher, leading to repeat purchases;
• Are orders insured – this could protect both you and your shoppers in the short and long term;
• Can the supplier provide any fraud protection mechanisms – safety and security are key factors for customer satisfaction but can also be essential for your business as a seller;
• Are they reputable – are there any online reviews that you can find on the supplier and how positive are they?

Collecting and analysing this data will enable you to make informed decisions.

The costs involved 

Above, we mentioned that the costs involved in running a dropshipping business are far less than those related to traditional models.

Yet, they are something to consider before getting started. 

Some of the common costs to research include:

• Website setup and maintenance; 
• eCommerce tools to grow your online shop;
• Marketing and advertising campaigns to attract online traffic and customers; 
• Supplier fees;
• Taxes and legal compliance; 

These costs can vary dramatically based on your supplier agreements and your business structure.

Dropshipping legal requirements and limitations 

Ensure you inform yourself of the legal requirements and potential limitations specific to the dropshipping industry. 

As you’ll be working with suppliers, it’s also essential to understand their regulations when choosing your partners.

For example, some suppliers might use another company’s intellectual property (like logos or other assets) without gaining permission. This could potentially cause legal conflicts for your business as well, depending on how you advertise the supplier’s products. 

If this business model doesn’t meet your expectations, keep in mind that there are plenty of dropshipping alternatives to explore. Some popular options include affiliate marketing, private labelling, and print-on-demand items.

Conclusion 

While dropshipping can be extremely rewarding, it can also create a range of different challenges for sellers. 

We hope that this article will help you understand in detail what is dropshipping and whether this business form is the right fit for you.

Frequently Asked Questions

What are the main challenges of running a dropshipping business today?

The main challenges of running a dropshipping business are related to limited control. For example, as a seller, you won’t be able to control delivery times, packing schedules, product quality, and other vital components determining how satisfied your customers will be.

Is dropshipping legal?

Yes, dropshipping is legal. Most retail stores in the UK and other countries rely on dropshipping methods, as few of them sell products they manufacture in-house. The dropshipping business implements this approach to the online space, turning it into a lucrative opportunity for business enthusiasts.

Is dropshipping profitable?

Yes, dropshipping can be a profitable business model. However, this depends on many factors, such as your business structure, choice of supplies, profit margins, and more.