What is Dropshipping (Dropshipping Meaning) & How Does it Work? 

June 28, 2024
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13 Minutes
Modified on:
June 28, 2024
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Written by:
Swati Bucha
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You may have heard of dropshipping multiple times, but do you wish to know its more profound meaning for business purposes? Then this extensive guide is for you. Dropshipping is a popular yet simple way to start an online business. It works on a process that eliminates common retail challenges, like buying, storing, and shipping inventory.

When a dropshipping store makes a sale, it forwards the order to a specific supplier, who then handles delivery to the customer. This lets the store owner focus on other tasks, such as branding and marketing.

Let’s learn more about what is dropshipping, how it works, and how to get started with this business. 

What is a Dropshipping Business?

Source

Dropshipping is an efficient order fulfillment alternative that allows eCommerce businesses to outsource some of their processes to prioritize important tasks. A few of the outsourced activities include procuring, storing, and shipping products to a third party, usually a supplier.

Dropshipping is a fulfillment model that appeals to entrepreneurs seeking efficiency and low overhead costs. However, it also comes at a price, especially when it comes to customer experience. Nevertheless, its business model is built to help you promote your products by successfully providing an online storefront. When a customer places an order, you send it to the drop shipper and then inform the customer that the products are on the way.

Dropshipping is usually suitable for entrepreneurs who want to sell generic products. Yet, the process may limit opportunities to build an effective brand and differentiate products. Businesses that use dropshipping methods may also end up competing on price, which leads to lower margins.

How Does the Dropshipping Process Work?

The logistics of dropshipping usually depend on your business arrangement. However, the dropshipping process follows this common sequence in most situations:

Step 1. Partner with a Dropshipping Supplier

Try finding a dropshipping supplier that offers the specific products you want to sell to your customers. Make sure to sign an agreement with these suppliers, who will handle the storage, packaging, and shipping of your customer purchases.

You could even partner with an individual business in your respective niche. Alternatively, you may try using a dropshipping app to sell your products from multiple suppliers.

Step 2. Set Up an Online Store

Next, create your online store for the dropshipping business. This store will list all products from your supplier at the specific price you decide.

You may also add a dropshipping app to your store to keep your product listings updated. It also enables you to forward orders to suppliers automatically.

Step 3. Receive a Customer Order

The checkout process in dropshipping happens when a customer visits your store and places an order. The customer then pays, receives an order confirmation, and awaits delivery of their desired products.

Step 4. Forward the Order to the Supplier

Once your customer pays for the order, send the order details to your dropshipping partner or supplier. If you have a dropshipping app, this step will be automated.

Step 5. Supplier Prepares and Ships Your Product

The dropshipping supplier prepares the order accordingly and ships it directly to your intended customer. Several suppliers also offer brand invoices and custom packaging to enhance customers' shopping experiences. 

Step 6. Customer Receives the Product

The customer receives their product from the dropshipping supplier. Meanwhile, your online store handles any customer service needs that may arise in the future.

So, in short, your role in the dropshipping business would be to gather leads, convert leads into clients, collect customer orders, and forward the order to the supplier. The supplier will handle the delivery and everything else. 

Key Players in Dropshipping 

Now that you know what is dropshipping business, let us highlight some of the key players and their roles. This will help you determine which dropshipping providers could be right for the business based on your fulfillment requirements and business model.

1. Seller of Record

The dropshipping process starts with the seller. Often termed the seller of record (SoR), the main entity sells the product to the end consumer. They have the authority to set the price, record the purchase as revenue, and assume responsibility for the sales tax on any sale.

The seller of record continues to work even when a third party stocks and ships the items because the seller owns the products before they are shipped to the customer.

2. Manufacturers

Manufacturers make products to sell to wholesalers and retailers. All interested online brands can purchase goods from their partner manufacturers. However, the bulk purchase amounts required by these manufacturers may create issues when starting or scaling your business. That is why several manufacturers offer dropshipping services themselves to resolve this issue.

3. Wholesalers

These entities buy products from manufacturers and sell them to retailers at a slightly higher price in a product supply chain. Wholesalers often act as middlemen because they do not sell the products to the end consumers. However, they may provide dropshipping services to different retailers.

Pros and Cons of Dropshipping Business

Every product delivery approach has advantages and disadvantages if you are working with an eCommerce business. Here are potential pros and cons to consider when deciding whether dropshipping is right for your business.

Pros of Dropshipping

  • Overhead Costs: Dropshipping has the potential to lower overhead costs because you do not store or ship the products yourself. Most of the work, such as maintaining a storage facility or sending products to customers, is managed by the drop shippers.
  • Starting Costs: Entrepreneurs who wish to own a business with minimal investment may choose dropshipping. This is because they do not have to invest in facilities or resources to process their orders.
  • Reduced Risk: If you work with a dropshipping business, you do not have to pay for inventory. Hence, there is less risk of losing money due to unsold merchandise or over-ordering products.
  • Multi-channel Selling: You can use dropshipping for your online business while selling on your domain. You can do this at your convenience with the help of eCommerce platforms or social media channels.
  • Operating Location: Dropshipping enables you to fulfill orders regardless of your location. This allows you to work from anywhere and at any time.
  • Scalability: Leveraging suppliers through dropshipping can make it feasible for you to accept more orders without increasing the inventory you store, package, and ship over time.
  • Multiple Products: Depending on your agreement with the drop shippers, there may be no need to pre-purchase inventory. Hence, you can sell several items and increase your earning potential.
  • Flexibility: If you are unsure what products to sell, dropshipping allows you to test different products. This enables you to see what sells best without risking your investment.

Cons of Dropshipping

  • Competition: Dropshipping can be a highly competitive field due to the low cost and investment needed to start.
  • Product Quality: Dropshipping often reduces your involvement in the order fulfillment process. Hence, you may be unable to monitor and guarantee product quality to your customers.
  • Branding: The products you sell may not be distinguishable from similar offerings by other sellers. This could make it difficult to differentiate your brand.
  • Profit Margins: Your business may end up competing more aggressively on price due to a lack of product differentiation. Selling at low prices can diminish your profit margin.
  • Fulfillment Timeline: If a dropshipping service handles the fulfillment process, you do not have control over order selection, packaging, and shipment.
  • Inventory Management: You may not be able to get real-time updates on product availability. For example, a customer may place an order only to find that their desired product is out of stock, leading to a poor customer experience.
  • Supplier Errors: Low-quality drop shippers may make several mistakes, especially when fulfilling customer orders for your products. This could lead to poor packaging and even missing items.

Handling Your Dropshipping Business with Neo

Managing a dropshipping business can present several challenges, such as inventory management, order fulfillment, and customer service. However, the right platforms and strategies can streamline your operations and enhance efficiency. Email marketing is one channel where you can gather your leads through strategic email campaigns or cold emails

Since dropshipping is a small business, Neo is designed to empower such businesses. It is an all-in-one platform that offers business email management and hosting, web hosting, and domain name registration—all at cost-effective rates starting from $1.99/user/month. 

It offers a .co.site domain extension, and you can register your custom domain for free if you purchase the annual plan. It provides one-page website development and deployment complementary to all its plans. The best part? The Neo email address will serve as a link for your one-page website. 

One such efficient platform is Neo, which offers several advanced features to handle your dropshipping business. These include:

  1. Business Email Management 

Neo offers you a business email address that you can use instantly after signing up. This helps add credibility to your dropshipping business and enhances its online presence, making more customers likely to choose your business for their orders. The business email offers 100 GB of storage space, 100% uptime, and 24/7 customer support.

Besides, you get a ton of business email management tools, like Read Receipts, Priority Inbox, Turbo Search, Email Rules, and much more to simplify inbox management. Besides, you can set up email aliases, like customersupport@yourbusiness.co.site, so that your customers can directly send their queries to you. 

  1. Growth Suite

This email and marketing suite offered by Neo offers several features beneficial for your dropshipping business. It includes an in-built calendar synced with your email address to track your product shipping process. The suite also offers a free one-page website to inform customers about your business and products. Additionally, it includes email marketing to send emails to multiple people and track message openings, and meeting booking options to schedule discussions with your dropshippers.

  1. Top-Notch and Robust Security Protocols

Neo is built like a vault. It enables data encryption to keep your customers' details safe and secure. Neo also has a two-factor authentication policy to prevent hackers from attacking your business website. Moreover, the platform has advanced antivirus and antispam measures to ensure your products and customer details remain secure.

Wrapping up,

Success in a dropshipping business depends on various factors. These may relate to the niche you choose, the quality of your suppliers, your marketing strategies, and your ability to provide excellent customer service. There is no denying that dropshipping helps streamline your business operations efficiently. However, you must also be aware of its cons so you can identify areas for improvement and work on them accordingly.

Neo can help you with this process by providing advanced features to handle your dropshipping business efficiently. This platform will allow you to streamline your operations in a way that saves time, reduces errors, and improves efficiency.

Frequently Asked Questions

1. What is dropshipping actually about?

Dropshipping is a process where a vendor fulfills orders from a third party and ships the products directly to the customer. In other words, the vendor passes the sales order to the supplier, who then fulfills the order for the intended customers.

2. What are the legal requirements for dropshipping?

You need to consider several legal aspects when starting a dropshipping business, including:

  • Acquiring a Business License
  • Paying Your Taxes
  • Getting Business Insurance
  • Not Infringing Copyrights
  • Focusing on Branding
  • Keeping Marketing Materials Truthful
  • Choosing Only Good Suppliers

3. Is dropshipping a risk?

No, dropshipping is a legitimate business model. However, there can be issues, such as encountering scammers, including dropshipping agents and suppliers. Even savvy dropshippers may sometimes be fooled. This is the primary risk associated with dropshipping.

4. Can I make money with dropshipping?

Yes, you can make a lot of money with a dropshipping business. Although such businesses traditionally have low margins, there is a significant opportunity to create a profitable business over time. It is crucial to understand the difference between markup and margin when pricing your products.

5. Can I start a dropshipping business without a bank account?

Unfortunately, you cannot start a dropshipping business without a valid bank account. You need to pay the supplier for the products after a customer places an order. Most importantly, a bank account is necessary to receive the money when the customer pays for your product.

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