Welcome to Chapter 5 of our order management guide. In this chapter, we’ll cover the most important things to know about dropshipping in relation to order management.
There are many different ways to dropship; however, here we’re just going to cover the basics.
Confused? Maybe this is too advanced or too basic for you? Head back to the order management homepage.
What’s the Difference between Fulfillment and Dropshipping?
In order management, when the term ‘fulfillment’ is used, we mean preparing and shipping an order to a customer. Typically, this involves using a shipping partner who collects the shipment from your warehouse.
Dropshipping is an alternative way of fulfilling orders where a business doesn’t keep the products it sells in stock and acts only as the middleman between the vendor and the customer.
Inventory stays with the vendor, and the e-commerce seller only facilitates the sale through their site as a middleman. The vendor then must ship the sold products to the customer.
The customer likely does not know anything about the vendor and may believe they are buying from the e-commerce seller.
Dropshipping appeals to sellers because it is cheaper. There are fewer overhead costs because they don’t store or ship the products, so they don’t pay for storage facilities or couriers.
Because of lower start-up costs, businesses can start dropshipping with a smaller budget than most sellers if they can find customers to sell to.
However, it’s not just small businesses that use dropshipping. Some larger companies dropship when they cannot fulfill orders.
For example, if you make a sale but don’t have the inventory on hand, but your vendor does, you can request the vendor dropship the order to the customer.
Dropshipping can also be more convenient for the customer because if you are out of inventory, they do not have to wait for you to receive goods from the vendor before they can be shipped.
Dropshipping can also be helpful for businesses that have grown very quickly. For such businesses, it is hard to keep on top of all the orders, and they can use a mix of regular fulfillment and dropshipping to meet orders.
Long story short, if you ever oversell something you can’t fulfill, dropshipping is an excellent way around that. Your business might already be using a mix of dropshipping and other fulfillment methods.
Dropshipping shouldn’t be confused with cross-docking, which we’ll focus on in the next chapter.
Is Dropshipping Legal?
Yes, dropshipping is legal and a very popular method of fulfilling orders in the US. If you have legal concerns about dropshipping, know they are largely unwarranted, and dropshipping is highly accepted.
Even some big brand names, such as Nordstrom and Macy’s, use dropshipping as a fulfillment method. Some businesses even depend more on dropshipping than standard shipping.
However, you should still understand and follow local laws. If you’re not sure, reach out to your local authority and get a clear understanding of how they would affect how you do business.
You should also check with the marketplaces you sell on to ensure you comply with their rules. Facebook, Shopify, and TikTok Shop have banned sellers who have failed to comply with their rules.
Some marketplaces require that the products be in the same country as the seller.
Is Dropshipping Hard?
Dropshipping can be hard work, but its difficulty depends on multiple factors. For example, dropshipping is simplified when you only have one vendor. In such cases, you only need a website to sell your vendor’s products.
Dropshipping becomes complicated when you start selling products from several different vendors. They may even sell the same products at different prices.
You must then manage different fees and prices, which can quickly become overwhelming.
However, while managing several vendors may sound challenging, it is wise not to depend solely on one because you will not have anything to sell if they run out of inventory.
How Successful Are Dropshippers?
Sources vary, but up to 90% of dropshipping businesses fail. There are many reasons behind this, but the biggest reason dropshipping businesses don’t succeed is because it is a highly competitive industry with very thin margins.
Because of this, it’s very easy for dropshipping businesses to run into losses.
For example, a product that costs a customer $12 will cost the seller $10 to buy from the vendor, and the seller will make $2 from the sale. However, if the customer then returns the product, it will cost the seller $12.
You also become reliant on vendor updates, which, depending on your vendor, can be frustrating and determine your ability to meet orders.
Some vendors don’t update sellers, so you have no idea when orders will arrive or if a vendor has enough supply to meet your demand.
Such situations often lead to overselling. You may have a certain product that is selling very fast, but the vendor runs out of inventory before you can arrange for products to be dropshipped to customers.
Many dropshipping businesses that succeed start with low capital until they can afford to invest in a warehouse and inventory and slowly depend less on dropshipping.
You may be interested in this blog post: How to Make Money Dropshipping
How Do You Start Dropshipping?
Dropshipping is a low-capital investment opportunity, and if your business is already processing orders, you likely have everything you need to start dropshipping.
On top of that, if you’re already a big business, you might not consider dropshipping because of the thin margins, as mentioned above. Dropshipping may only be useful as an alternative fulfillment method if you cannot fulfill orders.
Nevertheless, here’s what you need to start dropshipping.
Reliable Vendors Capable of Delivering Products
Having excellent vendors is one of the key pillars of dropshipping. Ideally, your vendors should give inventory updates so you know when a product is out of stock (or getting close).
Furthermore, your vendors should be willing and able to ship products to customers and should be able to do this consistently and reliably—this is vital for customer satisfaction.
You should also check your dropshipping vendors for quality, which should be balanced with price, as you must be sure you will profit from the arrangement with the vendor, or the arrangement will not be worth your time.
Lastly, as a side note, it is imperative that when you find such a good vendor, do not share their details with other sellers!
If other sellers hear who your vendors are, they may start buying from them, impacting your availability of goods.
A Website or Marketplace to Sell Products
As a dropshipper, you are essentially a third party between the vendor and the customer. You don’t handle the products; you’ve handed over that responsibility to the vendor.
This is why it is even more important to have a solid place to sell products, whether it be your own website, a marketplace, or both.
Furthermore, you need a robust marketing approach, which is why the branding and idea behind the company must be strong. You may consider specializing in a specific product category.
Key Points From Chapter 5
Remember these key points about dropshipping.
- Dropshipping is a method of fulfilling orders where the e-commerce seller doesn’t hold inventory. Instead, they send orders to the vendor, who then ships them to the customer.
- Dropshipping is legal in the US. However, it is wise to check local regulations to ensure you are compliant and any marketplaces you sell on.
- The more vendors you work with, the more complex dropshipping becomes. However, many dropshippers need multiple vendors to have enough inventory to fulfill orders.
- Dropshipping can be risky because of thin margins. Up to 90% of dropshipping businesses fail. Large businesses may use dropshipping as an alternative way to fulfill orders on top of regular shipping.
- To start dropshipping, you need reliable vendors capable of fulfilling orders and a website or marketplace where you can sell products.
Bonus: Are you curious about dropshipping in inventory management? Check out Chapter 3 of our Inventory Management guide too!
In Chapter 6, we’ll go over everything you need to know about cross-docking.