Definition of dropshipping.
We will start by explaining what dropshipping is (also called drop shipping or drop shipment): dropshipping is a method of distribution and delivery of products with which the seller receives payment for the order amount and the customer receives the product directly from the manufacturer, not from the seller.
Dropshipping is revolutionizing e-commerce or online business (and is gradually taking over from traditional business), radically expanding the catalogs of physical stores. Like almost all new business models, dropshipping is a new trend that originated in the United States and is increasingly present in Europe and the rest of the world.
This distribution model marks a before and after in the world of e-commerce, as it allows its owners to set up a store without having to invest in storage or stock delivery costs. The seller reaches an agreement with the dropshipping supplier and does not need to worry about all the related logistics.
Terminology and particularities of dropshipping.
Before we get into the heart of the matter, let’s see the difference between two terms in the industry:
- Dropshipper: is the wholesale distributor who sells to the retailer and at the same time sends the product to the final customer.
- Dropshipping: is the method of sale and distribution of different quantities of products, through which the retailer makes the sale to the final customer, and through which a dropshipper, in agreement with the retailer, sends the product to the final customer anonymously.
This point is clear, but for the avoidance of doubt, we will again review the difference between dropshipping and traditional commerce (without dropshipping).
In the classic e-commerce or traditional business formula, the seller buys his products from the distributor and stores them in his facilities.
When he receives an order from one of his customers, the retailer takes care of processing the order and sending the product to the customer. In this case, the retailer has to bear the costs of storage and delivery.
On the contrary, with the dropshipping modality, the seller has neither stock nor warehouse of his own but has at his disposal a wholesaler or dropshipper.
Therefore, when receiving the order, instead of processing and sending it as it would normally be done, the seller contacts the wholesale supplier who will send the product to the customer.
Dropshipping is a retail technique that saves the cost of shipping the product and significantly reduces the delivery time.
Diagram of the dropshipping process.
Is it clearer now? Now we are going to see schematically the 3 protagonists who take part in this type of trade, and the relations which they maintain.
- Customer: He buys an article on e-commerce, without knowing if the delivery is done in dropshipping or not.
- Seller: When he receives the order, the seller places an order with his wholesale supplier.
- Wholesale supplier or dropshipper: The wholesaler packs the order in packaging on which appears the name and the address of the seller (and never his own). He sends the order directly to the customer.
The wholesale supplier receives the sales order with the end customer’s address and sends the product directly to the customer, handling all shipping processes, customs, and other distribution costs.
This new method of selling dropshipping is very advantageous for the seller who does not need to store any product.
He does not have to worry about this aspect and can make his sales without having to buy the product before. Once the sale is made, the owner of the e-commerce obtains his profits corresponding to the difference between the price of the wholesaler and the Price of Sale to the Public (PVP) that he defined himself in his e-commerce.
Finally, in a Dropshipping agreement, the retailer acts as an intermediary between the dropshipping wholesale supplier and the customer.
Notable features of dropshipping.
Dropshipping is a good option for a retailer (who usually sells in small quantities to the general public) when the retailer receives an order for many units of the same product. Instead of managing the distribution, the retailer makes an agreement with the dropshipper to have the products sent directly to the final customer.
With this new method of shipping and inventory management, professionals take care of the delivery and there is no need to rely on a physical inventory of products.
On the contrary, the retailer has more time for retail sales, his real vocation.
Catalogs are growing and can offer exotic or large format products without having to worry about import or storage costs which could be significant. Wholesale dropshippers also benefit from reduced shipping costs and continuous sales of their products.
How does dropshipping work?
We have seen what dropshipping is and its advantages for an online store. We will now see in detail how it works. In all the sales and distribution processes with Dropshipping, different factors come into play. We will try to explain each of them in this Dropshipping Guide.
How a business relationship with a dropshipper should work.
If you decide to work with a dropshipping provider, you will be giving them a lot of responsibility. This can be a bit daunting at first, but you don’t have to worry about it if you find a professional and experienced company.
However, so that you know how this type of business relationship usually works, we will look at the first phase that is established between your two companies:
For a commercial relationship between a dropshipper (B2B distributor) and a seller (wholesaler or retailer) to work properly in a Dropshipping service, the first thing that the seller must take into account is to use companies specialized in dropshipping that have a vast catalog of products duly updated, as well as large warehouses, as automated as possible.
In other words, it is essential to have a good dropshipper.
Once the commercial relationship between the dropshipper and the retailer or wholesaler has been established, the dropshipper will provide the latter with a product catalog in the format agreed upon by both parties: database, access to websites, CSV, etc.
Some dropshippers do not provide an updated catalog, given the speed at which the catalog evolves, and prefer to maintain an e-commerce site where sellers directly choose which products to import to their particular stores. Once the dropshipper’s catalog is in their database or their physical catalog, the seller is responsible for checking the availability of the products, as well as the delivery times offered by the dropshipper. In some cases, the delivery times will always be the same.
The difference in price between the dropshipper and the seller, that is, between the selling price and the cost of the dropshipment, is the profit margin of the seller, who will receive it at the time of the purchase from the dropshipper.
The seller acts as a distributor without stock and can devote his time and effort to selling, promoting, and advertising his products.
The dropshipper is responsible for the logistics of delivery and management of the products between the end customer and the seller. A strong relationship between the dropshipper wholesale supplier and the retail seller can become a relationship of mutual trust and reliability. From there, many sellers usually benefit from credit lines offered by their dropshippers.
Factors to consider with Dropshipping.
We have seen in detail what dropshipping is and how it works, but some aspects must be taken into account before starting this type of distribution. Adjustment of profit margins.
The dropshipper takes care of the majority of the processes associated with the distribution.
This usually means an increase in price to the end customer. Saving on logistics costs can therefore imply an increase in profit margins. Customs fees with dropshippers abroad.
It is best to choose wholesale distributors that offer dropshipping services in your country, even for a particular sector.
The United States and China have a large supply of dropshippers, but shipments usually go through customs, which increases shipping costs and problems with logistics or product quality.
Delivery time according to geographical areas.
Sellers with businesses that deliver in 24 or 48 hours maximum usually work with suppliers located in the same country or, at most, in the same continent. It should be taken into account that an excessive delivery time can discourage many end customers.
Taxes on international operations.
Before adopting a dropshipper dynamic, it is advisable to ask for advice from tax experts to know which regions may cause problems and imply additional taxes for the circulation of goods on their territory.
Dropshippers with a good reputation.
You can consult specific registers of dropshippers that have verified the legitimacy of the suppliers they list. However, it is recommended to make your own experience, ordering a few different products to analyze the shipment and the quality of the packaging and products.
Depending on the terms and conditions of the various dropshippers, the cost of transportation per order can be set according to negotiations with the transportation company, or the dropshipper can choose the transportation company that best suits the seller and the geographical area of delivery of the package.
Complaints about unauthorized transactions or purchases.
This happens when a consumer has filed a complaint against a payment made through PayPal or their bank’s payment gateway, regarding a transaction or purchase. This can be due to any reason, such as not receiving the product.
The refund claim mechanisms are largely designed to protect consumers, but there is always the possibility that unscrupulous people abuse them. Therefore, the seller and the dropshipper must agree on what solutions to put in place so that this type of behavior does not harm them in the future.