What is dropshipping

What is dropshipping, and how does it work in the UK?

This is a guide about how dropshipping works, understanding the various players in the process, and exploring potential advantages and disadvantages of using dropshipping as a delivery method for ecommerce businesses.
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Dropshipping: an introduction

The growth of the e-commerce industry has led to many profitable ancillary businesses. One such business is dropshipping. This is a model whereby order fulfilment–the process of stocking, packing, shipping and delivering products to customers – is outsourced to a third party, often called the ‘dropshipper’.

This can be considered an attractive option, especially for entrepreneurs, because one of the possible advantages dropshipping can offer is a way to start a business with low initial capital and low overheads.

While many sellers around the world may have opted for dropshipping as the right solution for their ecommerce business, getting a better understanding of how it works might help you make a more informed decision about whether it is right for you.

What is dropshipping?

Dropshipping is one of the many options available for sellers to focus on selling products online – either on their own ecommerce website or an external website – while outsourcing the fulfilment process to a third party.

In some agreements, the dropshipper also procures and stocks the required quantity of products, and handles inventory and stock-taking, which means the seller does not have to handle those aspects either.

How does dropshipping work?

In general, the dropshipping process depends on the precise agreement between you, the seller of record, and the third party you have chosen to sign up with to handle the fulfilment process on your behalf but typically the dropshipping process follows this general sequence:
  • Seller signs agreement with dropshipper.
  • Customer orders online.
  • Seller receives order.
  • Customer receives an order confirmation
  • Seller forwards the order to dropshipper.
  • Dropshipper ships the order.
  • Customer receives their product.
Sellers can also choose to have certain automated solutions that send pre-written messages to the customers at each stage of the fulfilment process. This can include messages confirming that the order has been received, that the product has been dispatched (by the dropshipper), and a final confirmation once the product has been delivered to the chosen address.

These are all just illustrative examples of how dropshipping could work – it is not necessary that your process will follow the exact same steps, in that order. It all depends on the dropshipper you choose and what specific service(s) you have agreed upon.
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Understanding the seller, the manufacturer, and the wholesaler

In the world of ecommerce, anyone might potentially be a seller – an individual, a small company or even a large business can sell products online. However, when talking about dropshipping, the term ‘seller’ usually refers to a person who only sells products to an end customer.

The seller

Also called the Seller of Record – the seller is the one who chooses what products to sell, decides the sales price, receives the final payment, and agrees to pay any required taxes or surcharges based on local rules and regulations. Even if you are not handling stocking, packaging, shipping, and delivery, you are still the owner of the goods you are selling, making you the seller of record.

The manufacturer

This can be an individual or a business – makes certain products. They usually sell these in bulk to a wholesaler or a retailer, not as single pieces directly to the end customer. As a seller, you could buy products in bulk from a manufacturer directly, but many manufacturers do not sell small batches of products.

They instead look to sell them in bulk and may have a certain minimum quantity of products that must be purchased. For entrepreneurs or individual sellers just starting out, buying so many products at once may be difficult, both from a financial as well as storage point of view. Hence why having someone else handle this part of the process could be beneficial.

The wholesaler

The wholesalers are the entities that usually buy products in bulk from manufacturers, and then re-sell these products – usually with a margin added – to retailers (such as shops) or other sellers (you, for example). Wholesalers may also offer dropshipping services to the retailers or sellers who buy from them.
So, in a typical supply chain, a manufacturer or wholesaler does not sell products directly to an end customer. A seller often does that, after procuring these products from a retailer, wholesaler, or manufacturer. Traditionally, the seller is also responsible for storing the products and then delivering them to the customer.

However, sellers may opt for dropshipping to help avoid storing products, either at their own location or in a rented storage solution, and, finally, arranging the delivery of the products to the end customer.

Dropshipping products from different suppliers

Because dropshipping can free sellers from having to purchase and store products, some of them may choose to sell a range of products from different suppliers. These could be sourced, stocked, and delivered by the same dropshipper, or each product could be handled by a separate third party – it depends on the agreement and method chosen by the seller.

Depending on how you do this, offering a range of products from different suppliers could have some possible benefits, such as:

1.

You could offer a wider range of products to customers

When you select multiple suppliers for your business, they might be able to provide you with a wide variety of products. This makes it easier for you to offer more choice to your customers.

2.

You could widen the scope of your business network and build more relationships

Using multiple suppliers to source your products from provides you the potential to start numerous business relationships. This can be a potentially large advantage when your business grows.
With all this said, just as with any normal process, it might not be easy to deal with multiple business partners. Therefore, careful research would be recommended before considering this option.

Possible advantages and disadvantages of dropshipping

With dropshipping, you may outsource the process of stocking, storing, and delivering products to a third party. So, depending on the kind of third party you choose and the specifics of your arrangement, there can be various potential advantages for your business, as well as some challenges you could probably face.

Possible advantages of using dropshipping

    Low initial costs

    Whether you start an online or a physical, brick-and-mortar store, the initial costs can be very high. These can include sourcing, stocking, managing inventory, managing staff, having multiple outlets, marketing to gain new customers and even possibly manufacturing the products yourself. Because dropshipping allows you to outsource many of these aspects, it can potentially lower your overheads and initial investment costs.

    You may not need a warehouse

    Normally, regardless of whether they’re selling online or in a physical store, a seller or store owner would need to stock items in a warehouse. Along with the investment for storage and handling, they may also need staff to place, list, identify and retrieve goods on shelves. Because the dropshipper is responsible for storage and retrieval of products, you can reduce the cost of a warehouse.

    Easier to test new products

    Customer expectations, tastes and needs keep changing. But, in traditional retail, it can be expensive to try new product lines to see which ones prove more popular. However, dropshipping, particularly with multiple suppliers to choose from, might allow you at least some options to test products in small quantities – if your customer response is unfavourable, you could stop offering those products.

Potential challenges with dropshipping

    High competition

    The first advantage we mentioned also creates the first challenge: because of low overheads and initial investment, there is a possibility that other sellers can compete with you in the same space and sell the same products – particularly if the products are very popular or trending. Therefore, you may need to work harder to stand out amidst the competition.

    Potential lack of control

    In dropshipping, you will be selling products that are stocked and delivered by a third party. This means that you could potentially have a lack of control over several aspects of the fulfilment process, such as storage quality control, inventory management, quality of packaging used, trustworthiness of delivery mechanisms, etc.

    Bulk discounts

    Often, large retailers will purchase high volumes from manufacturers or wholesalers, enabling them to negotiate for what are called bulk discounts. This might allow them to pass on the benefit to customers in the form of reduced prices and offers.

    However, if your ecommerce business does not require buying and storing such a large volume of products, you may not be able to get these bulk discounts.

    Disjointed orders and deliveries

    You may list a variety of products in your ecommerce store, which may all be handled by different dropshipping suppliers. So, if a customer orders different products, there is a chance that each of them will be delivered separately, since they are all stored in different locations.
When you consider all of this in balance, it may turn out that, in your specific case, the disadvantages of dropshipping outweigh the positives. However, in such cases, there are other alternatives you can explore, such as affiliate marketing or Fulfilment by Amazon.
A man and woman standing in a warehouse looking at a tablet

How FBA works as an alternative to dropshipping

If you feel that dropshipping is not a great choice for your ecommerce business, you can consider using Fulfilment by Amazon (FBA) instead.

With FBA, Amazon handles the storage and delivery of your products. However, before you can start selling using FBA, you have to first package your chosen products according to Amazon’s packing guidelines and, following our shipping requirements, send them to a nearby Amazon fulfilment centre.

Once the products are stocked in the fulfilment centre, they will be listed as available for your customers to buy. This is one of the big advantages of becoming a seller on Amazon and using FBA to deliver your products to customers.
After this stage, whenever a customer orders a product, Amazon is in charge of picking, packing, shipping and delivery. We will also handle all customer service requests as well as any returns.
FBA also offers different options for specific requirements, such as FBA Small and Light, FBA Subscribe & Save, Multi-Channel Fulfilment and FBA Heavy Bulky.

Is dropshipping the right choice for you?

Now that you know more about dropshipping, here are some potential factors to consider helping you decide.

1.

Brand identity

Whenever you sell any product, the look, feel and design of your products can be a deciding factor for customers. For various reasons, dropshipping only gives you a partial control over these aspects. If you are not able to find a dropshipper who can customise products the way you want them, it could be a potential drawback.

2.

Product quality control

Once again, since you have limited visibility into the actual items being bought and stored by your dropshipper, you have limited control over the quality of the product. If the end products are not of the promised quality, it could result in customers dropping you as their preferred choice.
A man and woman standing in a warehouse looking at a tablet

3.

Delivery times

Since the delivery and fulfilment process is in the hands of your dropshipper, you need to ensure they have a good track record when it comes to timely shipments. Services like FBA can help you deliver products quicker – some of them may even be eligible for free, two-day delivery under Amazon Prime, if they meet certain terms and conditions.

4.

Funding

If you have less capital to begin with, dropshipping and certain other alternatives can allow you to reduce expenditure on sourcing, procuring, and storing products before you start selling them.
Answering these points will bring you closer to deciding on whether you want to use dropshipping as the fulfilment method for your ecommerce business.

Conclusion

In the end, how you choose to complete the fulfilment process for your online store is up to you. As we have explained, there are advantages to not having to stock, pack and ship your own orders – but there could also be potential challenges with outsourcing all of this to a third party.

You are now aware of how dropshipping works and what its potential advantages and disadvantages are. Based on this information, you can conduct more research and then finally decide on whether you want to use dropshipping or go with an alternative option for your ecommerce business.

FAQs

What is dropshipping?
Dropshipping can be one of the ways by which a seller may outsource the process of stocking, packaging, and delivering products to customers to a third party.
Do I have to use dropshipping to deliver my products?
No, it is not mandatory to use dropshipping.
Can I do dropshipping via Amazon?
No, Amazon is not a dropshipping service, but Fulfilment by Amazon (FBA) can be an alternative to dropshipping, wherein Amazon will store, pick, pack and ship your products.
By opting for Amazon’s multi-channel fulfilment, you can also utilise FBA to deliver products that you sell on your own ecommerce website or on several other websites, not just on Amazon.
Is dropshipping allowed on Amazon?
You can check Amazon's dropshipping policy if you intend to fulfil Amazon orders using a dropshipper.

To use dropshipping services for your business on Amazon, you must:
  • Be the seller of record of your products
  • Identify yourself as the seller of your products on all packing slips, invoices, and external packaging
  • Be responsible for accepting and processing customer returns of your products
What is the difference between a manufacturer, wholesaler, and retailer?
Manufacturers generally make the products, as their name suggests. Wholesalers usually buy products in bulk from manufacturers, and then sell those to retailers – in most cases, they do not directly sell to end consumers. Retailers, on the other hand, can operate small shops or outlets from which they directly sell to end consumers. Some manufacturers, wholesalers and retailers may also offer dropshipping solutions to deliver products to end customers.
Can I deliver products all over the world using dropshipping?
This is something you might want to check with your dropshipper. Some of them deliver internationally, while others don’t.
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