What is Drop Shipping? A Beginner's Guide to Starting an Online Business

Yes, online trading has many advantages, especially for new business owners. But it has its challenges, too. For many people trying to start a business without a premises, storing inventory is a big challenge. Box-filled bedrooms and boxing tape all over the kitchen table can lead to professional life having a big impact on the personal lives of not only you but your loved ones.

So what solutions are there? Well, one of them is to start drop shipping! And that’s what we’re going to look at today. We’ll cover:

• What is drop shipping?

• The drop shipping business model

• Pros and cons of drop shipping

• What kinds of products can I sell as a drop shipping business?

• How to get started as a drop shipping business

Once you’re finished with this blog, not only will you know how to get started as a drop shipping business, you’ll know how to thrive! Let’s get started.

What is drop shipping?

Drop shipping is a business model used in ecommerce where, instead of holding the stock they sell, retailers work with a supplier or manufacturer who will produce, store, package, and ship the product directly to the customer on the retailer’s behalf. This means, from the retailer's perspective, all they need to do is market the product, handle the transaction, and manage the communication with the buyer, without even needing to see or handle the product itself.

How does it work? The business negotiates rates and inventory numbers with the manufacturer (or any third party that has the product they want to sell). Then, when each sale comes through, they purchase the products they need from the manufacturer who, instead of sending it to the business, sends it directly to the customer.

From the customer’s perspective, the experience is no different. The packaging will still be yours, the product is the same, and they won’t communicate with the manufacturer, only with you. But from your perspective, everything is much simpler.

The model is popular with startup businesses, businesses using social media to sell their products (like influencers), and entrepreneurs looking to keep upfront costs low. This is because drop shipping is highly accessible, with minimal risk as you’re not tying up capital in stock you might not sell or committing to a leasehold. There’s also lots of flexibility as you can renegotiate, change your products and packaging, or adapt the model based on how trade is going! What’s not to like?

The drop shipping business model

1. The customer buys the product from you

The majority of your focus when using the drop shipping model goes towards attracting customers and making sales through an online store. Whether it’s online or social media advertising, SEO work, or putting your products on marketplaces, a lot of work goes into getting digital traffic to your store.

Then, you need the store itself to seal the deal. Design your brand carefully, showcase your products at their best, make the pricing clear and the checkout smooth. Your payment portal should require only the essential customer information to avoid slowing down the sale and making unnecessary demands of the customer. If you can, build in a progress monitor so they know they haven’t got far to go to complete the order. 

2. You order the product from your supplier

Once the customer has completed their purchase, that’s when you place your order with the drop shipping supplier. If you use a sophisticated ecommerce integration like Epos Now Online or Shopify, you may well be able to automate this process, which would mean this step happens without you or your team needing to do anything at all.

Well established drop shipping businesses will have strong relationships with a reliable supplier who will raise any issues with the order quickly, allowing you to address them. But typically, the order will go through quickly, and you can use a portion of the money given to you by your customer to pay for the order with the supplier, allowing you to keep the profits.

3. The supplier ships the product to the customer

Once the supplier receives your order, they’ll pick, pack, and ship the product straight to your customer. Unless you use a minimalist packing design, such as a plain box with the product inside, the supplier will white label the package for you. This means adding your logo and business name or using branded packaging. It can also mean adding your own invoices, promotional inserts, or thank you cards into the parcel, strengthening your brand post-sale, and helping boost customer loyalty.

Your supplier can do all the above for you, plus managing shipping times, courier services, and tracking updates. Nevertheless, it’s important that you stay informed throughout the process so you can provide customers with accurate delivery information and updates if needed.

4. You handle the aftercare

Once the customer receives the product, your supplier has played their part and you handle the aftercare. After all, they are your customer and your responsibility. This means you handle any complaints and returns, any refund requests or enquiries about the product.

Strong aftercare is important for maintaining your reputation and encouraging repeat business. Once the customer has completed a purchase, you can also use email marketing, social media advertising, and loyalty campaigns to remarket products and generate future sales from them. Building long-term customer relationships is one of the most valuable parts of ecommerce success. By providing responsive support and a positive buying experience, you can turn one-time buyers into loyal customers who make further purchases and keep your business going!

Pros and cons of drop shipping

Pros of drop shipping

• Low startup costs. An undeniable advantage of drop shipping is the low financial requirements upfront. You don’t need to purchase much stock upfront as you only spend on inventory when you’ve already been paid for it. You don’t need a warehouse or shop floor. All you really need is to design and print your packaging and create your website or the social media account you’ll sell from. All in all, the startup budget you need is one of the smallest for any business type.

• Flexible location and working style. Another consequence of not needing a premises is that you can manage your business from just about anywhere. All you need to do is get online and check on your website and any recent orders. This flexibility makes drop shipping particularly attractive for freelancers, digital entrepreneurs, and people looking for a side business.

• Wide product selection. Drop shipping allows businesses to offer a wider product range without needing to manage a complex inventory. You can test product ranges, drop products that aren’t selling or aren’t profitable enough, and adapt quickly to changes in the market, and never lose money invested in unsold stock.

• Easier scalability. As your sales grow and suppliers continue handling order fulfilment, all your efforts and additional profits can go into building your brand and marketing the business, which means fewer teething problems associated with growing businesses.

Cons of drop shipping

• Lower profit margins. The flipside of the practical benefit of having the supplier handle order fulfilment is that same supplier takes more of the money. Paying the supplier to package and ship the order, combined with difficulties of staying competitive in the global ecommerce market makes each sale less profitable than traditional retail. This can make maintaining healthy profit margins more challenging.

• Less control over fulfilment. Because you can’t whip a product out of your stockroom whenever you take an order, your business is hugely dependent on the reliability of your suppliers. Delays, damaged products, or fulfilment mistakes can affect your customer experience, even when the issue is outside your direct control.

• High competition. The low barrier to entry means that many others just like you are selling products of all kinds online. This makes competing on price extremely difficult, making branding and marketing hugely important.

• Complicated returns and customer service. Managing refunds, returns, and complaints can become more complex when you’re not the one directly shipping the products. Resolving issues often requires you to link up between the customer and supplier, which slows down the support process and requires extra legwork on your part.

What kinds of products can I sell as a drop shipping business?

Ultimately, if there’s a supplier willing to produce it, and a postal service will take it, any product can be sold using the drop shipping business model. Even so, there are some products that lend themselves to drop shipping, and some that don’t.

Common drop shipping products include items of clothing, shoes, beauty products, home decorations, fitness accessories, pet supplies, phone accessories, gaming equipment, and smaller electronic products. Niche products like hobby equipment and personalised gifts, or the sustainability industry are also well suited to drop shipping as businesses find it easier to appeal to these smaller markets.

As a rule of thumb, a product suited to drop shipping will be lightweight and easy to ship, relatively cheap to produce and store, and with broad enough appeal that social media and online advertising will get you plenty of sales. Successful drop shippers often focus on trend-driven products or niche markets where strong branding and targeted marketing can help them stand out from larger competitors and build loyal customer audiences.

Products that require complex installation to use, or anything requiring specialist support, or quality control, is less well suited as you won’t be able to see the products before shipping, and so these kinds of products are liable to higher customer service and returns requirements.

How to get started as a drop shipping business

• Choose your niche and products. Start by identifying a market you want to target and researching products with strong demand. Choosing a niche rather than selling everything at once can help you build a clearer brand identity that resonates and helps you market to a specific audience.

• Find reliable suppliers. Drop shippers are hugely reliant on their suppliers, so it’s important to work with companies that offer quality products, reliable shipping, and good communication. You need these relationships to work. If you’re not sure where to start, many drop shippers use supplier directories or ecommerce integrations to connect with manufacturers and wholesalers.

• Build your ecommerce website. Every sale you make will come through your website, so you need a professional e-store with stylish branding, clear descriptions of your products and pricing, and easy navigation of your catalogue and your checkout. If you don’t possess the web design and branding skills you need, it may be worth hiring a professional to help you. The extra confidence customers get from your website will pay your investment back ten times over.

• Set up marketing channels. Once your store is live and your supplier is ready to go, focus on attracting visitors through social media marketing, search engine optimisation (SEO), paid advertising, email campaigns, and influencer partnerships. Strong marketing is essential for generating traffic and sales.

Dropshipping: a great way into business when done right

Drop shipping, thanks to its lack of premises, minimal staffing requirements, and no need for expenditure on initial stock, is one of the most practical ways to start a new business. Businesses simply need to focus on building their brand and reputation, and marketing their products, while, once designed and packaged, the manufacturers or suppliers to most of the legwork.

There are challenges: the need for a reliable supplier is paramount, and there is strong competition in ecommerce, making it difficult to compete on price (especially when the suppliers need to be paid for all the extra work they do). But with the right niche, supplier, and a strong marketing strategy, drop shipping can provide a straightforward and fairly profitable route into the world of online retail.

Like this blog? Take a look at some of our other business guides, or see what Epos Now POS systems can do for your business!