Drop Shipping Explained | How it Works and What are The Benefits

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There’s an alternative to traditional inventory stocking, and it’s being adopted by businesses around the world. Learn more about Drop shipping explained here!

In this article we will explain what drop shipping is and how it works and will list the benefits and you can decide whether this is the right business model for you.

If you are looking for an online business opportunity that requires little to no startup cost, chances are you might have heard of drop shipping. It is a retail model that can save you thousands of dollars in inventory space. In this article, we will break down how drop shipping works and what this business model entails.

Dropshipping Market Size & Growth (2020 – 2025). The size of the global dropshipping market was estimated at 111.28 billion dollars in 2018 and should record a CAGR of around 29% from 2020 to 2025.

Source: Market Data Forecast

Read ahead to learn all about it

What is Drop shipping?

Drop shipping is a retail fulfillment model where you won’t have to pile up supplier products in your inventory. Instead, your suppliers will package and deliver the products to your customer directly, on your behalf. So, the entire process goes down without you having to touch a single package that you’re selling.

In contrast to standard retail models, you don’t have to spend any money on inventory space or shipping costs for drop shipping. There are no handling fees involved, and no management team is required to take care of the products. You won’t have to stress about recording new products as your inventory shelves begin to empty.

You never have leftovers in your inventory as well. You’re only selling products that your customers demand, so there will be no dead inventory for your business anytime soon. And the risk is minimal. You can focus more on marketing and sales and less on supply chain operations.

And the best part is, you don’t have to pay any money out of your pocket to get the products to your store. You’re only purchasing a product after receiving payment from your customers first.

How Does Drop Shipping Work?

The mechanism of drop shipping can be explained in three simple steps:

  • The first thing you need in a drop shipping ecommerce is a supplier. Most drop shipping suppliers work from overseas, so you will need to establish a form of communication that works well for all stakeholders. The system cannot work without a strong medium of communication. Find a partner that fits the bill and compile a list of products that you’re willing to sell on your ecommerce website.
  • As customers place orders on your website, you will forward the details to your supplier. That’s when you will confirm your order to the drop shipping supplier.
  • Upon confirmation, your supplier will package the ordered products and ship them as per the information provided. The packaging is done with your ecommerce’s branding, and your customers will receive them directly, without you having to touch the product. You will pay your suppliers after receiving payment from the customers.

4 Benefits of Drop shipping

1.Ease of Business Setup with Minimal Cost

As you may have already realized, setting up a drop shipping ecommerce is rather easy and cost-effective. You don’t need any startup cost as your products are being purchased by you only after delivery is confirmed. This is perhaps the biggest advantage that the model offers and the main reason why so many people are drawn to the business.

In a traditional model, businesses have to start by spending tons of money on inventory space and products. But that’s not the case for drop shipping. You’re simply outsourcing your orders to suppliers. So, you can launch an ecommerce business quite easily with minimal cost.

2.Easier to Scale

In a standard retail model, more orders mean more work for you.  So, you will only be able to accept orders for the workload your team can handle. Such is not the case for the drop shipping model. As you leverage suppliers who are experienced and trained to handle bulk orders, you can easily take in more orders. Moreover, since you’re not pre-purchasing the products, you can offer a wide range of products on your website – after consulting with your suppliers, of course.

With such growth in sales, your business will scale better. So, with the drop shipping model, your business is meant to expand.

3.Low Overhead Cost

Since you’re not purchasing products prior to sales, and there is no rent on inventory space, you will have very low overhead costs. Your website is probably the most expensive product you own for the business. With a computer with an internet connection, a website, an automation app, and some effective marketing solutions – you’re all set for a glorious ecommerce business.

4.More Resource Availability

Just think, you don’t need to worry about paying for or managing inventory space. And tracking inventory is completely out of question. There’s no need to sweat over inbound shipments either. In fact, packaging and shipping are being taken care of by your suppliers. All you have to worry about is growing your business and promoting it better. Since you don’t have to deal with the products physically, you are potentially saving a lot of resources that can be invested in other important sectors like marketing and sales campaigns.


Is Drop shipping right for you?

Drop shipping is an ideal model for businesses that are only starting out and cannot raise their budget just yet. If you haven’t decided on a niche yet, drop shipping will provide you with the flexibility to test your luck with various products. With minimal risk, budget entrepreneurs can begin to earn a profit before they decide to invest in inventory space and physical stores.

Since drop shipping can get you started with little investment and low overhead cost, it is a perfect model for novice businesses and validating entrepreneurs. It will be beneficial even if you want to introduce a new line of products to your already established business, especially if you’re not entirely confident that it will generate expected sales.

Recommended Read: Shopify vs WooCommerce vs BigCommerce | Comparing Top ECommerce Platforms

Conclusion

If you are just setting foot in the world of business, you should know that finding the right business model is much easier said than done. So, it is always wise to take calculated measures and minimize your risk. We hope that our article has helped you understand the model better. Now that you know how drop shipping works, we hope you can give your business a kick start!

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