How Dropshipping Works

What is Dropshipping?

Dropshipping is similar to owning a store and selling products to customers, however rather than buying products to sell to customers, you ship products to customer as and when they pay for them. Let’s say, for example, a customer purchases a candle from you. Rather than having already bought candles to store and ship out to customers, you’d list a selection of candles a wholesaler has in stock and, when a customer purchases a candle, you would contact the wholesaler and have that candle delivered directly to them. That way, you do not have to store products and thus will not need to pay for a place to store them.

To a customer, purchasing from a dropshipping store would feel exactly the same as buying from anywhere else – in actual fact, you have probably purchased from a number of dropshipping stores without having even known! Let’s say, for example, Richard is looking to buy a new phone-holder for his car. He visits AwesomeCarMerch.com and finds a great looking holder, so places the order. Little does Richard know, AwesomeCarMerch.com does not actually have any phoneholders in its stock – it places an order from BestPhoneAccessories.com who then ship Richard’s phone-holder directly to him. Richard pays for a product and receives it as normal, however he is not aware that AwesomeCarMerch.com did not actually send the product to him, they simply processed his order and had it shipped from elsewhere.

The retailer is the middleman in this equation. Orders will be placed through the retailer’s online store, and the wholesaler will ship their products bought in bulk to thousands of retailers and their customers. To better understand how this process works, as well as the many components that make it flow, we’ll take a look at the ‘supply chain’.

The Supply Chain

To fully understand dropshipping it is important to have a grasp on the supply chain. The supply chain is simply the journey a product takes from it being manufactured right until it reaches a customer. There a number of steps in this process you’ll need to be aware of.

  1. Firstly, the product is manufactured. This just means the product is made – it is transformed from raw materials into an item with a function. It would be cheapest to purchase products directly from manufacturers, however this is often difficult to do so as many manufacturers have minimum sale requirements and will not ship directly to customers. That’s where a wholesaler comes in.
  2. Wholesalers purchase products from manufacturers in bulk. These will be stored in large warehouses that typically house a whole range of products. Wholesalers will sell at an increased price so as to make profit, hence why it is significantly cheaper to purchase from manufacturers themselves. Many wholesalers will only sell to retailers and not to the general public.
  3. Which is exactly where you, the retailer, are added to the equation. As a dropshipper, you will purchase products from a manufacturer(s) to be shipped directly to customers. You will only need to purchase these as they are sold to customers and so any money made from these sales will be used to order products so you will never be out of pocket. The most common way to sell products is through an online store – we’ll come to how to setup your store later.

The Process of Dropshipping

So how exactly does the whole dropshipping process map out? Well,

  1. Firstly a customer will place an order through your online store. Once setup properly, this purchase will send a confirmation email straight to their inbox telling them when to expect their order and their order reference number. Their payment will automatically be transferred to the store’s (likely your) bank account
  2. You, the retailer, will then need to place an order with your chosen wholesaler. This could be as simple as forwarding the customer’s confirmation email to the wholesaler. You will then be charged for the cost of the product and any additional shipping and processing fees.
  3. Assuming the product is in stock and all payments were successful, the wholesaler will ship the product directly to the customer and send you an email with your invoice and tracking number.
  4. This information will then be emailed to the customer from you and, so long as all goes well, a profit will be made for the order. Your profit is the difference between the customer’s payment and your payment to the wholesaler.

Fees You’ll Need to Pay

It is important to bear in mind that there are a number of fees you’ll need to pay as a retailer. Many wholesalers require per-order fees. These are the costs of packaging and shipping you’ll need to pay for for each order.

Minimum order fees may also be required for your first order. Wholesalers often ask for these to filter out shopper that will likely not bring any business and are only planning to make one-off orders. This typically would not be an issue, however oftentimes your first order cost will fall below the minimum order requirement a wholesaler has. In this case, it’s often best to pay the minimum order fee as a way of establishing a deal with a wholesaler. That way you can freely make orders in the future without any minimum order complications.

So that, in a nutshell, is dropshipping. It’s a simple process that’s easy to startup and can be done from anywhere in the world with internet connection. It’s also a great way for people hoping to start a business that have little expertise to get the ball rolling. In the next article, we’ll discuss how to find a dropshipping product that will sell.

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