What Is Dropshipping & How Does It Work?

I have been in the dropshipping business for many years. As such, I have learned all the ins and outs of this industry, including its nuances and common pitfalls.

Today, it has become the default business model of many online sellers. What I want to do is show you the following:

• What dropshipping is
• How it works
• Steps to start a dropshipping business
• The cost you need to prepare

Keep reading, and in the end, you will have what you need to decide if this is the right business for you!

Key Takeaways

• Dropshipping is online retail without paying for inventory
• It is profitable if you price your products correctly
• Be ready for competition
• You need a website to dropship effectively
• Dropshipping is not a get-rich-quick scheme

What is dropshipping?

Dropshipping is a business process where you sell someone else’s products. You do not buy the inventory and store them in your house.

Instead, you only order from your supplier once the customer has already paid you. Your profit comes from the difference between the supplier’s price and your selling price.

How does dropshipping work?

In a snapshot, here is how dropshipping works:

• You look for a product to sell
• You ask if the seller dropships
• You put up an online store
• You upload the pictures of the product
• Customer orders from your stores and pays for the item and shipping
• You contact the supplier and pay for the item, pay for shipping, and provide the customer’s address
• The supplier ships the item to your customer

From this model, you can see that there is little risk in dropshipping. In traditional retail, you must buy the inventory before selling it.

So, for example, if you want to sell coffee mugs, you must buy 100 pieces. Then, you put these mugs in your warehouse or house.

You post the coffee mugs online, hoping for someone to buy them. If no one does, your money is sitting on those mugs. If no one buys, it is a financial loss.

Think of dropshipping as selling a networking product, like Avon. With Avon, you have a brochure. You use that brochure to sell to your friends.

The thing is that you do not pay Avon for the products right away. You only do that if your customer has an order. Then, of course, you would take a down payment from your customer.

Then, you call your Avon agent or go to their office to buy the product. Then, finally, you take the product to your customer.

Dropshipping is so similar to that process. However, dropshipping is online.

Steps to Start a Dropshipping Business

A business will only succeed if you do it correctly from the beginning. So, to help save you from the agony of failing, I compiled a list of steps to start a dropshipping business.

The steps are:

• Decide on a Niche
• Find a Supplier
• Build an Online Store
• Market the Products

Step 1: Decide on a Niche

A niche is an industry or specialization. For example, “shoes” is a niche. First, you must choose the type of product you want to sell.

Why?

For one, you want your site visitors to think you are an expert. If you sell all sorts of products, you are just another dime-a-dozen online store.

More importantly, it would help if you chose a sub-niche. A sub-niche is a deeper level of expertise or interest. For example, for shoes, a sub-niche is “men’s shoes” or “sports shoes.”

Choosing a niche is essential; it has something to do with what you understand. You must choose something that you are passionate about.

It also helps you avoid the shiny object syndrome. Many people tend to add so many products to their online stores. The result? The consumers are confused. 

So, how do you choose a niche?

Here are my tips:

• Choose a profitable niche
• Make sure the niche has a market of people who are ready to buy
• You must understand the niche you selected

Do not pick a niche that you do not know. For example, do not sell motorcycle accessories if you do not even have a motorcycle. How will you know what products bikers want if you are not a rider?

Finally, choose a legal niche to sell in your target country. Do not sell sex toys or drug paraphernalia—these things are mostly illegal and hard to market.

Step 2: Find a Supplier

The next step is to look for a supplier. The supplier can be a retailer, brand dealer, or manufacturer. It is the supplier’s responsibility to ship the item to your customer.

Where can you find dropshipping suppliers?

There are many directories where you can find a supplier. If you want, you can also visit sites like Alibaba and AliExpress. These are Chinese online retail stores.

Alibaba is a wholesale website. AliExpress is a retail website. Both are in China, and all the products you would find here come from China, too.

Not all suppliers facilitate dropshipping. Once you have found a supplier, ask him if he can ship the item to your customer.

When talking to the supplier, you must know the following:

• The product quality
• The shipping cost
• The shipping time
• The return or refund policy

It makes sense that you order the product yourself. It is the only way to determine if the product is worth selling.

To make this process easier, you are better off using a software program. An excellent example of such a program is Dropship.IO (even though I am a bit biased, haha).

Dropship.IO is a database of global suppliers—all of them are dropship suppliers. The beauty of this automated artificial intelligence tool is that you no longer need to look for a product manually.

With a tool like Dropship.IO, you can:

• Discover dropshipping products
• Analyze competitors
• View the sales performance of a product
• Explore customer interest on Facebook
• View product sales trends
• Calculate your costs and margins 

Dropship.IO is not a free tool. But then it is better to pay a small subscription fee than waste your precious time looking for suppliers manually. In addition, there is a 7-day free trial where you can test the tool!

Step 3: Build an Online Store

By now, you know what product to sell and have found a supplier. The next step is to build your online store.

If you do not want to build your online store, here are your alternatives:

• Sell in eBay
• Sell in Facebook
• Sell in Amazon
• Sell in Etsy

However, each of these marketplaces has its rules about dropshipping. Some of them allow it, but with certain conditions.

In addition, these sites charge a lot of fees. For example, Amazon charges a seller fee, referral fee, fulfillment fee, and more.

You also do not have control over these websites. The better thing to do is build your online store.

Over the years, I have used several website builders. The top that I recommend for dropshipping are Shopify, Wix, WooCommerce via WordPress, and BigCommerce.

Of all these, the easiest to use and the best is Shopify. The founders of Shopify built the platform for online retailers. It is so easy to use that you can create a store in less than an hour.

Before building a store, you must prepare the following:

• Your domain name
• Your business name
• Your business logo
• Some images and videos for your home page
• Standard pages like About Us, Contact, FAQ, How to Order, Return Policy, etc.
• Standard image size, content per product page, etc.

Building the website will take some time, and it is not free. Shopify, for example, charges a monthly subscription fee.

Step 4: Market the Products

Once you have the website up and running, the next step is marketing. This particular area is the most challenging.

Do not worry, as I have you covered.

Below are the main methods on how to market your dropshipping store:

• Social media
• Advertisements
• Blog

I will discuss these three in more detail later. But, for now, know that marketing is nothing more than blasting your products into the eyes of your target buyers.

Different Types of Dropshipping

There three main methods by which you can dropship, and these methods are:

• Your Store
• Online Marketplaces
• Social Media

Your Store

In this method, you will build your website from the ground up. It may sound intimidating, but it should not be.

There are many website builders you can use how to build an online store. You do not even need to know how to code.

These website builders have a drag-and-drop feature. You can also pick themes. From here, the next step is to upload your product images and details.

Online Marketplaces

Online marketplaces refer to eBay, Amazon, Etsy, etc. Generally speaking, these sites do not allow dropshipping.

However, this is rather a misunderstanding than a hard and fast rule. Amazon, for one, does not like it if you dropship products that people can find in another retail store.

There was a time when Amazon customers complained that their package came from AliExpress. The customers said that it did not make sense.

Why would they pay more for a product on Amazon when they could have purchased that same thing from AliExpress, right?

That is why Amazon banned dropshipping. However, it is okay to dropship if the product is not for sale elsewhere. It means you will dropship directly from a manufacturer—someone who does not sell his items on retail marketplaces.

Social Media

The last common method is social media. For example, you can build an online store on Facebook or Instagram.

Facebook also has a marketplace. The problem with this is that you cannot charge your customers. Instead, you must meet up or discuss how the payment would work through private chat.

In addition, you will encounter many scammers on social media sites. You do not have any protection if the buyer cancels while the product is in transit.

If you ask me, the best way to go is to build your store. You are in full control of your dropshipping websites and do not have to pay a lot of fees.

What Do I Use to Create a Dropshipping Store?

The best platform to create a dropshipping store is Shopify. Even Kylie Jenner uses Shopify, so why shouldn’t we do Shopify dropshipping?

Shopify is an all-in-one online store platform. Here is a snapshot of what you can do with it:

• Build a website store
• Create product pages and product categories
• Launch a blog
• Charge customers money
• Add applications from the Shopify App marketplace
• Do marketing
• Implement SEO strategies

Shopify does not offer a free account. However, the basic plan is all you need to build a fully functional store. Shopify has three main plans, which I encourage you to review.

Pros and Cons of Dropshipping

Here are the pros of dropshipping:

• Easy to start
• No big capital required
• You do not pay for inventory
• The fixed monthly cost is affordable
• You have a low business risk
• You can manage your store anywhere
• Someone ships the item for you
• You can sell as many products as you like
• You can sell internationally

Here are the cons of dropshipping:

• There is a high level of competition
• The profit margin is low
• You cannot control product quality
• You cannot control the shipping costs and standards

Is Dropshipping Profitable?

Yes, dropshipping is profitable. But, like any business, you will profit if you do the math correctly.

First, you must identify your fixed costs. Fixed costs are the monthly fees you spend. For example, let us say you are paying $29 per month on Shopify, then $29 per month on Dropship.IO.

That is a total of $58 per month.

So, if you are selling one product with a capital of $10, and you sell that for $15, your gross profit is $5 per product.

You must sell at least 12 monthly to cover your fixed costs ($5 x 12 = $60).

Dropshipping is profitable if you can find low-cost, high-quality products that you can sell for a high price. The trick here is a balancing act.

First, I would advise you not to spend a lot. You may want to buy many things, like apps, to make your website look better.

Do not fall into this temptation. Instead, focus your expenses on necessities only. For marketing, use free social media sites to share your products. Do not spend a lot of money on ads.

Only spend once your business is already consistently making money.  

The Costs of Starting a Dropshipping Business

How much does a dropshipping business cost? Unfortunately, there is no single answer to this, but I will give you a breakdown.

• Website cost – $29 per month
• Dropship directory cost –$29 per month

These are the two primary expenses you need to prepare. For your business logo, you can do it yourself or pay a professional.

There are people on Fiverr who will make your logo for $5. Some will make it for $50. Choose a designer that you can afford.

Now, you also need pages for your website store. You can pay a writer to do this or do it yourself. I suggest the former.

There are many templates for standard pages that you can copy. For example, you can download free Terms & Conditions pages, Return and Refund Policy pages, etc.

How to Market a Dropshipping Business

Marketing your dropshipping business is critical. People will not know your store exists if you do not tell them.

Here are the three main marketing methods for dropshipping:

• Social media
• Advertisements
• Blog

Social media

I recommend that you build social media pages for your dropshipping store. However, do not do this on all social media channels.

The two best choices are Facebook and Instagram. Start with Facebook and share that page with your friends and family.

Instagram is also good, but you must publish lifestyle posts about your product. This strategy is difficult, as you do not have the product.

Once you have a Facebook page, post images for your product; do not forget to add the price, selling proposition, and link to your store.

In addition, you must ask your friends and family to share what you shared.

Advertisements

Advertising is the fastest way to get traffic to your website. However, it is also the costliest.

Here are the places where you can advertise:

• Facebook
• Google
• Instagram

The advantage of Google is that it can show your products in many channels. When you launch a Google ad, you can choose to show the ad on:

• YouTube
• Blogs using Google AdSense
• Gmail
• Android games

The conversion rate of online advertising is somewhere between 1% and 4.3% [1]. If you ask me, this is the last of the three methods you should do.

Read as much as you can and watch as many YouTube tutorials before advertising online. It is too costly, and the last thing you want is to drain money.

Blog

Blogging is an effective way to get traffic, and consequently, sales.

Here are some tips I can share:

• Blog about topics that will benefit your target market
• Position yourself as an expert
• Do not neglect best practices on search engine optimization
• Blog regularly   

Blogging is free if you write the articles yourself. However, you can always hire a ghostwriter online from sites like ProBlogger if you are not a writer.

Dropshipping In Different Countries

Can you dropship to other countries, and what are the rules? Generally speaking, the rules do not vary that much.

The world is now a free global marketplace, with only a few countries left with too strict trade policies, like North Korea.

Below are some things I will share about the biggest dropshipping markets.

Dropshipping in the UK

It is perfectly legal to dropship in the UK. The thing is that you must choose a UK-based supplier or one who is in Europe for faster shipping.

The UK has consumer laws, and not all things are legal for selling. In addition, there are tax laws that you must comply with. For example, a UK supplier who sends to a UK customer is a transaction that must pay VAT.

Dropshipping in India

It is legal to dropship in India. If your store is not in India, you do not need a license to do business. However, you must adhere to the country’s business standards if you are from India.

For example, you must get licenses, trademark documents, pay GST and many more. GST stands for Goods and Services Tax applicable to the whole country.

Dropshipping in Australia

It is legal to dropship in Australia. However, the land is pretty much on its own, so you better find an Australian supplier.

If you are in Australia, you must also register your business and pay taxes. Australia also implements a consumer law that you must not break, like misrepresenting your products.

Dropshipping in the US

The USA is the best market for dropshipping. Why?

• There are many dropship suppliers
• Consumers have money to spend

It is not illegal to dropship to the US if you do not live there. However, if you are in the United States, you must register your business and pay your taxes. Otherwise, the IRS will come knocking at your door.

FAQ

Is dropshipping competitive?

Yes, it is incredibly competitive. However, because the barrier to entry is low, many people venture into this business.

Is dropshipping legal?

Yes, it is legal. There is nothing illegal about it since you are merely a retail salesperson. Just make sure you do not sell illegal items like drug material, vaping products, and sex toys. By the way, some countries allow these products, so research carefully before selling them.

Is dropshipping right for me?

Dropshipping is right for you if you love retail and do not have much capital. It is the best business model where you can make a lot of money with small business risks.

Do I need dropshipping insurance?

Yes, I would advise you to pay for shipping insurance. This way, you are not liable when the logistics company losses or damages the item.

Summary

Is dropshipping worth it? Yes, dropshipping is a boon to retailers. Now, you can start a business without buying inventory.

And the best part? You have access to millions of products. On top of that, you can sell internationally.

Now, there are three things you must do:

• Think and decide on a niche
• Visit Dropship.IO and get your free trial
• Review Shopify and how it works

Dropshipping is not a get-rich scheme. It is a legitimate business model. And like all businesses, there are birth pains and challenges. Good luck!