What is Dropshipping?

Dropshipping is an e-commerce model where the seller doesn’t own any inventory or handle any of the shipping responsibilities. When a customer makes a purchase, the seller processes the order and transfers it to a third-party supplier—like a wholesaler or manufacturer, for example—who prepares and ships the order. The seller only pays the supplier for an item after someone buys it, which makes dropshipping a popular option for entrepreneurs who want to start an online store quickly and with minimal overhead.

According to Precedence Research, the global dropshipping market is forecast to reach almost USD 352 billion in 2024, $435 billion in 2025 and surpass around $825 billion by 2033.

If you’re planning to start an e-commerce business, you might be weighing your options for managing inventory and delivering products to customers. One popular method to consider is dropshipping, which gives entrepreneurs a fast way to build a catalog of products and sell products online without inventory.

How does dropshipping work?

Dropshipping is a way to sell stuff online without keeping products in stock or manually handling any of the shipping responsibilities.

In a traditional retail setting—whether brick-and-mortar or online—the business owner must maintain a warehouse full of inventory. When someone buys an item, the store itself handles the transaction and then ships that item directly to the consumer.

• The customer places an order from your e-commerce store
• The order is automatically forwarded to your supplier
• Dropshipping supplier prepares, packs, and fulfills the order
• The customer receives their order from the supplier

With the dropshipping model, however, there's no physical inventory to manage. When a customer makes a purchase, the store processes the order and transfers it to a third-party supplier—your dropshipping partner—who then prepares the order and ships the products out to the customer. The store owner only pays the supplier for an item when someone buys it; they're not responsible for producing it, storing it, or shipping it themselves. This dropshipping process allows you to focus on marketing and customer service without worrying about inventory levels or warehousing costs.

What are the benefits of dropshipping?

For many entrepreneurs, the most significant benefit of dropshipping is that it allows you to start an online store quickly without owning any inventory. Since you don’t buy the product until after it’s sold (and after you’ve been paid), dropshipping can provide a healthy cash flow for minimal investment.

Now that you know what dropshipping means, here are some other key benefits of dropshipping.

• Sell anything you want
• Test the market
• More options for customers
• Reduced operating costs
• International expansion
• More flexibility
• Easier scalability

Sell anything you want

There are thousands of dropshipping suppliers selling just about any product you could imagine. You can add as many dropshipping products to your online store as you want, and it's easy to add more product listings to your e-commerce sales catalog. This vast range of products allows you to tailor your online store platform to meet the needs of your customer base.

Test the market

Dropshipping lets you see which items resonate with your customers without investing in physical inventory upfront. By testing different products, you can stay ahead of market trends and make informed decisions about what to sell. If the products sell well and provide you with your desired profit margin, great! If not, you can choose to keep them in your online store anyway (just in case) or drop them altogether—there's no upfront cost to you either way.

More options for customers

Dropshipping provides business owners with an easy way to expand their product offerings and give customers more options. By offering a broader range of products—including custom products—you can meet the diverse needs of your customer base. If folks are browsing your site for a product and don't find exactly what they want, they may leave and shop elsewhere. With dropshipping, you can add more of the products customers are searching for and entice them to spend with you, fostering customer loyalty.

Reduced operating costs

Every time you have to touch a product in the supply chain, there's a cost. Freight, warehousing, inventory management, labor costs, picking, packing, and shipping fees all add up. Holding costs, dead stock, and damaged or misplaced items also add to the expense. You can only pass on so much of your operating costs to customers without alienating them. In many cases, it may be cheaper to sell a dropship product than stock it yourself, allowing you to offer more competitive prices.

International expansion

The internet opens the door to international selling since nearly anyone with an internet connection can access your online store and make a purchase. By using dropshipping partners, you may be able to partner with companies that offer products locally or regionally in countries where it would otherwise be cost-prohibitive to ship products across international borders. This means you can serve a global customer base, regardless of their customer location, without the complexities of international shipping.

More flexibility

As long as you can communicate with customers and suppliers, you can run your business from nearly anywhere—including your home. Since there's no brick-and-mortar storefront and no inventory to manage, you don't need a dedicated physical space for operating your business. This flexibility allows you to focus on other business activities, and even if you have minimal business experience, you can start and grow your dropshipping store.

Easier scalability

In a traditional retail or e-commerce store, increased sales also mean increased costs. There are more products to buy in bulk, manage, and fulfill. You may need expanded warehouse space and more employees to handle all of the tasks necessary to run the business, including complex inventory management. And if your volume grows quickly, you risk struggling with order fulfillment. In a dropshipping business model, much of the work is done by your supplier, allowing you to scale with less additional overhead.

What are the disadvantages of dropshipping?

Because you don’t have to store or manage inventory yourself, dropshipping can save you quite a bit of money on overhead. There are a few disadvantages to keep in mind, however.

• Low margins
• Significant competition
• Lack of inventory control
• Bad actors
• Less repeat business
• Managing multiple dropshippers

Low margins

Since you're not purchasing inventory upfront or in bulk—and you're paying someone else for storage and order fulfillment—your profit margins from dropshipping are typically lower than they would be if you managed the whole process in-house.

Online sellers often use dropshipping products to augment their other physical inventory. You tie up less capital with dropshipping, but you only get a small percentage of the sale; most of the earnings go to the dropship provider.

Dropshippers will typically offer you a discount on products because they don’t have to handle the product marketing and sales.  Your profit comes from the markup above the wholesale price. While you're saving on warehouse space, you're also unable to take full advantage of wholesale pricing. Plus, you'll still have to pay for order fulfillment, processing, customer returns, customer service, marketing, and other business overhead. That means you'll need to sell many dropship products to build a profitable business.

Significant competition

Dropshipping doesn't require a significant investment to get started, but the low barrier of entry can cause market saturation in the dropshipping business model. The most popular products can be found at thousands of online sellers; some may even come from the same dropshipping suppliers.

Selling dropship items can quickly be reduced to commodity sales, where you will be competing with other e-commerce sites on competitive prices and reputation. Larger, more established retailers may reduce their markup to offer lower prices, which can force you out of the market. Even if you can match their pricing, consumers may feel more comfortable buying from an established vendor that they trust for quality products, affecting your ability to build customer loyalty.

Lack of inventory control

In a traditional retail model, you're in control of every aspect of the process—from marketing and sales to shipping and customer service—so you always know exactly how much product you have in stock. With dropshipping, you rely on your supplier to handle a significant part of your business, including maintaining accurate inventory levels, so your reputation hinges on their job performance.

If there's an issue with an order—such as a product being out of stock— the customer will contact you, and you'll have to reach out to the dropshipping supplier to find a solution. This back and forth makes it tougher to resolve problems quickly and efficiently. Additionally, since you are the seller of record, you are responsible for any customer returns and must ensure compliance with all applicable legal issues.

Bad actors

While plenty of dropshipping partners are top-quality suppliers, you should be aware there are some bad actors, too. You might encounter some suppliers that have a professional presence but deliver in a less-than-professional manner.

For example, there are scammers who claim to sell brand-name products but ship knock-offs, infringing on intellectual property rights. When customers receive low-quality or counterfeit branded products, it reflects poorly on you and can lead to serious legal issues. So if you find a dropshipper that claims to provide designer products at dollar store prices, be very cautious. Like anything else, if it sounds too good to be true, it probably is.

Less repeat business

Since you’re selling other people’s products, it may be challenging to set yourself apart. Consumers shopping for discount items tend to buy from places where they can find low prices with minimal risk, so many folks will be comparison shopping rather than returning to your store regularly.

You may miss out on one of the most profitable things a business can do: earn repeat customers and build customer loyalty. Offering exceptional customer service, quality products, or unique custom products can help differentiate your store and retain your customer base.

Managing multiple dropshippers

Many dropshippers opt to use several different suppliers at once to increase the diversity of their products. This strategy can be beneficial, but shipping multiple products from separate locations can cause your fulfillment costs, including shipping fees, to rise, too. Managing different dropshipping methods and coordinating deliveries to match the customer's location can become complex, potentially impacting delivery times and customer satisfaction.

Legal considerations in dropshipping

While dropshipping offers many advantages, it's important to be aware of the legal aspects involved in this business model. As the seller of record, you are responsible for ensuring compliance with all applicable laws and regulations related to your business activities.

This includes respecting intellectual property rights when selecting products to sell. Selling counterfeit or unauthorized goods can lead to serious legal issues, including fines and lawsuits. Always verify that your dropshipping suppliers are providing authentic, quality products.

Additionally, you must be transparent with your customers regarding shipping times, return policies, and any fees associated with their customer purchases. Handling customer returns efficiently is crucial for maintaining customer loyalty and a positive reputation.

When drafting your business plan, consider consulting with a legal professional to ensure that all your business activities are compliant with local and international laws.

Dropshipping alternatives

Dropshipping is one way to enter the retail industry without investing in inventory upfront and a place to store it, but it's not the only way. There are several alternatives to dropshipping, including print on demand, affiliate marketing, and private labeling. Each of these business models has its own advantages and can be considered when drafting your business plan, especially if you're concerned about upfront costs.

Print on demand

The print on demand (POD) model allows users to upload designs that can be added to various products, including T-shirts, stickes, and coffee mugs. You can focus on creating designs instead of manufacturing products and holding strock. Plus, your selection of designs and products will still be unique custom products that can help you stand out in the market.

Affiliate marketing

With affiliate marketing, you’re not actually selling a product. Instead, you use an affiliate link to a product of your choice and get a small portion of that sale when somebody makes a purchase using the link. While affiliate marketing is easy, it’s a lot less hands-on and engaging than some of the other dropshipping alternatives.

Private labeling

Private labeling, or white labeling, allows you to purchase generic products that you can add your own labels and marketing materials to, effectively creating your own branded products. For example, Costco is a big-name retailer that operates under this model. The Kirkland products Costco stocks on their shelves often come from other producers.

With private labeling, you have a little more control over the image of your brand. However, it’s also a bigger upfront investment.

How to start dropshipping

One of the benefits of dropshipping is that it’s fairly easy to get started. If you want to start a dropshipping business with a small investment, here’s how you can do it:

1. Identify products to sell. Look into items that will sell well and don't have a lot of competition. Consider current market trends and choose a range of products that appeals to your target customer base.
2. Find a supplier. The third-party supplier you work with should be reputable to ensure the profitability of your business. Compare suppliers and read reviews carefully. Your dropshipping partner will be your main inventory source, so it's crucial to choose wisely.
3. Select an online store platform. Your e-commerce website will be the home of your products. Look for an online store platform that can support your sales and integrate with your dropshipping services. Some platforms offer an app marketplace where you can find tools and plugins to enhance your store's functionality.
4. Market your business. Now that your website is up and running, you have to develop a marketing strategy to grow your business. Utilize social media, email marketing, and SEO to reach your customer base and drive customer purchases.

Common dropshipping FAQs

Do I have to pay for products before selling them?

No. The biggest advantage of dropshipping is that you don't pay for products upfront. You only buy the product after you make a sale on your online store and receive payment for it from the customer purchase. This means you have minimal upfront costs.

How much money do I need to start dropshipping?

Creating a dropshipping store is significantly less expensive than opening a traditional retail shop or buying inventory upfront. Still, there are costs involved, including:

• Online store platform: You’ll need to create an online store. Most people use an e-commerce platform with tools to help build and maintain your product catalog. Costs can run from as little as $30 a month up to $300 a month (or more), depending on the size of your business. And if you choose to sell on Amazon, it can cost you $40-$60 per month plus a 15% commission on sales.
• Domain name: Your domain name is the online identity of your business—and a powerful brand-building tool, too. Fortunately, domain names are customizable and affordable, with many costing as little as $20 or less per year. If you’re using an e-commerce platform to sell stuff, you can even redirect the URL, so customers go directly to your store when they type in your web address.
• Website and hosting: Most of the major e-commerce platforms allow you to build your e-commerce website on their platform; they’ll even host it for you, too. If, however, you’d rather go the DIY route, you can expect to encounter additional fees along the way. You’d need to factor in the costs of designing a website (or hiring a pro to help)—including any paid plug-ins, extensions, or add-ons that might be required to get the site up and running. And if you want to choose your own web hosting provider, it can cost you anywhere from $50 to $1,000 per month, depending on volume, features, and services.
• Payment processing: Another thing to keep in mind is that there will be a fee every time someone uses a credit card or electronic payment service to buy products from your store. Besides any bank fees, you can expect to pay slightly less than 3% (plus a small transaction fee) for PayPal, Stripe, or Authorize.net. Visa, Mastercard, American Express, and Discover typically charge between 1.3% and 3.4%.

It may sound like things are starting to get expensive, but many entrepreneurs are able to get into the e-commerce business for $500 to $1,000, all while keeping their monthly fees under $100. When creating your business plan, it's important to factor in these upfront costs. Compare that to the cost of starting a retail store—you'd pay more than that just for a month's rent on your brick-and-mortar space.

What are the best-selling dropship products?

There are millions of products that can be sourced through dropshippers. According to Grand View Research, the dropship products that bring in the most sales are fashion items (30%), food and personal care products (30%), and electronics and media (22%). Other significant categories include toys, hobbies, DIY, furniture, and appliances.

Who will handle customer service?

People sometimes make the mistake of thinking that dropshipping is a completely automated business and that all they have to do is set it up, turn it on, and let the profits roll in. Unfortunately, that’s not the case. You’ll still need to manage the business, including handling customer support, sales, and marketing. Your dropshipping supplier will sell you the product and ship it out for you, but everything else is up to you.

How do I submit orders to suppliers for dropshipping?

Most dropshipping suppliers accept orders online through a portal or spreadsheets; some will even allow you to place orders by email or over the phone. If you’re using an e-commerce shopping platform that works with dropshippers, there’s a good chance that you’ll be able to submit orders directly from the platform.

How big is the dropshipping market?

The global dropshipping market is expected to reach $351.8 billion in 2024 and $435.0 billion in 2025.

Where can I find dropship suppliers?

If you’re working with an e-commerce shopping platform, look to them for recommendations on suppliers. They want to keep you as a customer, so they’re only going to recommend suppliers they trust. If you’d prefer to find a supplier, performing a quick online search for dropshippers will bring up plenty of results, including many suppliers specializing in niche products.

Remember: partnering with a reputable, reliable dropshipping supplier is one of the most important things you can do. Poorly manufactured products or low shipping standards will only lead to dissatisfied customers, so choose carefully.

If you’re sourcing products internationally, there will be a longer delivery time. Will people be patient when they’re used to getting 2-day shipping from other online sellers?

Some shoppers will understand the longer delivery times, especially if you’re selling a unique product. Other folks might not be as willing to accept a longer turnaround time on their order. It’s important to make sure that you’re very clear with customers about delivery timetables and any associated costs. A lack of transparency can lead to complaints and refunds, which add to your expenses.

Many dropshippers include the cost of shipping to their product price. This allows them to offer free shipping for items, which helps mitigate concerns over longer shipping windows. When you handle shipping on your own, it’s a crucial part of the variable cost formula.

Is dropshipping a legitimate way to run a business?

Dropshipping is completely legal. In fact, many of the online stores you visit regularly take advantage of dropshipping to supplement their product lines. Walmart, Sears, Rakuten, Staples, Target, Overstock, and plenty of others are in the dropshipping business.

You can even use dropshipping for order fulfillment at Amazon, but keep in mind that there are some specific rules you’ll need to follow, and you’ll have to pay Amazon a percentage of the sale. It’s also OK to dropship on an eBay store as long as you’re fulfilling orders from a wholesale supplier and not buying it from another retailer or marketplace.

It’s not that different than buying from any other e-commerce store. Most online sellers don’t make the products they’re selling; they buy them from manufacturers or wholesalers. With dropshipping, you’re doing the same thing without having to buy the inventory ahead of time. You will, however, have to pay a higher price to have a dropshipping supplier handle the order fulfillment for you.

Do I need a business plan to start dropshipping?

You don’t necessarily need a full business plan to get started with dropshipping—unless you want to pursue business loans, financing, or investors, of course—but you should take some time to think about your marketing strategy. You’ll need to consider how you’re going to get the word out about your business, grow your audience, and keep customers coming back. You can check out some marketing plan templates if you need a little inspiration.

Think dropshipping might be for you?

Dropshipping can be a profitable business if you pick the right suppliers, the right products, and then market your business properly. You’ll find stories online about people who made their fortunes dropshipping, but you’ll also find plenty of stories about people who didn’t have such positive experiences.

Go into it with your eyes open, do your research, keep your expectations realistic, and you just might find dropshipping success.

If you’re considering starting a dropshipping business, Mailchimp has the marketing tools you need to get started. From an intuitive website builder to smart email marketing tools, Mailchimp helps small business owners do what they need to do to grow.

Also, Mailchimp's integrations with various e-commerce platforms offer a seamless solution for businesses of all sizes.

Key Takeaways

• Dropshipping allows sellers to list and sell products without holding inventory or managing shipping, as orders are fulfilled by third-party suppliers.
• The global dropshipping market is projected to reach $352 billion in 2024 and surpass $825 billion by 2033.
• Key benefits of dropshipping include reduced operating costs, market testing flexibility, and ease of expansion without significant investment.
• Drawbacks include low profit margins, significant competition, reliance on supplier performance, and potential customer service challenges.