How Does Dropshipping Work – A Beginners Guide

What if you could start a thriving e-commerce business with little to no money at all?

As more people look to start their own businesses, e-commerce has become really appealing because the cost to get started is extremely low compared to traditional brick and mortar retail businesses.

So instead of having to commit to investing hundreds of thousands, or even millions of dollars in startup costs, you can start an e-commerce business for a few hundred or a few thousand dollars, which is a massive difference.

Not only that, the time it takes to get up and running can take months or even years for a traditional retail business, versus just a few days to get started with e-commerce.

With that said, there’s even a type of e-commerce that even easier, less expensive and quicker to set up…

…and that’s Dropshipping.

But how does dropshipping work?

Before we get there, let's start with a definition of dropshipping.

Dropshipping Definition

At its basic level, dropshipping means you're selling suppliers products on your own e-commerce site while the supplier packs and ships your orders directly to your customers.

When the item arrives to your customer, the package looks as though it was shipped by you and not your supplier.

All of this happens without you having to touch a single product that you sell.

Traditional E-commerce vs Dropshipping E-commerce

So, what’s the difference between traditional e-commerce and Dropshipping e-commerce? 

Traditional E-commerce:

With Traditional e-commerce, you’ll typically have to purchase inventory to have on hand so that it’s ready to ship out once your customer orders from you.

That means you have to have a place to store it, whether at home or in a warehouse of some sort. 

If you have to store your products in a warehouse, that will come with additional expenses, such as storage fees and possible handling fees and even additional shipping fees.

Then you’ll still need to package and ship out the inventory yourself.

If you send your inventory to a fulfillment house that will store, package and ship on your behalf, that option carries additional costs as well.

On top of that, you’ll need to keep up with inventory levels and re-ordering early enough to make sure you don’t run out of stock.

While there are a lot of other factors you need to keep in mind, those are some top-level items you’ll need to worry about when it comes to knowing how much money you’ll need to invest in up-front. 

It’s not uncommon to have to invest several thousand dollars to tens-of-thousands of dollars in inventory…

…and you don’t even know if your products will sell yet or not, which is a big risk in itself.

Dropshipping E-commerce:

On the other hand, with dropshipping, you never need to worry about having any inventory, which means:

• No products to store…
• Never have to package anything up…
• Never have to ship anything out…

And best of all:

• No money out of pocket to buy products!

You only make your product purchases once your customer pays you first, then you’re dropshipping supplier handles all of the fulfillment from there, making the entire process hands-free for you.

That also means you never risk trying to sell products nobody wants, so you avoid having dead inventory as well.

That’s a huge advantage!

This means you can focus more on marketing and growing your e-commerce store and less on running everything.

Now that we’ve covered those differences, let’s take a deeper dive into understanding more about answering the question “how does dropshipping work?”.

How Does Dropshipping Work?

In a nutshell, drop shipping works like this:

You open up an e-commerce store and fill it with the products you wish to sell from vendors and suppliers who will allow you to sell their products, while they fulfill them on your behalf.

They store all inventory, then package, ship and send you the tracking information when you place your order with them.

You only pay your supplier once your customer places their order and pays you.

Now that you understand more about how does dropshipping work, let's dive more into the benefits.

Little to No Capital is Needed

As we touched on above, the capital needed to start a Dropshipping business is greatly reduced, and this is a prime benefit that draws many entrepreneurs into the e-commerce industry.     

It's not uncommon for people to start their online store from home since you don’t actually need an office or inventory storage space.

In fact, you can get started with your own dropshipping business for under $100 per month:

1. Domain Name: $10 per year
2. E-commerce Platform: Shopify – $29 per month on Basic Shopify (after a free 14-day trial).
3. Automation App: Dropified – Check out our current dropshipping plans, and then try a free trial.

Seriously, less than $150 per month.

No capital spent on inventory, storage or shipping.

However, there are various other reasons to get into the drop shipping game.

Access to a Bigger Selection of Products

Since you don't have to purchase products in advance, you can offer a wider selection of items to customers.

All you have to do is partner with the dropshippers that deliver the products you want to offer.

The Risk is Minimal

Warehouses and storefronts require big investments, and since it's a physical property, they can sometimes be damaged by fires, bad weather, vandalism, and other factors.

When this happens, the amount of revenue from damaged property, inventory and downtime can be substantial. In order to protect yourself from these issues, you’ll need to have insurance as well, which is yet another cost of doing business in retail.

However, with dropshipping, this type of risk is reduced or almost nonexistent since you don't have any inventory or retail property to protect.

Operate Your Store from Anywhere

Since you can run your dropshipping store online, you don’t need much to run it.

No retail locations to worry about, no storage facilities, no products, no boxes, no shipping, no labels. Nothing.

All you need is your computer and internet access, and you can run your business from anywhere in the world.

It Offers Flexible Scalability

Unlike with warehouses and retail shops, you can easily scale your business up or down based on the demands of your customers. 

For example, during the holidays, you can easily scale up to meet higher sales volumes, so long as your current suppliers can keep up with your sales volume needs.

Profit Margins For Dropshipping Businesses

Your profit margin will depend on the types of products you're selling. If you decide to go with expensive electronics, then you can earn around 5% to 10%.

However, for the lower-priced accessories, you can see margins in the hundreds of percents.

On average, gross margins are around 15% to 20%.

Where Do You Find Customers?

You’ll treat your dropshipping business just as you would a regular online store or physical business.

That means advertising it, whether through mail, referrals, online ad platforms like Facebook and Google and more. You can even drive sales through platforms and websites like eBay, Amazon, Etsy and more.

Finding Drop Shipping Companies

There are various ways you can find dropship suppliers for your store. Let's review some of them.

Directories

You can subscribe to a directory for drop Shipping suppliers. Many of these are available online. However, keep in mind that these are typically lower quality entities that don't provide much value.

But you may find some gems in there, so it's definitely worth checking out. Typically, you'll find thousands of suppliers worldwide.

Manufacturers

Another option is to reach out directly to the manufacturer. If you have an idea of the product you want to sell, then find the contact details for the manufacturers.

Then they can direct you to authorized distributors that may offer dropshipping services.

AliExpress

This is the most popular place to find dropshipping suppliers for those getting started, because they have thousands of vendors to choose from and millions of products to sell.

As a result, they are really easy to work with and integrate with. However, being based primarily in China, the shipping time to reach your customers are really long.

Google Search

It's not easy finding wholesale dropshippers, since they don't really market their services well. You'll likely end up sifting through pages and pages of results before you find legitimate options.

What Are the Requirements for Working with Dropshippers?

In the U.S. you can't do business with a dropshipper unless you're an established business with an Employer Identification Number (EIN).

An EIN is free to apply for and acts as a “social security number” for your business, and you’ll use it to file your taxes for your business. 

It's not difficult to build a legal business structure, and in most cases, you'll only spend a few hundred dollars to get everything set up. Many times your CPA can help you set this up the right way.

Outside of that, different suppliers may have different requirements in order to work with them, so you’ll have to review each one carefully to see how they work with dropshippers.

Sites like AliExpress are extremely easy to get started with, requiring very little to start using them.

Are There Any Fees Associated With Drop Shipping Companies?

How does drop shipping work when it comes to fees? There are various fee structures dropshippers offer.

Per Item Fee

One option is to pay a fee per order. This may range between $2 and $5 per item, which covers packaging and shipping, and it may be higher for products that are bigger or harder to process.

No Fee

Vendors on sites like AliExpress don’t have additional fees outside of the product cost and shopping costs, meaning they’ve already priced their fees into the product costs itself.  

Monthly Fee

Another option some offer is a monthly fee. This is more ideal since it allows you to plan your budget better. However, in the beginning, you may not want to go this route until you start making sales.

Beware of fake dropshippers that ask you for ongoing fees.

Purchasing Minimums

Then there are some dropshippers that have purchasing minimums, like wholesalers. In some cases, this is only for your first purchase. Other times, it's on a monthly basis.

When you don't meet the sales threshold, then you'll have to pay a fee.

You've Answered How Does Dropshipping Work — Now What?

In order to make any business idea work, you need a good plan. Once you research your audience, identify products you want to sell and find your dropship suppliers, it's time to build your e-commerce store.

This is all easier with the services offered at Dropified. With Dropified, you can streamline the management of your dropshipping business. 

You can save time adding products to your online store, processing orders and researching products. It comes with all sorts of features as well, such as product price change alerts and auto scan for tracking numbers.

Let's not forget you can automate your Shopify store, so you continue earning as you sleep.

You can connect various stores to your account, including Alibaba, eBay, Etsy and more.