Dropshipping: What it is & why it might be smart for your small business

Editorial Team

6 min read
Female worker scanning a box in a warehouse

Managing inventory can be costly and cumbersome. Fortunately, there’s an alternative model that’s becoming quite popular among small businesses and eCommerce retailers: dropshipping.

Requiring little to no overhead for inventory, dropshipping can help lower inventory costs and boost profits. But, there are a few challenges retailers should consider before jumping in.

What is dropshipping?

Dropshipping is a type of supply chain management in which a retailer does NOT keep the product it sells in stock. Instead, when a customer orders the product, the retailer contacts their manufacturer or wholesale merchant–who keeps inventory of the product on-hand–and has the product shipped directly to the customer. Retailers make a profit by selling the product at a higher price than what manufacturers/wholesale merchants sell it to them for. 

The dropshipping inventory model can be a boon to small businesses just starting out because it doesn’t require as much upfront capital for inventory. This model also cuts out the cost of buying and storing physical stock–and that can help businesses turn a bigger profit. What’s more, it offers businesses flexibility to experiment with new products. However, there’s a downside: when more parties are involved in the supply chain, the cost of doing business can increase–and that can impact profits. 

What is a drop shipment–and how does it work?

Once a customer orders a product, the retailer contacts their manufacturer/wholesale merchant to order and have the product shipped to the customer. The manufacturer/wholesale merchant is responsible for the shipping process. This is a drop ship. Retailers have little to no control over the manufacturer’s shipping process, so it’s helpful, when considering dropshipping, to understand the shipping process of the manufacturer/wholesale merchant, so you can offer clear communication about product delivery to your customers. 

Who’s involved–and what role do they play?

Retailers sell a variety of products on an eCommerce website. Once they receive an order, they contact a manufacturer/wholesale merchant to ship that product to the customer. To turn a profit, retailers typically sell the product at a higher price than what they’re charged by manufacturers/wholesale merchants.  

Manufacturers make products in bulk, but typically don’t sell their goods directly to the public. Retailers or wholesale merchants often buy products directly from manufacturers. 

Wholesale Merchants typically buy and stock a variety of products from manufacturers, and, in turn, sell these goods to retailers or directly to the public at a marked up price. 

While dropshipping can help reduce inventory costs and boost profits, there are some key benefits–and challenges–to consider before launching a drop ship business.

Benefits of dropshipping

1. You don’t need a lot of capital to start or maintain business

And, since retailers don’t need to keep a physical inventory on hand, they also don’t have to worry about potentially having to mark down unsold or extra inventory to sell it. 

2. You can be based anywhere in the world

As there’s no physical stock to house, retailers can launch and operate a business from just about anywhere that has an internet connection. 

3. You can offer a wider range of products–faster

Since the retailer provides access to stock at various manufacturers/wholesale merchants and doesn’t have to keep stock on hand, they can offer their customers a wider selection of products. Depending on the locations of your manufacturers/wholesale merchants and their shipping speeds, retailers may be able to ship items out faster and to a wider range of customer locations.

4. You may be able to generate larger profits

Since retailers don’t keep a physical inventory onsite, they don’t have to invest capital in building and maintaining an inventory or training staff on how to manage an inventory. Instead, they can invest their resources in other areas of the business–like improving the customer experience, marketing, or other business-boosting activities.

Challenges of dropshipping

1. It can be competitive

Since dropshipping is a relatively simple way to start a business, just about anyone can get into it. That can lead to an oversaturation of small businesses selling the same products–and that can lead to more competition and thinner profit margins. 

2. You don’t have full control over the customer experience

As manufacturers/wholesale merchants are in charge of shipping, the retailer has little to no control of the shipping process–what shipping company is used, when the product will arrive, or even the way it’s delivered. That makes understanding your partner’s shipping policy critical to creating a good customer experience and to the success of your business. 

3. You don’t control of the quality of the product

Since retailers don’t keep a physical inventory on hand, they aren’t able to fully assess the quality of the product that will be delivered to a customer before it ships. That could mean a faulty or damaged product is sent to your customer, so be sure to craft a return or exchange policy that accounts for potential problems in the manufacturers/wholesale merchants’ processes.

How to start dropshipping

If you’ve weighed the benefits and the challenges of dropshipping and are ready to move forward, here are 4 steps to help you launch a dropshipping business.

1. Create a unique value proposition for your business

As dropshipping can be competitive, it is important for your business to stand out with a unique value proposition. Aim to create a brand and select authentic and interesting products that are true to your brand.

2. Create an eCommerce site

This is where customers will order products and how you can manage customer relationships.

3. Choose a manufacturer/wholesale merchant 

Your partner is critical to your customers’ experience and the success of your business. So, do your research. Then, select reliable manufacturers/wholesale merchants that produce quality products. Before signing with a dropshipping partner, be sure to review their shipping and handling policy and their policy on liability for a product that becomes damaged during the delivery process. 

4. Streamline your internal process for success 

As dropshipping can require fairly complex logistics, it’s helpful to consolidate how you manage customer information, communication, and purchasing processes into an organized system with smart technology. Successful small businesses typically invest in point-of-sale (POS) systems with strong customer relationship management (CRM) or customer engagement tools that streamline operations. 

Clover offers a POS system that can help you manage the end-to-end sales process from setting up your eCommerce site and managing online sales to payment processing and customer engagement–in a flexible retail system that’s accessible to you anytime, anywhere. Learn how Clover can help you launch your dropshipping business today.

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