Do you want to start an e-commerce business with an online storefront? In that case, you can choose among many different operational business models. In recent years, entrepreneurs who value exceptional operational efficiency and low overhead costs have increasingly opted for the dropshipping method of product handling and order fulfillment.
You may have heard of this trending business model, but you might not fully understand its various advantages and drawbacks. This article can answer some of your most pressing questions about dropshipping and serve as a launching pad for further investigation and research.
What Is Dropshipping?
With an understanding of what a dropshipper is, let’s dive into the dropshipping business model. Amazon defines dropshipping as:
“A way of selling products without handling inventory, storage, or shipping” by working with “third-party suppliers who ship products directly to customers on your behalf.”
- No inventory required
- Supplier handles fulfillment
- Retailer focuses on marketing and sales
By leaving all these essential business processes in the hands of others, dropshipping places a relatively light administrative burden on the business owner.
There are some disadvantages to understand and consider when learning about dropshipping. These disadvantages include, a real complex customer service model, inventory management complications and level profit margins as you may end up competing solely on price. However, the biggest downside of dropshipping is the lack of control that it offers the business owners who adopt it. This makes it a great model for most entrepreneurs who want to sell generic or established branded products without establishing a strong company brand presence of their own. Conversely, dropshippers who aspire to become a trusted brand name often face a steep uphill battle.
Beyond branding concerns, the dropshipping model can lead to issues in the areas of product quality control and inventory management. You can certainly develop methods of quality control regulation through your dropshipping suppliers, but the “hands off” approach of dropshipping significantly limits your opportunities to monitor and ensure high product quality. Because it is outsourced to one or more suppliers, inventory management is extremely simple in a dropshipping business. However, you can also find yourself quite powerless to address supply shortages or other inventory problems that may arise.
How Dropshipping Works
Dropshipping simplifies the traditional retail process by allowing business owners to focus on marketing and sales without managing inventory or fulfillment. Instead of stocking products, orders are handled by third-party suppliers who ship directly to customers.
Step-by-Step Process:
- Create an Online Store
You set up an eCommerce store and list products for sale without holding inventory. - Customer Places an Order
A customer purchases a product from your website at your retail price. - Forward the Order to a Supplier
You send the order details to a third-party supplier, wholesaler or manufacturer. - Supplier Prepares and Ships the Product
The supplier packages and ships the item directly to the customer. - You Keep the Profit Margin
The difference between your selling price and the supplier’s cost is your profit.
Key Considerations:
- Dropshipping suppliers can include wholesalers, manufacturers or specialized fulfillment partners
- Success depends on finding reliable suppliers and maintaining competitive pricing
- This model removes traditional supply chain steps, reducing overhead and operational complexity
In the traditional supply chain model, manufacturers will sell products in bulk to wholesalers, wholesalers sell those products to retailers at an increased cost, and then retailers markup product prices once again for consumer sales. In many modern market sectors, companies have found success by eliminating one or more of these often-expensive supply chain steps. Dropshippers should consider working with any wholesaler or manufacturer who is willing to ship directly to the final customer.
Why Start a Dropshipping Business?
Thanks to its streamlined supply chain structure and low overhead requirements, you can establish a new dropshipping startup with relatively little upfront capital. The lack of initial investment and ongoing inventory costs also significantly reduces the financial risk associated with starting a business.
Companies that employ dropshipping can operate from virtually any geographic location because they sell their products online and don’t need to worry about shipping from their own warehouse. The dropshipping model also makes it far easier for companies to test new product lines, scale up business operations and sell a broad spectrum of products.
Because they have limited branding opportunities, companies that adopt the dropshipping model must often maintain low product profit margins to outpace the competition in terms of price. However, the independent authority Shopify reports a relatively healthy profit margin of between 10 and 15 percent for companies that find the right products to sell to the right consumer base through the right supplier relationships.
Pros and Cons of Dropshipping
Pros:
- Low startup cost
- No inventory management
- Easy to scale
Cons:
- Lower profit margins
- Less control over shipping and quality
- High competition
Legal Aspects of Dropshipping
While some people mistakenly question the legitimacy and ethics of the dropshipping model, dropshipping is an entirely viable and legal method of order fulfillment that many global ecommerce leaders employ today. In fact, very few retail companies sell products that they manufacture themselves, and methods of product supply chain and distribution have rapidly evolved as the online storefront has grown to replace the brick-and-mortar shop in many respects. Just be sure to investigate the various local, regional and national laws and regulations that might affect your dropshipping business before you launch it.
Starting a Business
No matter what type of company you want to establish, you must complete several regulatory and licensing processes before you can legally go into business. One of the first steps that you must take is choosing what type of business structure you want to adopt.
Sole Proprietorship, C Corporation or Limited Liability Company (LLC)
Before launching your dropshipping business, you’ll need to choose a legal structure. The most common options—sole proprietorship, C corporation, and limited liability company (LLC)—each offer different levels of control, liability protection, and tax implications.
Common Business Structure Options:
Sole Proprietorship
- Simplest and least expensive to set up
- Full control over business decisions
- Income is reported on your personal taxes
- Downside: You are personally liable for all business debts and risks
C Corporation (C Corp)
- Separate legal entity from its owners (shareholders)
- Provides limited liability protection
- Can raise capital through stock
- Downside: Subject to double taxation (corporate profits & shareholder dividends)
- More complex compliance and reporting requirements
Limited Liability Company (LLC)
- Combines flexibility with liability protection
- Owners are not personally responsible for business debts
- Profits and losses typically “pass through” to personal taxes
- Fewer formal requirements than a corporation
- Popular choice for small to mid-sized businesses
Laws and Regulations
Beyond registering your dropshipping business with the government as a sole proprietorship, a C corporation or a limited liability company (LLC), there are many other legal standards you must meet before you can successfully operate your business. To sell things online, you must take care to adhere to all applicable sales tax and value added tax (VAT) requirements, which might vary between business sectors and legal jurisdictions.
Even if the products you sell never pass through your hands, it is important to note that you are still responsible for ensuring that everything you sell complies with relevant product safety, quality and labeling standards. You are also responsible for following all laws that relate to marketing those products. Before you make a shipment overseas, you should research all relevant import and customs regulations. Your company website and ecommerce operations must also comply with all payment processing and general online business regulations.
How to Start a Dropshipping Business
If you bear in mind all the intricacies detailed above, a dropshipping business model can be straightforward. Use the following series of steps as your guide.
Step 1: Develop a Business Concept
Every great company begins as an idea. No matter what methods of product handling and order fulfillment you happen to favor, you should gravitate toward business concepts that hold promising profit potential and that fall within your personal areas of interest and expertise.
Step 2: Decide and Source Product Offerings
Before committing to a specific market niche or business concept, it is important to perform extensive research. You will want to know all that you can when it comes to the products that you offer, the target consumer you want to reach and the different ways that you will reach that consumer. It is also extremely vital to conduct thorough competitor research.
Step 3: Establish Relationship With Suppliers
Your success and failure as an entrepreneur using the dropshipping model hinges on your ability to choose a dropshipping supplier that delivers the right high-quality products promptly and on-schedule to the right customer. Some suppliers go above and beyond these essential functions to add supplementary touches, such as providing branded products with special packaging to help further unify your marketing efforts.
Step 4: Create an Online Store
Just as the physical storefront reflects the overall quality and style of a brick-and-mortar business, your ecommerce storefront will represent your dropshipping business online. Even if you don’t offer branded products or spearhead a unified advertising campaign, your ecommerce website offers you the opportunity to express a strong company image and offer finely tuned information about the products you offer. You may also want to place online storefronts or ecommerce links on your social media pages or existing online marketplaces. Most successful dropshipping businesses take a multichannel approach to sales.
Step 5: Register Your Dropshipping Business
Beyond choosing a name for your dropshipping business and filing it as a sole proprietorship, a C corporation or an LLC, there are many other things that you must do to property register it. While specific registration requirements will vary between sectors and jurisdictions, common registration procedures include securing an employer identification number (EIN) for tax purposes, applying for appropriate industry-based licenses and permits and registering with the IRS and other relevant government agencies.
Take Your Business Knowledge to the Next Level
Starting a dropshipping business is just the beginning. Growing and sustaining it requires a deeper understanding of marketing, operations, and strategy. The graduate business programs at Keiser University are designed to help you build those skills and apply them in real-world business environments.
Learn more about your options and see how the right degree can support your goals.
After experiencing profound personal loss, Sydney Nau found her purpose in nursing. Today, she leads with compassion while advancing her education and transforming lives through patient-centered care.
