E-commerce Terms Explained: Dropshipping

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E-commerce Terms Explained: Dropshipping

Get SigmaOS Free

It's free and super easy to set up

E-commerce Terms Explained: Dropshipping

Get SigmaOS Free

It's free and super easy to set up

E-commerce Terms Explained: Dropshipping

If you're interested in starting an e-commerce business, chances are you've come across the term 'dropshipping.' Dropshipping has become an increasingly popular method for entrepreneurs to start an online store with minimal investment and inventory costs. In this article, we'll explain everything you need to know about dropshipping, including how it works, the key players in the ecosystem, and how to start a successful dropshipping business.

Understanding Dropshipping

Before we dive into the specifics of dropshipping, let's take a moment to understand what it is, and how it differs from traditional e-commerce models. In a typical online store, the retailer purchases products from a supplier, and then holds the inventory in a warehouse or storage facility until a customer places an order. The retailer then fulfills the order by picking, packing, and shipping the product to the customer.

With dropshipping, the retailer doesn't purchase the product upfront. Instead, they list the products on their online store, and when a customer places an order, the retailer passes the order details to the supplier, who then ships the product directly to the customer. This means that the retailer never physically handles the product, and doesn't need to hold any inventory.

Dropshipping has become increasingly popular in recent years, with many entrepreneurs turning to this business model as a way to start an online store with minimal investment.

What is Dropshipping?

Technically speaking, dropshipping is a business model where the retailer does not keep any inventory, but instead lists products for sale on their website and then pass the order details to a third-party supplier, who then ships the product directly to the customer. The retailer makes a profit on the difference between the supplier's wholesale price and the retail price they list on their website.

One of the key advantages of dropshipping is that it allows retailers to offer a wide range of products without having to invest in inventory upfront. This means that retailers can experiment with different products and niches without the risk of being stuck with unsold inventory.

The Dropshipping Process

The dropshipping process typically involves three main parties: the retailer, the supplier, and the end customer. Here's how it works:

  1. The retailer lists the product on their website at a markup from the supplier's wholesale price.

  2. A customer places an order on the retailer's website and pays the retail price.

  3. The retailer forwards the order details to the supplier, along with the customer's shipping address.

  4. The supplier then ships the product directly to the customer, using the retailer's name and branding on the packaging.

  5. The retailer makes a profit on the difference between the wholesale and retail price.

One of the key benefits of this process is that it allows retailers to focus on marketing and customer service, rather than on the logistics of storing and shipping products. This can be particularly beneficial for small businesses that may not have the resources to manage a large inventory or shipping operation.

Benefits of Dropshipping

One of the main benefits of dropshipping is the low startup costs involved. Because the retailer doesn't need to purchase inventory upfront, they can start their online store with minimal investment. This makes it an ideal business model for entrepreneurs who are just starting out or those who want to test the waters before committing to a fully-fledged e-commerce business.

Another advantage of dropshipping is the flexibility it offers. Because the retailer doesn't need to hold inventory, they can list a wide range of products on their website without worrying about storage space or inventory costs. This makes it easier to experiment with different products and niches, without committing to a large inventory purchase.

Dropshipping can also be a great way to tap into new markets and reach a wider audience. By partnering with suppliers who specialize in certain products or regions, retailers can offer a wider range of products and reach customers who may not have been accessible through traditional distribution channels.

Common Challenges in Dropshipping

Despite its advantages, dropshipping is not without its challenges. One of the primary challenges is maintaining consistent product quality and shipping times. Since the retailer is not directly involved in the shipping process, they rely on the supplier to ship the product to the customer in a timely manner and to the retailer's standards of quality.

Another challenge is that because dropshipping is a low-barrier-to-entry business model, there is a lot of competition in the market. This means that retailers need to work hard to differentiate themselves from their competitors, either through unique branding, marketing, or customer service.

However, with the right approach and a commitment to providing exceptional customer service, dropshipping can be a highly profitable and rewarding business model for entrepreneurs of all levels of experience.

Key Players in the Dropshipping Ecosystem

The success of a dropshipping business relies on several key players. Let's take a closer look at these players:


Suppliers are the backbone of the dropshipping ecosystem. They are responsible for sourcing and stocking the products, and shipping them to the end customer. The quality of the supplier's products, shipping times, and customer service all play a critical role in the success of the retailer's business.


Retailers are the face of the dropshipping business. They are responsible for creating a website, listing products, and marketing to potential customers. Retailers must also maintain high levels of customer service, as they are the primary point of contact for the end customer.


Customers are the ultimate driver of success in dropshipping. They dictate demand for products and ultimately determine the success of the business. Maintaining high levels of customer satisfaction is critical for the long-term success of the business.

How to Start a Dropshipping Business

Starting a dropshipping business requires careful planning and strategy. Here are some key steps to follow:

Finding a Niche

The first step in starting a dropshipping business is to identify a niche that you're interested in. This could be anything from pet supplies to home decor. The key is to identify a niche that has demand but is not overly competitive.

Choosing a Supplier

Once you've identified your niche, the next step is to find a supplier who can provide quality products at a wholesale price. Look for suppliers who have a proven track record of reliability, good customer service, and timely shipping.

Setting Up Your Online Store

Setting up an online store is relatively simple these days, thanks to platforms such as Shopify, WooCommerce, and Magento. Choose a platform that suits your needs and start building your store. When designing your website, make sure to focus on creating a strong brand message and a user-friendly experience for customers.

Marketing Your Dropshipping Business

Marketing is key to driving traffic and sales to your online store. Some effective marketing strategies for dropshipping businesses include social media marketing, content marketing, and paid advertising.

Tips for Successful Dropshipping

Here are some tips for running a successful dropshipping business:

Managing Inventory and Order Fulfillment

While dropshipping means you don't have to manage inventory yourself, it's still important to keep track of stock levels and ensure that your supplier has enough inventory to fulfill orders in a timely manner.

Providing Excellent Customer Service

As the face of your dropshipping business, providing excellent customer service is critical to building a loyal customer base. Respond to customer inquiries promptly, and resolve any issues quickly and efficiently.

Handling Returns and Refunds

Handling returns and refunds can be a complicated process in dropshipping, especially since the retailer doesn't physically handle the product. Provide clear return and refund policies to customers, and ensure that communication channels are open in case of any issues.

Scaling Your Dropshipping Business

As your dropshipping business grows, be prepared to scale up your operations. This could involve expanding product offerings, hiring additional staff, or investing in marketing to accelerate growth. Make sure to track your metrics and adjust your strategy accordingly.


Dropshipping is a viable business model for those looking to start an e-commerce business with minimal investment and inventory costs. By carefully selecting a niche, finding reliable suppliers, and providing excellent customer service, you can build a successful dropshipping business that can compete in the crowded e-commerce market.