What is Dropshipping? A Guide for Online Store Owners

We’d all love to be able to ship products directly to customers, but who has the space to store all that inventory? Luckily, dropshipping is a solution for any budding business looking to send its stock to customers, without having to worry about buying a surplus or paying for storage. Dropshipping can help those who are just finding their footing in the ecommerce world, as it’s a very low-stakes investment, both in regards to time and money.

It’s not a perfect solution – it has its drawbacks and negative press, and like any system, it can be abused to make a very small minority very rich. However, when played right, dropshipping can help small businesses find their footing or make supplemental income.

For the sake of consistent examples, in this article we’ll be talking about selling and shipping toys – action figures, teddy bears, dolls, you name it – but it’ll work as a thorough guide no matter what products you have.

What is Dropshipping?

Dropshipping is a method of sending and delivering products using a third-party supplier. Rather than receiving an order online and shipping the product yourself, with the dropshipping model, you’ll use a portion of the payment you received to buy the product from a supplier. Then this supplier will ship it directly to the customer.

Essentially, you’ll be removing yourself from the supply chain in order to both save on your own costs and expedite delivery to customers. To do that, of course, communication with your suppliers is paramount and the best dropshipping suppliers out there are the ones that make it quick and simple.

What is a Dropshipping Business?

When boiled down, dropshipping is a bit like running a standard business, except in reverse. Rather than ordering a load of products and then selling them to customers, dropshipping businesses instead sell products to customers, and then order them from a supplier to be sent directly to that customer’s address.

Dropshipping isn’t actually that different to how a normal business operates – it’s just that the order of events has shifted slightly. For example, picture a toy shop – Al’s Toy Barn – with shelves lined with action figures and dolls. To sell these items, Al’s Toy Barn would need to have bought them from a supplier.

Al’s Toy Barn would also have bought these items at a price considerably lower than its own selling price. For example, it would buy a batch of Transformers toys for $5 per unit, then sell them for $20 each. Dropshipping follows the same model of profit, ensuring that the selling business makes enough money to operate.

So if Al’s Toy Barn were to shift to an online model, and incorporate dropshipping, it would first list the Transformers on its site. Then, when an order was placed, it would contact the toy manufacturer and tell it to ship a unit directly to the customer’s address.

How Does Dropshipping Work? The Details from A to Z

What exactly happens when a dropshipping order is placed and fulfilled? Here’s the general series of events that will happen when a customer orders through a dropshipping system.

1. The customer browses your site and makes an order, making a payment to you, the business owner
2. This order is either sent to you, or sent to the dropshipping distributor through an automated system
3. If there is no automated system in place, you’ll have to send the order through to the relevant dropshipper, as well as the money needed to purchase the product from the supplier, leaving you with your final profit
4. Once paid for the product, your dropshipping distributor will pick and pack then ship the product to the customer
5. Due to the distributor’s experience in shipping products, the customer will likely receive their order faster than if you were to send it via traditional mail services

This is a fairly simple process, but it does come with its own pros and cons. Here are some noteworthy examples.

The Pros of Dropshipping

In 2020, the global dropshipping market was valued for a whopping $149.4 billion. And this model isn’t just for small businesses – Amazon itself uses dropshipping to complete over a third of its sales. Recent numbers also show that 27% of online retailers now prefer dropshipping because of the whirlwind success waiting at their doorstep.

Evidently, dropshipping is a very viable method for delivery. But what makes it so appealing for ecommerce businesses in particular?

Lack of Inventory Costs

Like any brick-and-mortar shop, Al’s Toy Barn would need to invest in real estate and infrastructure in order to operate, no matter how small a business it is. But a small business that operates online and uses dropshipping can forgo these costs, as it won’t need to pay for the storage, logging, and shelving of its products.

Wide Product Selection

Let’s say you’re selling toys the old-school way – on shelves in a shop – but you only have five shelves’ worth of room. That’s not a lot of space for your stock, so you’ll need to be discerning about what you fill your shelves with. With this in mind, you do your research and find the 15 best toys to sell. While these products may do very well, you’ll probably still be keenly aware of the additional sales you’d be making if only you had room to stock the top 25 best sellers.

Even ecommerce merchants that don’t use dropshipping will need to find somewhere to store their products, whether that’s their own home or a rental storage facility. Not only does this obviously take up space and cost money, but it also means that online sellers have to be as strict as brick-and-mortar shops about their stock.

With dropshipping you won’t need to worry about experiencing such rampant FOMO. In fact, you can list the top 100 best sellers on your website if you like – since the distributor is the one shelving the products, you don’t need to be too exclusive in terms of numbers.

Low Initial Investment

This refers to investment of both capital and time. Obviously most businesses start in the red, as it takes a decent investment to set up any business, with any profits over the first few months mostly being put toward filling that hole. However, if a business doesn’t have to front the cost of buying a load of inventory and paying for somewhere to store it, that frees up a load of cash and time that can be saved or used elsewhere.

And with the time you save not having to manage an entire inventory of products, you might even be able to maintain a full time job (depending on your dedication), meaning that you won’t need to worry too much about jumping into the unknown of a brand-new business without a safety net.

The Cons of Dropshipping

Dropshipping can be a great method of selling products online, but it’s not without its drawbacks. In fact, the entire industry has received its fair share of ire, especially from detractors who think that dropshippers are simply piling onto a get rich quick scheme. In that spirit, here are some of the less glamorous aspects of dropshipping.

Very Thin Margins

In a way, working as a dropshipper is like working as a middleman, and you’ll essentially be paid a finder’s fee for connecting the customer to the distributor. While Al’s Toy Barn is making a very nice profit margin on anything it sells, it’s somewhat entitled to this margin due to the overhead it pays in order to exist. Dropshippers, on the other hand, have very little overhead outside of running their website, so they have less of a “right” to collect such a margin.

The estimated discount a dropshipper will get from manufacturers is around 20%. So if they sell a product for $20, they’ll have to buy it from the distributor for $16, giving them $4 of profit. Based on the average cost of a low-tier ecommerce website builder plan, you’d need to make several sales just to break even, let alone make a substantial profit.

Lack of Inventory Control

This is one thing that could either never be a problem, or could escalate into a substantial issue within a week. Since dropshipping means you’re never in control of your own inventory, there’s a very possible chance that the distributor(s) you use could run out of a certain product. If this happens without you knowing, you might keep making sales on your website without being able to fulfil them.

This could lead to a complicated process of refunding, letting down your customers, and scrambling to unlist the product from your site, lest other potential customers fall victim to the same trap. If you were in control of your own inventory, you’d be able to hastily put up “out of stock” icons before anything went wrong, but with dropshipping, you’re at the mercy of your distributors.

Limited Branding Options

“Branding is everything” is a common sentiment in the business world, and for good reason. Some of the most powerful businesses in the world are only so successful due to their iconic and easily recognizable branding. However, you won’t be able to control anything like the logos, colours, or fonts on your products or their packaging when dropshipping.

You can implement as much branding on your site as you want, but if your customers aren’t seeing your logo and colours on their final packaging and products, you’re not going to stick as strongly in their minds as you would otherwise – which might lead to a less enduring relationship between you and your customers.

How to Start Dropshipping in Canada

Let’s go over the exact process you’d need to follow to set up an ecommerce business that uses dropshipping.

1. Start Your Ecommerce Business

We’re really starting from square one here! But you can’t sell products online if you don’t have a website or ecommerce platform. Simply setting up your website and making sure it’s equipped to sell your products is a critical step. Shopify is one of the best platforms for dropshipping, as it includes multiple features that allow users to take full advantage of its ecommerce angle. For more information on Shopify and the full breakdown of its costs, you can review our comprehensive Shopify pricing guide. 

But if you want to avoid Shopify’s transaction fees, give Wix a shot. It offers great value for money with its extensive website features that you can utilize to help your online store stand out from the competition. Of course, we also covered all of Wix’s costs and plans in our Wix pricing guide, so you don’t have to find them yourself!

2. Decide on Individual Products

Hopefully you’ll already have decided what general industry you’re selling in by this point, but no matter what field you’re looking at, you’ll have to do a generous amount of market research to know what is worth dropshipping.

The margins can be quite thin, so you’ll want to choose products that sell frequently in order to make enough to justify the whole venture. For example, toothbrushes, facemasks, and yoga mats all sell very well through dropshipping sites. If you’re particularly savvy, you can even track down unfilled niches within your industry, which can also help you build your brand.

And before we forget – make sure to check whether you have the legal green light to sell any products you choose. Canada has strict guidelines on which products can be bought and imported, so familiarize yourself first to steer clear of penalties and any headaches. 

3. Seek Out a Dropshipper and Form a Relationship

As simple as it sounds, a quick Google search or two will be able to link you up with a dropshipper who might want to partner with you. Once you’ve found a supplier and agreed to work together, you can even set up a system that automatically sends them the address and order info they need in order to fulfil the order. eBay and Amazon also have their own dropshipping schemes that can help bolster sales. 

4. Start Selling

This is where the fun begins! Once you’re all set up, you can officially go live and start filling out orders. Like all businesses, you’re likely not going to have a meteoric rise to nonstop profits, but since dropshipping is such a low-stakes investment, you won’t have to worry too much if it starts as more of a trickle than a boom.

However, if you are looking to increase your marketing reach, you could always invest in some digital marketing techniques to get yourself on peoples’ radars. This could mean signing up for some email marketing software to promote yourself to existing customers, or mastering SEO to make sure you show up at the top of important Google results pages.

Dropshipping vs Ecommerce Fulfillment – What’s the Difference?

You may have read up to this point and realized that this process sounds a fair bit like ecommerce fulfilment, but it’s a bit different in a couple of ways.

For the unfamiliar, ecommerce fulfillment is a similar process, but the vendor owns all the stock in the warehouse. For example, if Al’s Toy Barn was an online-only vendor, but still owned all the stock that people would buy online, it might use ecommerce fulfillment to send its orders.

On a small scale (like running a business out of your garage), this might just mean storing, packaging, and sending all your products with your own two hands. However, if your business grows beyond the point of storing your products in your home, you may opt for an external facility.

Obviously not everyone can buy a warehouse on a whim, so businesses can rent out parts of storage facilities and pay for their products to be packaged and shipped directly from those locations. This is done using a 3PL (third-party logistics) provider, an outsourcing company that will manage supply chain logistics.

Both systems involve a third party managing and packaging the inventory you’re selling. But the main difference is that with dropshipping, you act as an intermediary, while with ecommerce fulfillment, you’re the sole owner of your inventory. Obviously, this ownership and convenience costs considerably more, so ecommerce fulfillment is recommended for businesses that are more established.

Ecommerce fulfillment definitely has its own perks and advantages. For example, if you have a high enough budget and don’t want to deal with the downfalls of dropshipping – like unstable inventory management or thin margins – it alleviates most of those problems. If you’re willing to pay more, it’s certainly worth checking out.