How does the dropshipping model work?
SEPTEMBER 14, 2022 | USE CASES
If you’ve spent any time in the world of online entrepreneurship, you’ll have noticed the growth in dropshipping – no surprise then, that the market is projected to reach $591 billion by 2027. But how does the dropshipping model actually work, and whom does it work for? Find out in our quick explanatory guide.
The dropshipping business model: how it works
The dropshipping model itself is pretty simple:
1. The buyer places an order for an item through your online store
2. You do not hold this item in stock, but rather purchase it from a third-party wholesaler
3. You have the item shipped directly from the wholesaler to your buyer
As for how returns are handled, you can choose whether or not to disclose that it has been dropshipped. In the blind dropshipping model, there will be no return address associated with you, but this can be problematic. In the private label dropshipping model, the order will still be fulfilled directly by the wholesaler, but your return address will be added to the label.
How do dropshippers get access to product inventories?
The most common way, as above, is through wholesalers. As dropshipping has risen in prominence over the past ten years, more and more wholesalers offer specific services tailored to those in the industry. Quite often, this looks like a regular fees per order of around $2, but it is becoming more common (albeit minority) to see a monthly subscription, where you pay a fee of around $20 for access to a wholesaler’s inventory. This helps to cover account management and related fees.
The advantages of the dropshipping model
Dropshipping is an excellent way to grow in the e-commerce space because the barrier to entry is very low.
As you can see above, you don’t need to incur the sometimes eye-watering costs of having a warehouse to store an inventory, or even to handle fulfilment yourself – your major cost is solely promoting your own online store, and you can devote your energies almost entirely to doing so. It also means you don’t have to deal with unsold or slow-selling inventory, the latter which can be one of the mistakes that can harm an e-commerce store.
Likewise, you have no need for a physical presence in the form of an office or similar. Just make sure make sure you have your laptop and a good internet connection, and you can be your own boss from anywhere that strikes your fancy!
Likewise, the dropshipping model is eminently scalable. Whether it’s as a full-blown business in its own right, or as a sideline to a traditional e-commerce store, you can easily and quickly expand into multiple sectors and multiple geographies. For example, imagine that you’re based in Vietnam. You can easily source wholesalers based in, let’s say, the American market and sell to buyers also based in the US. All this happens without you ever setting foot on American soil!
The disadvantages of the dropshipping model
Now the above is certainly attractive to entrepreneurs, but it’s suited to a particular section of entrepreneurs.
One area that some could see as a downside is that the margins can be quite narrow. If you’re dropshipping in a particularly competitive market, you’ll find that the original wholesaler or seller’s own margins will be tight to outdo the competition, so your own ‘wiggle room’ to add on top of that is pretty small. Likewise, you need to factor in if sellers have a ‘dropshipping fee’. This is often around $15-20 a month in return for accessing a wholesale price.
If you work across a number of niches, or expect a higher sales volume, this isn’t problematic. Nor is it so if you’re normally in original e-commerce with a dropshipping niche on the side for expansion purposes.
Growing your dropshipping business fast
There is one additional trick to the above, however, and this is multiple accounts. Through Multilogin, you can run multiple stores on the same platform, meaning you can grow your reach and serve and re-serve the same audiences, helping to increase the likelihood of conversion. Find out more here about running multiple accounts.