Dropshipping Business Model – How Does It Work? (Explained)

While most businesses worldwide are looking for ways to cut intermediaries from their process for a more direct approach, some others are incorporating more intermediaries. Allowing intermediaries to come into a supply chain can have its benefits and drawbacks. However, with the advent of the internet, more intermediaries can help businesses make sales than before.

One particular business model that has grown in popularity is the drop shipping business model, which is similar to introducing intermediaries.

What is the Dropshipping business model?

The dropshipping business model is similar to a retail fulfillment in which a store doesn’t keep the products in stock. In the dropshipping business model, a company or business markets the products of a manufacturer or another company, usually through a website or social media platforms. The drop-shipper is responsible for marketing and attracting customers.

When a customer visits the dropshipping website, they can view various items, mostly from several suppliers. However, the dropshipping business does not need to have any stock items after the customer orders a product. The drop-shipper contacts the original supplier or manufacturer and gives them the details about the order.

When the supplier receives the details, it can prepare the product, if not preprepared, and ship it to the customer. In the process, the drop-shipper does not need to get the products and send them further. Instead, the supplier takes care of it. Similarly, the dropshipping business earns a margin that they add to each product.

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How does the Dropshipping business model work?

While the dropshipping business model seems straightforward, there is much more going on behind the scenes. Firstly, a drop-shipper needs to establish a platform through which it can sell products. Usually, this platform comes in the form of a website. Then the drop-shipper needs dropshipping software to allow the process to complete. There is various software that provides this functionality, such as WooCommerce, Magento, Shopify, etc.

The drop-shipper must then select products or items it wants to sell. Therefore, they must first choose the right suppliers, a list of which comes with the software above. Then, the dropshipping business has to look for customers and attract them to the website. When a customer makes a purchase, the software sends the details to the related supplier.

The supplier also receives personal information of the customer, to whom it must ship the products. The dropshipping business earns a margin for every sale they help suppliers make. The customer gets the goods after some time, depending on the supplier. As mentioned, during the process, the dropshipping business doesn’t hold or get inventory.

What are the advantages and disadvantages of the Dropshipping business model?

The drop shipping business model has some advantages and disadvantages. These are as below.

Advantages

The most vital advantage for businesses that want to use the dropshipping business model is the low capital required to start a dropshipping service. As mentioned, the drop-shipper doesn’t have to hold any inventory or pay for it during the process. The customer pays for the product, and the supplier delivers it. The dropshipping business gets its margin without any investment at all.

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The dropshipping business model is also easy to get started with for anyone. Due to the various easy-to-use software available online, dropshipping has become extremely straightforward. Similarly, due to the nature of dropshipping, businesses don’t have to pay for several types of costs such as shipping, packaging, holding inventory, reordering costs, and much more.

The dropshipping business model also allows businesses to sell a wide range of products using single or multiple platforms. There are thousands of suppliers that they can choose from and market their products. Similarly, they can categorize these products or make a separate website for each type.

Disadvantages

Dropshipping businesses have to work with low margins, which is one of its most considerable disadvantages. Since it is easy to get started and requires low capital investment, there is a lot of competition between dropshipping businesses. Therefore, drop-shippers need to decrease their prices to compete with others, which means lower margins.

Another problem with dropshipping is shipping problems. Since shipping is the responsibility of suppliers, it may take months for customers to receive goods sometimes. Since customers don’t order from suppliers directly, they usually criticize the dropshipping business instead.

Lastly, the dropshipping business model is heavily reliant on suppliers. Any problems or errors on the side of suppliers can negatively impact any drop-shippers associated with their products. There are many reported faults with suppliers in the past that have ended dropshipping businesses.

Examples

Inspire Uplift, Blue Crate, HYGO, Club Fit Wear, Notebook Therapy, etc., are examples of successful dropshipping stores. While these may not be among the top names in business, they are some of the top stores that use the dropshipping business model.

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Conclusion

The Dropshipping business model allows businesses to use their platform, usually a website, to sell goods from other suppliers. In the process, the dropshipping company acts as an intermediary and connects suppliers and customers. Similarly, the business doesn’t need to buy or hold any inventory. Instead, it just markets products.

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