What is dropshipping?

E-commerce has been an integral part of consumer behavior for a long time. Online shopping has been around for so long that it no longer makes sense to refer to it as “booming” or “trendy”. It has already become mainstream and is around to stay. Today, retailers can sell products online at a scale previously unheard of and with virtually unlimited options. This market is constantly evolving and innovating.

One such innovation is dropshipping. This business model makes it possible to sell goods online without having to have a warehouse or handle shipping yourself. For existing online shops, this may sound like a loss of control, but for anyone looking to start a new online shop these days, it sounds like the perfect solution.

So, what exactly is dropshipping? Which products are best suited to it? And how do you get started with dropshipping? Here you will find the answers to all these questions.

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Definition of dropshipping

The term dropshipping originated in the field of logistics. In the world of online shopping, it refers to a special type of distribution based on a very simple principle: an online shop can offer and sell products without stocking or shipping themselves. Dropshipping is as revolutionary as it is easy to explain. Dropshipping is the exact opposite of how you would define a conventional retailer. Both brick-and-mortar and online retailers normally purchase their goods in large quantities via different distributors, store them and of course handle the shipping.

In dropshipping, there are three parties involved:

  • The customer
  • The seller
  • The wholesaler or manufacturer
Note

It makes no difference to customers whether they are buying from a conventional online shop or one that uses dropshipping. Normally, they do not even know whether they are ordering from a direct retailer or a middleman. The result is practically the same for the end consumer in both cases.

How does dropshipping work?

The best way to understand how dropshipping works is to look at the steps involved:

  1. The customer orders goods from an online shop.
  2. The online shop then orders the products specified in the customer’s order from a wholesaler or manufacturer it is working with.
  3. Lastly, the goods are shipped by the manufacturer or wholesaler, who “drops” the order directly at the customer’s location.

An online shop with dropshipping thus acts as a kind of middleman. Customers can order goods and products from it. Once the online shop has received the customer’s payment, it passes the order on to a wholesaler or manufacturer which then takes care of the rest.

What are the advantages and disadvantages of dropshipping?

Customers of online shops using dropshipping will hardly notice any difference from conventional online shops, at least in terms of the ordering process, since the shops respond immediately upon receiving their payment. When paying by credit card or PayPal, this happens virtually at the same moment the order is placed. Those who pay by bank transfer or the like will have to wait two to three working days for the bank to process the payment. Online retailers using dropshipping usually will not forward the order to the wholesaler/manufacturer until they have received the payment. Otherwise, they run the risk that the goods will be shipped without the payment being made.

In terms of its definition, dropshipping sounds like it provides retailers with quite a few advantages. It also, however, offers some advantages to manufacturers and wholesalers. It allows them to concentrate exclusively on shipping their goods. It does not require any knowledge of e-commerce, and they do not need to worry about proving themselves in the fast-paced market or taking their product international. They can just focus on their products, shipping, and returns.

For shop owners, the biggest advantage of dropshipping is probably how easy it makes it to get started in e-commerce. Normally, this would require a lot of start-up capital; after all, there have to be goods in stock to be able to process customer orders quickly. The retailer is then left sitting on these goods if it does not manage to sell them. Dropshipping does away with all that. Retailers do not have to worry about buying goods, storage costs or insurance premiums. If a product is selling poorly or not at all, it can simply be removed from the range of products. This makes it much easier to create a business plan.

In addition, dropshipping can increase sales because it enables online shops to offer a nearly unlimited variety of products. Having a wide range of products makes an online retailer more attractive to customers. Another advantage is that it does not require a location. This applies to both the company’s headquarters and the shop’s operations. All you need is a good internet connection. Dropshipping is thus perfect for digital nomads who want to be able to work from anywhere in the world.

With all that in mind, dropshipping also has some disadvantages. Online retailers using dropshipping have no influence over crucial factors in the customer experience and have to rely entirely on their partners. This includes shipping, guaranteeing the quality of ordered goods and the returns process. If something goes wrong at any point, the online shop is responsible to the customer, even if the fault lies with the wholesaler or manufacturer. It takes time to grow your reputation and brand loyalty, and both can quickly be eroded by the failings of others. This is especially true if you did not properly vet your wholesalers or manufacturers beforehand. If you sell defective or counterfeit goods through your online shop, you will also have to bear the consequences.

The major advantage of not carrying your own stock can also be a great disadvantage. With dropshipping, there will always be multiple online shops vying for the stock of a manufacturer or wholesaler. This can lead to items selling out before the online retailer notices. This in turn leads to extra work since all customers who ordered that item have to be informed immediately about the delay.

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Lastly, the shipping process can become a disadvantage. When a customer orders various products from different manufacturers and wholesalers through a shop, they will still ideally expect a single shipment. When it comes to dropshipping, however, such an order will usually result in multiple packages arriving at the customer’s door. They will have been sent via different shipping services, arrive at different times and have varying shipping costs.

Tip

Good, open communication with customers – from the product description on the website to personal email correspondence – is crucial to make up for dropshipping’s weaknesses.

What are the main applications for dropshipping?

After weighing the pros and cons, three main applications for dropshipping emerge.

  1. For stand-alone online shops.
  2. In online marketplaces (e.g., Amazon or eBay): This has the advantage of being able to reach a large customer base but also the disadvantage of the platform setting the rules.
  3. For brick-and-mortar retailers (on both sides): Retailers can sell their own goods online via dropshipping, and they can offer products outside their own fixed stock if they run their own online shop.

What products are best suited for dropshipping?

Now that we have covered what dropshipping is and what its main advantages and disadvantages are, it is time to go over which products are best suited to this sales method.

The first thing you should consider when choosing a product is that you want to avoid returns whenever possible. Clothing is typically associated with a particularly high return rate, so it is not well suited to dropshipping. However, you can make an exception if you have been able to negotiate consistent and fair terms and conditions with the manufacturers and wholesalers in advance.

In general, having contracts for products is beneficial for all parties involved. Contracts provide suppliers with a secure basis for forecasting and partners with inventory forecasts.

Niche products are particularly popular in dropshipping. This is due to competition around these products and their pricing not being as high and the costs for search engine optimization being reasonable.

To profit from dropshipping, you should exploit its advantages as much as possible. For example, large bulky products are perfect for this kind of online shop because it allows manufacturers to send their unwieldy products directly to customers without needing an intermediary storage facility.

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Another commercial area is digital products. Instead of physical storage space, dropshipping provides digital server capacities through which digital offers can be downloaded after purchase.

Tip

Retailers should be very familiar with whatever products their online shop with dropshipping offers, the corresponding manufacturers and the target audience. All product information should be completely and clearly presented on the online shop. A comprehensive presentation of the product should include product names, a detailed description, pictures, and the price. Ideally, you should also provide information on the dimensions and weight of the packaging.

Even though dropshipping means giving up control over part of the customer experience, you can still exert a great deal of influence by having excellent product pages. If you fill your online shop with high-quality content down to the last detail, you will earn your customers’ trust. Offering as many simple payment methods as possible will also make it easier for customers to place orders on your website. Finally, it is especially important when using dropshipping to provide fast, simple, service-oriented customer communication through email, live chat on the website and social media.

Getting started with dropshipping

Dropshipping is primarily intended for people who already have experience in e-commerce and thus have the necessary know-how, contacts, and a good feel for the online market. However, for those who want to start small and learn by doing, here is a short guide to get you started.

Choosing the right product

You do not need to conduct complex market research to choose the right product. If you want to try out dropshipping, you should choose a type of product that you are particularly familiar with and for which you ideally already have contacts with manufacturers and wholesalers.

Setting up your own shop

Nowadays, setting up your own online shop does not necessarily require strong programming skills. You can find ready-to-use templates that enable the average person to set up a website within minutes. For easy-to-understand and user-oriented website construction kits and CMS services, you can look to IONOS. For example, you can take advantage of Managed WordPress, an all-round managed version of the popular content management system that includes hosting.

Tip

IONOS does not offer a dropshipping package directly. However, WordPress WooCommerce users can easily activate this option as a plugin.

Your own domain

It is also important to have a suitable domain and hosting environment. Today, it is very easy to register and set up a domain within seconds. With just a few clicks, you can register the domain and set up the entire infrastructure for your online shop with dropshipping.

Content, marketing, and service

Obviously, following these instructions will not guarantee success. An attractive online shop needs more than just a good template. It needs high-quality images and any relevant information that would convince the customer to make a purchase. If you want to promote your online shop, you should also seek advice from experts. This will provide better results than placing Google or social media ads in an untargeted manner. Good customer service and the right social media strategy can make all the difference. This will require additional staff if you lack the expertise. Once all that is in place, you can launch your new online shop in the e-commerce world.

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