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What Is Dropshipping & How To Start Making Money Online (2023)

by Amelia Pahm
What Is Dropshipping & How To Start Making Money Online - OneCommerce

Dropshipping is where you sell products online without having to deal with inventory or shipping. You simply find a supplier who can fulfill orders on your behalf. This way, you can start your own online store with minimal investment and risk.

The global dropshipping market size was worth $128.6 billion in 2020 and is expected to grow to $476.1 billion by 2026, based on a report from Statista. That’s a huge opportunity for online entrepreneurs like you!

Sounds a bit too good to be true, right? Well, it’s definitely not. Dropshipping is a legitimate and profitable way to make money online, as long as you do it right.

If you haven’t tapped into the world of dropshipping, you’re in the right place! In this blog, learn everything you need to know about dropshipping, including what is dropshipping, its benefits, challenges, best practices, and more.

Let’s dive in!

💡 Recommended reading:

What Is Dropshipping Business Model?

1. What is dropshipping?

Dropshipping is an eCommerce business model that allows entrepreneurs to fulfill orders online without having to deal with inventory, warehousing, or shipping.

Instead of buying and storing products in advance, dropshippers act as the middleman between consumers and third-party suppliers, who fulfill and ship the orders directly to the customers.

This way, dropshippers can start and run their online stores with minimal investment and risk, while offering a wide range of products to their customers.

2. Is dropshipping eCommerce?

Yes, of course. Dropshipping is a specific form of eCommerce that involves selling products online without having to own or handle the inventory physically.

In fact, eCommerce is a broad term that refers to any type of business that sells and buys products or services online, using technologies such as Internet marketing, inventory management systems, online transaction processing, and more.

Who Are Dropshippers?

Dropshippers are the people who run online stores without having to own or handle the products they sell.

They are not the product manufacturers or suppliers, as some might think when they search for “what is a dropshipping business.” Instead, they are the intermediaries between the customers and the suppliers, who are the ones who manage their inventories and do the physical order fulfilment.

Dropshippers act as the front end of the eCommerce business, while the suppliers act as the back end.

  • Dropshippers are responsible for creating and maintaining their online stores, marketing their products, attracting and retaining customers, and processing orders.
  • Suppliers are responsible for storing, packing, and shipping the products directly to the customers on behalf of the dropshippers.

Dropshippers make money by setting their own prices for the products they sell, which are usually higher than the prices they pay to the suppliers. The difference between the selling price and the supplier price is the profit margin for the dropshippers.

For example, if a dropshipper sells a product for $50 and pays $30 to the supplier, then the dropshipper makes $20 in profit.

Becoming a dropshipper also comes with its own challenges and risks, such as finding reliable suppliers, competing with other dropshippers, dealing with customer complaints, and more.

Therefore, you need to do your research and planning before you jump into dropshipping.

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How Does Dropshipping Work?

Now that we’ve got the answer to “What is dropshipping?“, here’s a basic and simple infographic of how dropshipping works:

The dropshipping model-OneCommerce

What is dropshipping & how dropshipping actually works

As illustrated, you can see there are three leading “players” in a typical dropshipping model:

  • Customers: search for the product they need from the sellers’ online store and order through it.
  • Sellers (or the stores’ owners): the intermediary between the purchase and delivery of goods between the customers and the manufacturers/suppliers. The sellers will get a commission from the price differences.
  • Suppliers: manufacture, pack, and deliver goods directly to consumers.

Then, how exactly do these players make dropshipping work? These steps can help you to understand more about the accurate process:

  • Step 1: Sellers need to promote the goods on their online web stores, receive orders, and check customers’ shipment details.
  • Step 2: The sellers buy the ordered products and transfer all the shipment information to the suppliers.
  • Step 3: The suppliers will work on the physical order fulfillment and ship them directly to the final customers.

Beyond the three basic steps listed above, managing your business also entails various other activities, such as taking care of customers or ascertaining the actual amount of inventory in suppliers’ warehouses to restrict the number of orders that can be fulfilled.

Now, keep scrolling down for additional information on how to address these concerns.

The Pros And Cons Of Dropshipping

1. Pros Of Dropshipping

Once mentioning dropshipping, I’m sure there are more pros than cons, and here are some notable things you can look at.

1.1. Less Investment Required

One of the biggest advantages of dropshipping is that you don’t need to buy or store any products, which saves you a lot of money and hassle. Some overhead costs that you don’t have to cover include:

  • Renting or buying a warehouse
  • Hiring and managing staff
  • Paying for utilities, insurance, security, etc.
  • Handling inventory, packaging, and shipping
  • With dropshipping, you only pay for the products you sell, which means you have more cash flow and less risk.

1.2. Easy To Start Your Own

Another benefit of dropshipping is that you can start your own online store without having to be an expert in finance or business.

In most cases, there’s no need to worry about sourcing, manufacturing, or delivering products, as your suppliers will take care of that for you. All you need to do is:

  • Choose a niche and products that you want to sell
  • Find reliable suppliers who can dropship for you
  • Create and launch your online store using a platform like Shopify
  • Market your store and attract customers
  • You can learn the ropes of dropshipping as you go along, and improve your skills and knowledge over time.
Note: This depends on whether your suppliers are reliable or not to fulfill the orders smoothly. Choose wisely!

1.3. Flexible “Office”

Dropshipping also gives you the freedom and flexibility to work from anywhere in the world, as long as you have an internet connection.

You can run your online store from your home, a coffee shop, a co-working space, or even a beach. Not to mention the freedom to go about your day, set your own schedule and work at your own pace. You are your own boss!

1.4. Less Potential Risks To Concern

You don’t have to worry about losing money or products due to overstocking or understocking, as well as having to deal with unsold inventory, damaged goods, or theft. Issues like shipping delays, errors, or returns will be handled for you by your suppliers.

What will you have to do? Focus on growing your customer base and increasing your sales.

1.5. Easy To Scale Up

Dropshipping also helps you to easily build up your business because you don’t have to invest in more inventory, warehouse, or shipping.

You can grow your business by selecting from a variety of vendors that can provide you with a variety of items, pricing, and quality. Plus, if your suppliers can distribute internationally, you will be able to broaden your market by selling to new countries and regions.

2. Cons Of Dropshipping

Besides all the appealing advantages of dropshipping, you should also notice the disadvantages. Therefore, just have a glance at these:

2.1. High competitions

Dropshipping is easy and low-cost, which means many people are doing it.

You have to stand out from the crowd by choosing a niche and products that are in high demand but not oversaturated, creating a unique and attractive online store, using effective marketing strategies, and providing excellent customer service.

2.2. Fewer chances for self-branded products

Dropshipping means you have less control over the products you sell, as they come from your suppliers. You have fewer chances to create your own branded products that reflect your identity and vision.

If you prefer some customization or personalization services from your suppliers, you may have to pay extra fees or settle for generic products that may not suit your brand and customers.

In case you really interested in building a branded business, check out our article on The 101 Guide on How to Start a Shopify Print On Demand Business!

2.3. Lack of quality control

The fact that you have almost no control over the fulfillment or inventory processes is both a big plus and a worrisome downside.

You might not be aware of how much stock remains, whether there are any damaged items, or whether the packaging method is appropriate because the to-be-shipped things are not in your hands.

2.4. Troublesome customer service

Dropshipping does not exempt you from dealing with customer service, which is crucial for any online business and affects reputation and credibility. You have to:

  • Answer any questions or inquiries from your customers before, during, or after the purchase
  • Resolve any problems or disputes that may arise from the order or delivery process
  • Process any returns or refunds that may be requested by your customers
  • Follow up with your customers and ask for their feedback or reviews
  • Dropshipping is not a way to ignore customer service, but a way to excel at customer service.

2.5. Lower profit margin

Dropshipping gives you less profit margin than other eCommerce business models, as you are selling other people’s products.

The average profit margin for dropshipping is around 25%, which means you have to sell more products or increase your prices to make more money. You also have to optimize your online store and marketing campaigns to increase your conversion rate and average order value.

💡 How to track and calculate profit margin? Check out these articles:

Ultimately, “Is dropshipping worth it?”. It still is!

How To Start Doing Dropshipping?

To learn more about kicking off a dropshipping business, specifically on Shopify, check out this guide:

Step 1: Choosing The Field You Want To Join

It’s important to know what you want to sell first because you will have to do market research to understand your competitors and your targeted customers.

Based on recent trends, consider some of these profitable niches:

  • Accessories and clothing
  • Office equipment
  • Gaming devices and accessories
  • Mobile phone’s extras and accessories
  • Healthcare products
  • Home furnishings
  • Groceries

However, there isn’t a specific “formula” to choose the best category for you, so it’s advised to pick the goods you are most familiar with and passionate about.

Step 2: Doing General Market Research

Before you start selling anything online, you need to do some market research to find out what products are in demand, who are your competitors, and how much potential there is for your niche.

The goal of market research is to find a niche that is not too saturated but still has enough demand and profit potential. Moreover, market research will help you to:

  • Choose a profitable and sustainable niche that suits your interests and skills
  • Identify your target audience and their needs, preferences, and pain points
  • Analyze your competitors and their strengths, weaknesses, opportunities, and threats
  • Develop a unique value proposition and a competitive advantage for your online store
  • Create a marketing and sales strategy that attracts and converts your customers

To do market research, you can use various free tools from Google, such as Google Keyword Planner, Google Trends, and Search Console Insight. These tools will help you to understand the search habits and trends of your potential customers, as well as the keywords and topics that are relevant to your niche.

You can check how the products you’re planning to sell are trending, by using Google Trends:

You can also use other tools like Moz Link Explorer, Ahrefs, or Semrush to get more insights into your competitors and their SEO performance.

💡 Best practice:

Avoid niches that are too competitive or too obscure, as they will make it harder for you to succeed. You want to find a niche that has a gap in the market that you can fill with your unique products and services.

It would be great if the chosen niches are not saturated and you still can make money from them; otherwise, you can select other niches you want to go from here.

Step 3: Selecting The Right Suppliers

What is dropshipping without a supplier? Do your research, and make your connection.

It’s not straightforward to find a good supplier, but you can do it quicker once you have my tips:

  • Directly reach the manufacturers or the drop-shipper and evaluate their website. The information they show on their homepage can partly tell you how professional and credible this business is.
  • Always ask for samples and read the previous customers’ reviews. This action can help you experience their overall shipment service and know more about others’ opinions. Furthermore, you can also check the actual order fulfillment speed, handling returns for broken items, and billing process.
  • Try raising some problems and see how they support their customers.

Remember, do not forget to mention fraud protection, orders’ insurance, predictable fees, and the terms listed in your future dropshipping agreement contract.

Step 4: Building Your Online Store

A well-thought-out online store can leave users with an excellent first impression of your business and even make them want to return. To do that, you need to pay attention to the website domain, hosting, and advertising costs.

Luckily, your work can be much easier if you use eCommerce platforms as a solution to save costs, effort, time, and money. Some most well-known names here are Shopify, WooCommerce, Wix, Ecwid, ShopBase, Shift4Shop, and BigCommerce.

For beginners that need some quick-to-launch and customizable store, Shopify dropshipping is most likely to be the best option here.

It will only take you a few minutes to open a brand-new store on Shopify:

  • Register an account and log in to Shopify.
  • Pick a theme you prefer (it should match your products and the general vibes you want to bring)
  • Start dropping the products into your Shopify store.
  • Create collection pages for your products before categorizing them.
  • Finally, set up the payment information, and your store is ready.

Step 5: Opening Marketing Projects To Boost Sale

One of the most important steps to grow your online business is to promote your products and reach your customers.

You can’t just wait for them to find you by chance; you have to actively attract them to your website. That’s why marketing is vital for new business. Marketing can help you to:

  • Increase your brand awareness and recognition
  • Generate more traffic and leads to your website
  • Convert more visitors into buyers and loyal customers
  • Boost your sales and revenue
  • Build trust and credibility with your audience
  • Stand out from your competitors

There are many ways to market your online business, but one of the most popular and powerful ones is social media. Social media platforms such as Facebook, Instagram, Twitter, YouTube, TikTok, etc. have billions of users who are looking for information, entertainment, inspiration, and connection.

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Is Dropshipping Legal?

Yes, dropshipping is legal once you follow every law (from local, national, to international) related to merchandise sales, especially some below from the beginning.

1. Business license

Not every country or state requires a small intermediate goods business to apply for a business license. However, having a “legal certification” will strengthen your position in the business world.

Another small note is that you should carefully consider the type of business model listed on the license before applying. Each country will have different requirements and benefits, so you have to choose what’s best for you.

2. Taxation laws

Taxes are the must-faced issue for any retailer, as does your dropshipping store.

Although there are many types, you should focus on sales taxes (levied on the transaction of services and products) and income taxes (usually levied on the percentage of profits you earn).

The ways to measure these taxes differ between countries or even states; therefore, you should have more advice from a local, professional accountant.

3. Truth in advertising laws

One of the biggest mistakes that some dropshipping sellers make is to exaggerate or misrepresent their products in order to increase their sales. However, this can backfire and harm their reputation and credibility, as well as expose them to legal risks.

Customers have the right to expect that the products they buy online match the descriptions and images that the sellers provide. If they feel that they have been deceived by misleading advertising, they can sue the sellers for breach of contract, fraud, or unfair trade practices.

This can result in fines, penalties, refunds, or even criminal charges for the sellers.

Truth in advertising is not only a legal obligation, but also a good business practice. Stay truthful and transparent with your customers, and build trust and loyalty with them.

4. Copyright laws

It is possible for you to be in breach of copyright law and to be sued once the supplier you choose provides you with counterfeit products to ship to customers.

Therefore, you have to pay attention to the terms to protect yourself while working on paper with suppliers.

5. Consumer protection laws

To protect your customers, always purchase product liability insurance!

You can never foresee what will happen, even if the items from the suppliers are of highly consistent quality. Therefore, you should follow consumer protection laws as you are directly accountable for the goods.

Do You Need An LLC For Dropshipping?

It depends on your situation and preferences. You can decide whether or not to form an LLC for your dropshipping business, but there are certain benefits and drawbacks to consider.

A Limited Liability Company, or LLC, is a legal structure that protects your personal assets from business responsibilities.

This means that if you have any financial or legal problems with your dropshipping business, such as a lawsuit from a supplier or a customer, or a debt to a creditor, you will not be required to pay for them with your own money or property. The LLC, not you, will be held liable for the damages.

An LLC also has some tax benefits, as it is not subject to federal income taxes. Instead, the profits or losses of the business are passed through to the owners’ personal tax returns. This way, you can avoid double taxation, which is when you pay taxes on both the corporate and the individual levels.

However, an LLC also has some drawbacks, such as:

  • Cost: Forming an LLC requires paying some fees and filing some paperwork with the state where you operate your business. The fees and requirements vary by state, but they can range from $50 to $500 or more. You may also need to pay for annual reports, licenses, permits, etc.
  • Complexity: Running an LLC requires following some rules and regulations that may differ by state. You may need to keep separate records and accounts for your business and personal finances, file taxes in multiple states if you sell to different regions, comply with sales tax laws and regulations, etc.
  • Liability: While an LLC protects your personal assets from most business liabilities, it does not protect you from all of them. For example, if you personally guarantee a loan for your business, or if you commit fraud or negligence in your business activities, you may still be held liable for the consequences.

Therefore, whether you need an LLC for your dropshipping business or not depends on how much risk you are willing to take, how much money you are willing to spend, and how much complexity you are willing to handle.

Is Dropshipping Profitable?

Yes, definitely. Earning hundreds of bucks a month is manageable if you choose good suppliers with suitable items and manage your business well with proper strategic planning and research.

The most straightforward formula to calculate a business’s profit is:

Actual profit = Revenue – Costs

It’s straightforward to see that you have to maximize revenue while minimizing costs if you want more profit. To increase revenue, you should have high-quality products with reasonable prices and be able to sell a lot of them.

Besides, factors like shipping time over costs, goods’ demands, seasonality, return policy, etc., can also affect sales or revenue. Yet, there are a lot of must-pay expenses, which are challenging to reduce whenever you start a dropshipping business, for instance:

  • Platform costs
  • Marketing expenses
  • Costs used for technical support items (apps, extensions, or software)
  • Shipping costs
  • Product costs

All in all, to earn as much money as possible when you are still new, consider your initial products carefully and keep the system as basic as possible.

What Is Dropshipping – Final Words

Overall, we hope this article has given you all the details you need to figure out what is dropshipping, what is a dropshipping business, and how to launch your venture in this industry.

Remember to weigh all the benefits and drawbacks of this popular business model before deciding if it suits your needs.

If you like this article and want to learn more about dropshipping and how to get profitable, stay tuned on OneCommerce Blog for more guides and insights!

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