Dropshipping is a retail fulfilment model wherein the business does not stock the products it sells. The firm buys the product from a third party, and the third party then ships the product directly to the end customer. Dropshippers and aggregators can now both thrive thanks to improved logistics and the easing of trade barriers.
If you are an aspiring entrepreneur looking to embark on an online business, you would, in all likelihood, have considered dropshipping. As a business model, dropshipping has lately attracted a lot of entrepreneurial activity due to its potential to provide high returns at low overheads and relatively small startup capital. However, before embarking on a dropshipping venture, it is important to understand the nuances of dropshipping, its benefits, and its challenges.
What does Dropshipping Mean?
Dropshipping is a retail fulfillment model for online stores; wherein the business does not stock the products it sells. The business buys the product from a third party – who could be a manufacturer, a wholesaler, or even another retailer – and the third party then ships the product directly to the end customer.
Therefore, a drop shipping business is a storefront that customers visit to view and order products from. Once the customer selects and pays for the product, the drop shipping b2b online seller pays and transfers the b2c orders to the third party for the product – who then ships the product directly to the customer. The dropshipping store does not ever need to handle the products.
The business does not order inventory in bulk or stock products in the dropshipping model. Consequently, the business does not require hiring a large workforce, bearing overheads, building warehouses, and operating lower operational costs than the traditional online retail business.
How is Dropshipping Done?
To understand how dropshipping works, it is necessary to first understand the constituent elements of the retail supply chain:
- The Manufacturer – A manufacturer is the business entity that manufactures the product. The manufacturer does not sell to the end customers. Instead, they sell the manufactured products, usually in bulk, either to wholesalers or retailers.
- The Wholesaler – Wholesalers purchase products in bulk from the manufacturers, add a mark-up and sell them to retailers. Typically, wholesalers hold products in bulk from many different manufacturers.
- The Retailer – It is the retailer who sells the product to the end customer.
Here is how dropshipping works:
- The customer visits the online storefront of your dropshipping business (the retailer) and places an order by paying for the selected product.
- You pass the order on to your dropshipping partner, who may be a manufacturer or a wholesaler. This partner then packages and delivers the product to the customer.
- In this chain, the manufacturer/wholesaler charges you for the product and the delivery, and you charge the end customer.
As a general rule, the lesser the number of constituent elements in a supply chain, the fewer the entities taking a cut and the greater the profits for each entity. For a dropshipping business, the shortest supply chain – a direct contract with the manufacturer – is the most profitable.
How does Dropshipping Work in India?
Operationally, the dropshipping business in India works no differently from elsewhere in the world. The differences arise from India’s geographical location and the regulatory environment. These factors confer certain advantages/disadvantages to a dropshipping business in India.
China is the biggest manufacturer in the world. India’s geographical proximity to China provides Indian dropshipping businesses with the advantage of shorter shipping distances and lower transportation overheads.
However, regulations stipulate that sourcing from China requires the business to obtain multiple approvals/licenses for import/export. The rules also force Indian drop shipping businesses to import and sell in smaller quantities. As a result, businesses lose out on economies of scale – raising costs for the business and the price charged to the end customer.
In comparison, businesses in many other countries are provided import duty exemptions enabling them to buy at a lower cost and sell at a lower price to the customer.
However, despite the above bottlenecks, dropshipping businesses in India remain profitable through cost savings from practicing lean and efficient operations.
How To Start a Dropshipping Business?
Set up an Online Store
The first step in starting a drop shipping business is to set up an online store with a suitable e-commerce platform. Most well-known e-commerce platforms enable you to create an online store easily and quickly. For example, you can become a part of Amazon dropshipping through the ‘Fulfilled by Amazon’ scheme. Although theoretically, it is possible to set up a dropshipping business without an online store, your reach will be limited, and the business growth will slow.
Identify an appropriate dropshipping idea
Successful dropshipping businesses steer clear of commodity products and choose to sell niche products in niche categories to avoid profit-sapping competition – for example, environment-friendly wooden cutlery. Dropshipping allows the business to observe how the product sells and pivot to a new product based on the sales figures.
Contract a suitable manufacturer/wholesaler
Once you have identified the product(s), the next step is to find a reliable supplier for the product(s) at a reasonable price. You can identify and reach out to a supplier directly or through specialized platforms that facilitate such connections. The choice of the correct supplier is critical because any deficiency in the product or service provided by the supplier will be attributed to you by the customers.
Financial and Legal Due-Diligence
Complete all the regulatory and financial requirements related to the registration of the business, GST registration, Import & Export Code (IEC), bank account, licenses, TIN, EIN, etc.
Market your Business
Finally, when you are ready to start selling – market your business to make potential customers aware of your product/service. Use all available marketing channels such as TV, print, digital, social media, influencers, etc. – appropriate to your product to gain visibility for the brand.
Is Dropshipping Easy?
Building no successful business is ever easy, and dropshipping is no different. However, dropshipping can be highly profitable if you have planned well and run a tight and lean operation. Some of the challenges that you need to consider and plan for; include a strategy to handle refunds and returns, settling transaction disputes, thin margins, disputes with the hosting platform, managing risks associated with an unreliable supplier(s), etc.
With greater internet penetration and increased smartphone affordability – more and more people are moving online to make their purchases. The time is just right to capitalize on the opportunity – identify the right product, pick the right platform, select the right supplier, and do the necessary financial and regulatory due diligence – and you are in business.
For a frictionless payment experience for your customers on your online storefront, you can avail yourself of the services of specialized payment firms such as PayU India.
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The main advantages contributing to the growth of drop shipping are Low overheads, Flexibility to pivot, and Easy scalability
By the very nature of its structure, dropshipping extends your success runway by allowing you to iterate the product offering, target customer(s), marketing strategy, customer service, etc.
The downsides to drop shipping are low margins, lack of control on product/fulfillment quality, and hypercompetitive & complex logistics.