How Dropshipping Works: The Ultimate Guide

ByVladana Donevski
March 01,2022

Dropshipping seems to have been the buzzword among people looking to start a business for quite some time now. This is more than understandable, as it is an excellent source of income that doesn’t require a significant up-front investment, too much know-how, or management skills typically associated with retail.

This business model is great for beginners: You can quickly test everything and figure out what works without any major drawbacks. For that, though, you’ll need to figure out the basics, such as what it is and how dropshipping works. Then, it’ll be up to you to decide whether this business option will be the one to make you a successful entrepreneur. Let’s get down to explaining the basics.

What Is Dropshipping?

Dropshipping is a business model that allows you to sell products on your website without worrying about inventory or shipping. This form of eCommerce order-fulfillment method enables you to purchase products wholesale from a third-party supplier. Your supplier will keep the products in their warehouse and ship them for you. All you have to do is sell them.

While this sounds similar to the standard retail setup, there is a significant difference. The merchant doesn’t handle keeping products in stock or maintain inventory. Instead, they typically purchase merchandise on an as-needed basis from a supplier.

Now, we’ve used many new terms here. Let’s identify the key players in the scheme, to make the dropshipping definition clearer.

Supplier

Having a supplier that works with you rather than against you is the only way to run a successful dropshipping business. After all, you will be relying on your supplier to store and fulfill your orders. Sometimes, your supplier might be the manufacturer of the goods you’re selling, too.

Some of the most popular supplier solutions are AliExpress, SaleHoo, and Wholesale central. However, depending on your niche, you can find many independent dropshipping suppliers to make your store stand out.

Selling Merchant (You)

But can’t everyone simply go to AliExpress and order whatever they want? The answer is yes, so you might be wondering why anyone would need a dropshipper as a middleman. However, AliExpress and other wholesale websites are typically, well, a mess.

From product descriptions and images that are as daunting as possible, to poor search results, unknown sizes, and plenty of unknown providers who may or may not be the real thing - it may all seem like too much work for the average shopper.

This is where you - the dropshipper - come in. If your main question is: “What is a dropshipping business’ purpose?” here is a quick run-through: You are the one doing the research, curating the wholesaler sites, and guaranteeing the right product will end up on their doorstep. It is up to you to provide a shopping experience your customers can rely on.

Depending on how committed you are (and you need to be committed for this to work), creating a top-notch website is a great idea. It should have images and videos that accurately represent the product. You should also focus on providing a realistic delivery timeframe and excellent customer support. After all, that’s what’s your customers are paying you a little bit extra for.

Customer

The customer is, of course, the third part of the dropshipping model. They place an order on your website, and once they pay you, you can direct the order to your supplier. Your supplier will accept the order, charge you their cut of the price, and ship the product to the customer.

Keep in mind; your customers are working with you and not with the supplier - your reputation is the one that will be damaged if something’s wrong with the product. And while you can always rely on reputation management companies down the line, it is always better to be safe than sorry. After all, a happy customer is returning customer, and you want as many of those as possible.

So, What Does a Dropshipper Do?

As the dropshipper, you are the intermediary between the customer and the supplier. It’s your job to create an excellent customer experience and carefully select exceptional products to sell. If you pair that with innovative advertising to reach and expand your audience, you’ll be all set.

What Are the Benefits of Dropshipping?

Now that we’ve covered what dropshipping is - let’s go over some of its benefits by comparing it to more traditional online stores.

Fewer Significant Expenses

Unlike a more traditional setup, which requires plenty of spending upfront for inventory, dropshipping allows you to launch a store without a single item in stock. Retailers typically have a lot of money tied up in their supplies, but dropshippers don’t have to pay a single cent until the customer pays for the order first. This also means that you don’t need to worry about investing in a product that ends up performing poorly on your site. As there’s no commitment from your side, you can test out and replace products to no end, until you're completely satisfied with the selection.

Get Started Quickly

There are business solutions that require a lot of planning and learning before you start. However, with this type of eCommerce business, you can learn as you go. As mentioned, with a dropshipping business, you don’t have to worry about the products, managing a warehouse, shipping your orders, finding the right order-fulfillment software, handling returns, and other tasks people with retail stores typically have to figure out.

As Inexpensive As a New Business Can Be

Most dropshipping companies are home-based businesses, so you won’t need to rent office space. You also don’t have to invest much to get started - all you need is a laptop and a website. What’s better, even as your business grows, you are unlikely to experience a lot of recurring expenses and costs. The ones that do appear won’t break your bank.

Sell Anything You Want

If there is a supplier for it, you can list it on your dropshipping store and sell it. Since you don’t have to purchase anything and store it before selling it, your wares can be anything. Look for trending products, and list them without worrying.

Easier To Test Until You Succeed

If you are unsure which products would sell well, dropshipping is the best way to test things out and find what works. You can order samples of the goods for yourself for a negligible price. On the same note, finding what works quickly will allow you to scale and grow faster. With the other models, twice the orders means twice the work, but dropshipping excels in this case: The extra work is handled by the supplier. For example, you only have to maintain the same standard of service your customers like.

The Disadvantages of Dropshipping

While the benefits make dropshipping a very enticing business option, there are also downsides to it that you should consider. Let’s discuss what you need to be aware of before you start building a dropshipping platform.

Harsh Competition Means Low Margins

While there might not be many physical stores in your niche, you’ll be dealing with a lot of competition online in this day and age. Since it is pretty cheap to open one of these dropshipping websites, you can expect your competition to offer products with rock-bottom prices attached. It can be challenging to compete with that. While you can take advantage of the competition’s weaknesses, which are usually poor customer support or low-quality websites, the price will always be a big deciding factor.

This is why you need to research your competition first - finding a good niche to set up a dropshipping shop in can make all the difference.

Tricky Inventory Tracking

While there is plenty of software for keeping track of inventory and warehousing for eCommerce, you don't need that for dropshipping. Still, you will likely be dealing with multiple suppliers and several warehouses, which can make keeping track of what is in stock and which dropshipping products you’re out of difficult.

Luckily, there are many apps out there to remedy this problem, so choose one to stay in sync with your providers.

Shipping Cost Calculation

Multiple warehouses and suppliers also mean various locations - and this will influence your shipping costs. Passing the charges to the customer is not always the best idea, and automating these can be difficult.

Common Supplier Mistakes

Everybody makes mistakes, especially while fulfilling orders. When opening a dropshipping store, you need to be prepared to own your mistakes - but also the suppliers’. After all, it’s your job to maintain a business reputation.

To minimize the amount of apologizing, corrections, and stress you’ll take on with this type of business, make sure you only choose the best dropshipping suppliers.

If you want to do it right, you should always purchase several test products beforehand. Check the order for everything: Package quality, missing products, and poorly executed shipments. If you are unhappy with the end result, chances are, your customer will be disappointed as well.

No Control Over Products

With dropshipping, you’ll have to give up any dreams of unique branding or customization - all designs are entirely up to the supplier. If you’re lucky, you might find a supplier comfortable with customizing their products. Still, you can expect that they will also require a pre-purchase of minimum order quantity for those.

Now that you’ve had dropshipping explained, it is time for the biggest question of them all:

Is Dropshipping The Suitable Business Model For You?

Essentially, dropshipping is an excellent business model for anyone looking to start a shop without investing too much upfront. However, it does take a keen eye for detail, superb research skills, and excellent people skills. You’ll need to know how to manage a site, too, and you should most certainly practice your customer support voice before you dive in.

Now, if you’re confident this will be a good gig for you, here are some quick how-tos.

How To Start a Dropshipping Business

To start with dropshipping, you need to get the basics set up first. Here is what you should know.

Select Your Niche And Target Audience

This is where your research skills can shine. You need to scour the market for existing stores in the niche you’re interested in. Pay close attention to their pricing structure, current offer, and how they rank for particular products. If the market is already saturated with competition and you can’t find the room to top them, consider another one.

Choose Suppliers Carefully

As mentioned before, your suppliers can be your best friends or your biggest enemies - so choose your wholesaler wisely.   

There are many websites dedicated to eCommerce that provide complete directories of potential dropshipping wholesalers. From there, you select the providers you would like to feature on your dropshipping site. Once you create a shortlist, email them, or give them a call about your business plan. This also serves as the first test, so make a note of how long it took the suppliers’ team to reply.

Here are some things you should check:

Charges And Expenses

If you’ve done the market research, you already know what the competition charges. Compare that to the offer you got from your provider. If there isn’t enough room in between for you to make a profit, look at other options. Also, make sure you ask about any additional fees the supplier might charge, as these can quickly eat up your profit.

Shipping And Return Policies

Familiarize yourself with the suppliers’ shipping and return policies. You need a supplier who uses tracking numbers, which are essential for keeping your customers updated on the whereabouts of their orders.

You also need to know how complicated it would be to fix things if something goes south. Get informed about the eCommerce dropshipping suppliers’ return policies, and if a supplier doesn’t accept returns or provide any other guarantees, look elsewhere.

Billing

Not all suppliers charge the same way: Some will bill you on a per-order basis, while others do it monthly. You’ll want to find a supplier that will work with your cash flow rather than against it.

Creating Your Dropshipping Store

The last step on your journey toward dropshipping success is creating a website. When crafting a dropshipping website, you have two options. You can build your website from scratch, or choose one of the many available eCommerce platforms out there.

Which one you’ll choose depends entirely on you. However, with an eCommerce platform, a large chunk of the job is already done for you. All you’ve got to handle is adding the products and customizing the platform to fit your brand. On the other hand, eCommerce builders allow you complete control over the look and functionality of your site, and remove all competition from the same platform. It is something you should certainly consider if you’re going for a highly competitive niche.

Extra Tips For Successful Dropshipping

If you want to find out how to make money through dropshipping, and have your business become a success quickly, here are some pro-tips to consider and implement.

Choose Your Products Wisely

Just because you can list anything doesn’t mean you should. Do market research, focus on your niche, and display only high-quality products. Think about your customers, marketing plans, and how difficult something will be to ship.

Focus On Customer Experience

Dropshipping is not a new thing: That means your niche probably has one-too-many dropshippers in it already. You probably won’t match the low prices, but you can offer the best customer experience on the market. It is something your customers will appreciate paying a bit extra for.

An easy-to-use website with excellent visuals and accurate descriptions, realistic shipping times, and exceptional customer support could make a customer choose you over other dropshipping companies. If you’re not sure how to accomplish it on your own, consider hiring a UX agency - it will certainly pay off in the long run.

Invest In Your Brand

You need to build a good relationship with your clients, which you can’t do without proper marketing and support processes. Create a solid social media presence, catchy marketing, and email campaigns. Make sure you provide top-notch customer support. Reputation is the key to success with this business model, and you shouldn’t neglect any opportunity to position yourself as a reliable spot for products in your niche.

FAQ
Why is dropshipping bad?

You will hear people say that dropshipping is bad, and that’s true to an extent. Several hazards lurk for those trying to learn how dropshipping works, such as low margins and high shipping costs. Still, the biggest issue with dropshipping is that these entrepreneurs rarely control the product or shipping quality. If a dropshipper pairs up with the wrong supplier, this business model can prove costly rather than lucrative.

How much do dropshippers make on average?

Typically, a dropshipper will take 10%-30% of each sale that goes through their website, which can often equal between $1,000 and $5,000 per month. The rest typically pays standard recurring fees, such as dropshipping fees, hosting the website, and covering marketing expenses.

How does dropshipping work, step-by-step?

If you are wondering how dropshipping works, it’s relatively simple: A dropshipper is the intermediary between a customer and supplier. Customers order a product through a dropshipper’s site, and the dropshipper forwards the order to the supplier. The supplier then fulfills the order and sends the product to the customer.

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However, big data carries big challenges as customers are more and more concerned about data privacy. So, businesses need to make sure they are handling customer data responsibly and transparently if they want to keep using it to boost profits. Mobile Commerce Will Continue To Grow Mobile commerce is expected to continue growing in the coming years. According to statistics, mobile devices are used for over 40% of online transactions, their rising popularity indicates that this is one of the trends in online shopping that’s here to stay. Mobile commerce offers a number of advantages for businesses, such as increased reach, shorter buying cycles, and improved conversion rates. It also offers many advantages for customers, including the ability to shop anywhere at any time. If you want to stay ahead of the competition, it’s important to make sure your eCommerce platform is mobile-friendly. This means having a responsive design that looks good on all devices, as well as providing a smooth and easy-to-use mobile shopping experience. Omnichannel Selling Will Become the Norm Omnichannel selling is a term used to describe the practice of selling products through multiple channels, such as brick-and-mortar stores, online stores, mobile apps, and more. This eCommerce trend and approach allows businesses to reach more potential customers and provides a more seamless shopping experience. In the past, businesses have often treated each selling channel as a separate entity. However, this is changing as more and more businesses are adopting an omnichannel approach. This shift is driven by the increasing popularity of online shopping and the need for businesses to provide a more cohesive customer experience. As omnichannel selling becomes more common, it’s important for businesses to make sure they’re building eCommerce websites that can support it. This means having a platform that is integrated with all of your other selling channels and that provides a consistent experience for customers regardless of how they shop.  Environmental Sustainability Will Play a Big Role As we become more and more aware of the impact our consumption has on the environment, sustainability is becoming an important factor in purchasing decisions. Customers that follow new online shopping trends want to know if the products they’re buying have been ethically sourced and if the company they are buying from is taking steps to reduce its carbon footprint. In order to stay ahead of the competition, businesses need to make sure they’re considering environmental sustainability in all aspects of their operations. This includes everything from the sourcing of materials to the packaging and shipping of products. Customers are now more willing to pay extra for sustainable products, so there is a big opportunity for businesses that are able to meet this demand. How To Make the Best Use of ECommerce Trends ECommerce is constantly evolving, and it can be difficult to keep up. However, by staying informed and making sure your eCommerce platform is up to date, you can ensure that your business is able to stay ahead of the competition. To make the most of the latest eCommerce developments, consider the following: 1. Keep Up With the Latest Trends To stay on top of your game, you must be proactive and regularly seek out new information. There is a number of ways to do this, such as reading industry news, following relevant blogs and industry influencers, and attending eCommerce conferences. You can get to know what’s going on in the industry and find inspiration for your own business.  Read up on the research data and statistics that are available on eCommerce growth trends. This can help you understand the current landscape and make informed decisions about where to focus your efforts.  2. Take Advantage of Digital Tools There are a number of digital tools that can help you improve your eCommerce business. From marketing automation software to customer relationship management systems, there’s a variety of features that can make it easier to run your business and provide a better experience for your customers. Check the data and sales figures, and invest in analytical tools so you can understand where your customers are coming from and what they are looking for. 3. Learn From Your Competitors It’s important to keep an eye on your competitors to see what they are doing and how they are reacting to the latest eCommerce retail trends. You can learn a lot from observing their strategies and understanding their strengths and weaknesses. Should they fail, you can learn from their mistakes. If they succeed, you can try to replicate their success. Final Words As the global eCommerce ecosystem continues to grow and evolve, it's important to stay on top of the latest trends. Instead of leaning on traditional shopping methods, more and more consumers are turning to the internet to purchase items. Mobile phones play a big role here, as they provide a convenient way to shop on the go. What's more, consumers are getting more comfortable with new technologies such as AI, AR, chatbots, and voice search. These eCommerce trends in technology are changing the way we interact with eCommerce platforms and retailers. With all that said, we're confident that you now have a solid understanding of the current eCommerce landscape. Just remember to keep your eyes peeled for new trends so you can stay ahead of the curve.
By Danica Djokic · September 15,2022
As a business owner, you are likely responsible for overseeing all aspects of your company’s operations. This includes setting your own salary. This decision can be difficult to make, especially if you’re not sure what’s standard or how to determine what’s appropriate for your situation. In this article, we’ll discuss some factors you should consider when deciding how much to pay yourself as a small business owner. What To Consider When Setting Your Salary Setting your own salary can be daunting, especially if you’re a freelancer or small-business owner. After all, you need to make enough money to cover your expenses and earn a profit, but you don’t want to price yourself out of the market. So, what factors should you consider when paying yourself from your business? Business Structure One of the first things you should consider is your company’s business structure. Are you a sole proprietor? Do you have a business partner? Are you an S corp? Your company’s business structure will affect how much money you take home and how much in taxes you need to pay. For example, if you’re a sole proprietor, you’ll likely take home less money than if you’re running a corporation because you’ll be paying taxes on both your business income and personal income. On the other hand, if you’re running a corporation, you’ll only be taxed for your corporate income. This means that more of your business profits will stay within the company, which can be reinvested or distributed to shareholders. Business Expenses Another factor to consider when paying yourself as a small business owner is your business expenses. How much does it cost to run your small business? You should consider expenses like rent, utilities, payroll, and marketing. You’ll need to make enough money to cover these costs, plus your personal living expenses. One common mistake small business owners make is not accounting for all of their business-related expenses. Make sure you have a clear understanding of all the costs associated with running your business before you start setting your salary. Personal Living Expenses In addition to business-related expenses, you also need to account for your personal expenses, such as housing, food, transportation, and health care. Again, one common mistake people make is not accounting for all their personal expenses when calculating the business owner’s salary. Industry Standards Another factor to consider is industry standards. What do other businesses in your industry pay their employees? This will help you determine a reasonable salary for yourself as the business owner. Of course, you don’t want to undervalue your services.  Ultimately, setting your salary comes down to determining what you need to earn to cover your costs and make a profit and then finding the right balance between pricing yourself too high and too low. By taking the time to consider all the relevant factors, you can ensure that you set a fair and competitive price for your services. How to Calculate Your Owner’s Pay You should consider a few balance sheet items when calculating your salary as a small-business owner. These include your monthly net income, all business-related taxes and fees, and business expenses.  According to some small business revenue statistics, 86.3% of small business owners earn less than $100,000 a year. However, this does not mean you must stay within this bracket. Below are some steps you can take to get a clear picture of a small business owner’s salary and how to calculate it yourself. Calculate Your Monthly Net Income Your monthly net income is the total revenue your business brings in minus any taxes or fees. This number can fluctuate from month to month, so it’s important to take an average over a period of time to get an accurate number.  Next, you’ll need to subtract all business-related taxes and fees. This includes income taxes, self-employment tax, and any other business-related expenses. Once you have your monthly net income minus taxes and fees, you’ll be left with your profit.  Calculate Your Tax Savings The next step in calculating owner pay is determining your tax savings. This includes any deductions you can take for business expenses, home office expenses, and health insurance premiums. You can consult with a tax professional or use a tax calculator to get an accurate number. Once you have your tax savings figured out, you can add this amount to your monthly net income to get your total monthly compensation. Calculate Your Business Expenses The final thing you’ll need to consider when setting your salary is your business expenses, including office rent, utilities, supplies, and employee salaries. Once you know how much it costs to run your business each month, it will be easier to calculate how much to pay yourself as a small business owner. One mistake many small business owners make is not accounting for their salary when calculating their business expenses. This can lead to severe financial problems down the road, so be sure to include yourself in the equation. By following these steps, you should be able to come up with fair and reasonable compensation for yourself as a small business owner. Remember to avoid common mistakes, and you’ll be on your way to success.  Ways To Pay Yourself As a business owner, you have two options: Either pay yourself a salary or take distributions from your small business. Here are the pros and cons of an owner’s draw vs. a salary.  Paying Yourself a Regular Salary To pay yourself a regular wage, just like you would an employee, you’ll need to set up payroll for your business and withhold taxes from your paycheck. One advantage of this method is that it can help you separate your personal and business expenses and make it easier to track your business expenses come tax time. The downside of drawing a salary is that it’s subject to payroll taxes, which can eat into your earnings. Additionally, if you have a slow month or two, you may find yourself struggling to cover your personal expenses if you’re relying solely on your business income. An Owner’s Draw If you are self-employed and paying yourself a salary, an owner’s draw is another method you can use. This method is often used by small business owners with irregular or variable income. With an owner’s draw, you simply draw money out of your business bank account as needed to cover your personal expenses. One advantage of this method is that you don’t have to worry about payroll taxes. Additionally, it can give you more flexibility regarding how much money you take out of your business each month. However, one downside is that it can be challenging to track your small business expenses come tax time. So, which method is right for you? How to pay yourself as a sole proprietor? Ultimately, it depends on your circumstances and the needs of your business. If you have a stable and predictable income, having a regular salary may be the best option. However, if your income is variable or unpredictable, an owner’s draw may be a better option. Final Thoughts Paying yourself as a business owner can be a tricky task. And there’s no universal rule on how much business owners should pay themselves. However, by following some simple guidelines, you can ensure that you are fairly compensated for your work without putting your business finances at risk.  What’s most important is to find a method that works for you and your business. And, of course, to avoid any common pitfalls.
By Nikolina Cveticanin · September 14,2022

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