How does drop shipping work in Shopify?

While searching for this topic, I guess you must have heard of dropshipping, one of the most popular business models in the internet age. By running a dropshipping store, you never have to spend too much time and money carrying inventory. Instead, you will be free to focus your valuable time and resources on growing your business and generating more sales. Therefore, dropshipping is considered a flexible way to run your business and works on a variety of ecommerce platforms, including Shopify , the largest platform on the market.

So what is dropshipping ? How does dropshipping work on Shopify ? And what are the pros and cons associated with this business model? Let's address each of these questions in this article.

About the dropshipping model?

Dropshipping is a retail fulfillment practice where you, as a seller, do not keep the products you sell in stock. Instead, when you sell an item through the drop-ship model, the item will be purchased from a third-party vendor who holds the inventory and ships the item directly to the buyer. This way, you don't have to handle order fulfillment and shipping.

As you can see, the biggest difference between dropshipping and traditional retail is that in dropshipping, the seller does not own or maintain their inventory, but instead purchases inventory from a third-party vendor when necessary. The third-party provider is primarily a wholesaler or manufacturer.

How does dropshipping work on Shopify?

There are two common approaches dropshipping merchants use:

1. Search for suppliers based in the US, Europe or anywhere else in the world. This can be done through online provider databases or apps that connect you with thousands of providers, such as Spocket .
2. Using Oberlo , an eCommerce app developed by Shopify that connects dropshipping merchants with suppliers based in China. It does this by allowing you to browse the Chinese eCommerce marketplace Aliexpress and import products from this marketplace directly into your Shopify store with just a few clicks.

In both approaches, when a customer places an order with you, they will be able to place their order and ship it through the app they use. Most dropshipping apps automate most of this process, so you hardly have to spend time on order fulfillment and shipping. The purchased order will be shipped to the supplier who will then pack and deliver to the customer no matter where they are in the world.

Here is a flowchart so you can better understand this process:

Step 1 : Start with the buyer. They may be interested in your product and want to buy it.

Step 2 – This is when the buyer places an order in your store.

Step 3 : The buyer must pay you in advance for the order.

Step 4 – Once the customer has made their payment, you as the dropshipping merchant buy that item from your supplier.

Step 5 : The supplier fulfills that order and sends it directly to the customer.

Step 6 : The buyer receives the order.

What are the benefits of dropshipping?

Dropshipping is a popular business model, especially among first-time entrepreneurs, because it has a low barrier to entry. You don't have to put up a large initial investment up front to get started like in traditional retail. Also, drop shipping allows you to test products very quickly; you can import any products you want to sell to your store, and if they don't sell, you just need to delete them. That doesn't cost you anything because you don't have to invest in inventory to test products. Here are some other reasons why dropshipping is a great business model.

Lower initial investment:

This is probably the biggest advantage when it comes to dropshipping. With this business model, you can launch an eCommerce business without spending thousands of dollars as inventory investment upfront. Traditional retail always requires entrepreneurs to invest a large amount of capital in purchasing and maintaining inventory.

When you dropship, you won't have to buy an item unless you have an order and payment from your customers. Without the need to invest in inventory, launching a business has a much lower capital burden. This also means that the risk associated with dropshipping is low. With traditional retail, if your products don't sell, you have to keep that inventory and the money spent on it is lost. With dropshipping, if your products don't sell, you lose very little.

Easy to start:

With dropshipping, you don't have to worry about these charges:

• Pay the rent and maintenance of the warehouse.
• Stock management
• Fulfilling your orders
• Inventory tracking for accounting purposes

Low overhead costs:

Since you don't have to buy inventory or manage the warehouse, your overhead costs will be quite low. Tons of successful dropshipping shops run their home businesses with an internet-connected laptop, and that's about it; very few recurring costs are required.

When you get bigger, you may need to spend more on your online infrastructures, like stronger hosting or a higher Shopify plan, but that will still be a lot less than running a physical store.

flexible location:

If you want to run a business and travel the world at the same time, then dropshipping is for you. You can run a dropshipping business from anywhere in the world; all you need is a laptop and internet access.

Tons of products to sell:

Since you don't have to keep an inventory of any products you want to sell, you can import as many products as you want into your store. If any of them don't sell, you just remove them.

Easy to test:

Dropshipping can be a way for entrepreneurs to build a business from scratch , or it can be a way business veterans use when they want to try out a new product line for their existing business.

Easier to scale:

With traditional retail, if you want to acquire three times the amount of sales you're making, you have to hire more people, you have to invest more, and you have to work three times as much. By comparison, most of the labor-intensive work in dropshipping is done by your supplier, making it easier to scale without having to deal with incremental work.

What are the drawbacks of dropshipping?

Margins can be low:

The level of margins is usually the biggest disadvantage of dropshipping. Dropshipping as a business model is very easy to start; it's easy for you, and it's easy for everyone else too. You can enjoy many of its advantages, just like anyone else.

Therefore, to increase revenue, many dropshipping companies take advantage of minimal dropshipping overhead costs to sell items at rock-bottom prices. Since the initial investment is small, most dropshipping can afford to run at a very small margin.

If you want to compete in the dropshipping business, you cannot sell at a higher price than your competitors' prices because your customers will compare your prices with theirs. What you can do to stand out from your competition is better marketing and better customer service.

Inventory issues:

If you own your inventory, you can know exactly what you have in stock at any given time. When any item is out of stock, you can quickly remove it from your website or restock it.

In dropshipping, on the other hand, you basically get your products from other people's inventory. This can be problematic because you don't know if the products you are selling are in stock. You can sell your customer a product that is out of stock, and because they have paid you before you realize the product is out of stock, you will have to resolve the situation by offering a refund.

It's lucky that most dropshipping apps now allow you to sync your store with your supplier's inventory data. That means if the vendor is out of stock on an item, that item will automatically be removed from their website. You just need to make sure that your supplier updates your inventory correctly.

Shipping can be tricky:

In dropshipping, you will be working with multiple vendors just like most dropshippers. This is so that when an item does run out, you have a backup. While this is beneficial for your inventory potential, it can make it difficult for you to calculate shipping costs.

For example, let's say you have an order for three items from a customer, all of which come from different vendors. You will have 3 different shipping costs on a single order, making it harder to work out how much you should charge for shipping.

Your provider makes a mistake, but it's your fault:

Dropshipping is the real life version of being blamed for something that is not your fault. In dropshipping, your customers don't care where you get their order from, they buy from you, so they'll blame everything on you.

If your customer receives a damaged product because your supplier packs the order poorly, it is your fault. If your customer never received their order, it's your fault. If the shipping is too slow, it is your fault. You will be the one who receives and addresses all the complaints from your customers.

You may think that you can only find and work with established and professional suppliers to deal with this problem, but in dropshipping, even the best suppliers make mistakes in order fulfillment. Therefore, you must be prepared to apologize and deal with any mistakes your vendors make. Try your best to avoid low quality vendors because they will cause you tons of frustrations like missing items, poor packaging, orders not shipped, etc.

Personalization and branding capabilities are limited:

When you drop ship, you are actually selling products from other brands, so you have to rely on your brand. While many vendors accept modifications for branding purposes, those changes will require a certain MOQ (minimum order quantity). For example, whenever you are dropshipping water bottles. If you are happy with the supplier's brand elements on the product, you can purchase a unit to ship directly. However, if you want to add your brand items, you may need to pay at least 100 pieces at a time.

How much would it cost to start a dropshipping business?

It is very difficult to calculate exactly how much it would take to start a dropshipping business because every business and niche is different. However, there are several categories that every dropshipping business will need to invest in to get started. The following is a quick list of necessary costs.

An online store on Shopify:

Of course, you will need an online store to sell products online. Shopify is a great option to start with. It only costs you $29/month to get a functional standalone store on Shopify that can be directly connected to Aliexpress (via the Oberlo dropshipping app). Shopify's ease of use will allow you to set up a store and start selling in about a day.

Estimated cost : starting at $29/month

A domain name:

When you sign up for Shopify, it will provide you with a domain name, but that's your default domain that doesn't seem trustworthy in the eyes of customers. It's hard to build trust with customers if you don't have a domain name that seems trustworthy.

There are many top level domain names available these days (such as .shop, .co, .xyz, etc.), I recommend that you choose a ".com" domain as it is the most common and popular. level domain for online business. You can check out our guide on creating a brand name and our review of the most popular business name generators (don't worry, they're all free to use).

Estimated cost : $5-20/year

Trial Orders:

Although you won't have to invest money in stock with dropshipping, it's a good idea to spend some money buying samples of the products you want to sell (at least the ones that look like the most potential if you're going to sell a million products in your store and you don't want to buy samples of all of them).

If you don't test the quality yourself first, you could risk listing products from low-quality vendors, leading to unhappy customers, wasted time handling refunds/returns, and reputational damage.

Estimated cost : Depending on what products you want to sell and how many samples you want to buy.

Online advertising:

In the long run, you can try different ways to reduce your customer acquisition costs through organic channels like SEO, referral rewards, word of mouth, etc. However, when you start, these approaches are very difficult to execute because they will take months or years to complete. That is why I said that you can try these methods in the long run.

At first, advertising is often the main method for online businesses to get traffic and sales. The most common channels you can rely on are Google ads and social media ads (Facebook, Twitter, Pinterest, etc.). Here are our guides on how you can run Google Ads and Facebook Ads .

Estimated Cost : Around $500 to start, and can increase over time depending on how your products perform.

How can you make money as a dropshipper?

At its core, dropshipping is all about selecting the right combination of products and marketing it to end consumers. Keep in mind that you will have to pay the cost of marketing and any costs related to the sale of your product. Therefore, these costs should be included in the final price you charge your customers. Here is the equation for your final price:

Final price = Supplier supplier + Marketing costs + Customer service costs

Of course, the supplier will supply you with their products at a price lower than their retail price, this will allow you to mark it up and make a profit as well. Vendors partner with dropshipping companies to acquire revenue that they otherwise would not have earned.

To make a profit with dropshipping, the most important thing to do is calculate how much you need to spend to acquire a customer and make sure your gross profit is more than your acquisition cost. That way, after you pay for everything, you have something left over for yourself (that's your net profit).

Is it legal to dropship?

Yes, dropshipping is a perfectly legal business model. You will have to pay sales tax and income tax just like any other type of business. You can see our guide on how dropshipping taxes work . To avoid potential legal issues, you should consult an attorney to ensure you follow the rules and regulations for drop shipping in your region.

Last words

So how does dropshipping work on Shopify ? Is it worth investing in it? It depends, and each person has their own answer to this question. Dropshipping is by no means a perfect business model. It has advantages and disadvantages, and if you can deal with the disadvantages and harness the power of the advantages, there's no reason not to.

Go ahead and create a dropshipping business for yourself now!