This article is all about dropshipping, which is very important for anyone who wants to get started in the world of e-commerce.
We will explore the advantages that this system offers in eliminating the need to store products physically and the benefits associated with shipping the actual products to end customers.
We will also consider the negative aspects of dropshipping and the possible alternatives.
We will explore the advantages that this system offers in eliminating the need to store products physically and the benefits associated with shipping the actual products to end customers.
We will also consider the negative aspects of dropshipping and the possible alternatives.
What is dropshipping?
Dropshipping is a retail method that was created in the US over ten years ago and is used mainly in e-commerce. With dropshipping, sellers don't stock the products they sell. Put simply, dropshipping is a sale with "direct shipping" from the manufacturer to the consumer.
The term dropshipping is a combination of the words "to drop" and "shipping".
When e-commerce retailers sell a product using the dropshipping model, they buy the item from a third party and have it shipped directly to the customer by the third party itself. Consequently, sellers don't have to handle the product directly. The biggest difference between dropshipping and the standard retail model is that sellers don't hold stock, meaning they don't have an inventory.
Instead, sellers fulfil their orders by buying their inventory as needed from a third party, which is usually a wholesaler or manufacturer.
The term dropshipping is a combination of the words "to drop" and "shipping".
When e-commerce retailers sell a product using the dropshipping model, they buy the item from a third party and have it shipped directly to the customer by the third party itself. Consequently, sellers don't have to handle the product directly. The biggest difference between dropshipping and the standard retail model is that sellers don't hold stock, meaning they don't have an inventory.
Instead, sellers fulfil their orders by buying their inventory as needed from a third party, which is usually a wholesaler or manufacturer.
How does dropshipping work?
Dropshipping is a supply chain model in which sellers, known as dropshippers, can ship products directly from a wholesaler's or manufacturer's warehouse to a customer's home without having to manage the logistics operations.
This enables dropshippers to concentrate purely on the commercial and marketing aspects of their outfit and focus solely on growing their business.
Dropshipping companies earn money from the commission on the suppliers' products that they sell; in other words, dropshippers act as an intermediary between suppliers and customers.
When they receive an order, they transfer the order information to the supplier and keep a percentage for themselves as a commission that constitutes their earnings.
The supplier then ships the product from the warehouse to the customer. In most cases, suppliers don't even know whether the person buying from them is a dropshipper or an end customer.
This enables dropshippers to concentrate purely on the commercial and marketing aspects of their outfit and focus solely on growing their business.
Dropshipping companies earn money from the commission on the suppliers' products that they sell; in other words, dropshippers act as an intermediary between suppliers and customers.
When they receive an order, they transfer the order information to the supplier and keep a percentage for themselves as a commission that constitutes their earnings.
The supplier then ships the product from the warehouse to the customer. In most cases, suppliers don't even know whether the person buying from them is a dropshipper or an end customer.
Advantages of dropshipping
Dropshipping is an excellent business model for aspiring sellers because it's cheap and easy to manage.
Dropshipping can also be used as a way to evaluate various business ideas because it allows you to learn a lot about how to choose and market products on demand.
Among the main positive aspects are:
Dropshipping can also be used as a way to evaluate various business ideas because it allows you to learn a lot about how to choose and market products on demand.
Among the main positive aspects are:
- Low initial capital (no need to buy products in advance)
This is probably the main benefit of dropshipping. Not having to buy products in advance makes it possible for sellers to launch their own e-commerce store without having to invest in an inventory.
Because there's no commitment to selling from a pre-purchased inventory like there is with a traditional retail business, the risk of opening a dropshipping store is lower.
Furthermore, the overheads themselves are reduced — by not having a warehouse, the costs of managing it are eliminated. - Easy to start and manage
Running an e-commerce business is much easier when you don't have to deal with physical products. The absence of physical products makes it possible to skip the production phase, so it's quick to get started.
What's more, there's no need to worry about: - Managing or paying for a warehouse
- Packaging and shipping orders
- Inventory traceability for accounting reasons
- Managing returns and inbound shipments
- Ordering products continuously and managing inventory levels
- Low overheads
Because you don't have to worry about buying an inventory or managing a warehouse, the overheads are pretty low.
If your business grows over time, these costs will increase, but they will still be lower than those of a traditional in-store sales or e-commerce business with a warehouse. - Full control over product marketing
Sellers have complete freedom in promoting the store, so they can choose all the marketing strategies they intend to apply and decide the prices. - Flexibility
A dropshipping business can be managed from anywhere with an Internet connection. In fact, all you need to be able to do is communicate with suppliers and customers — there's no need to be tied to a specific physical location. - Easy to test
Dropshipping is a useful method both for launching a new store and for entrepreneurs who want to test whether customers like additional product categories, such as accessories or completely new product lines.
The products that you might want to sell can be added without you needing to stock them, which makes it possible to test the market response without having to commit to buying stock first. The result also makes it possible to evolve over time because the products on sale can be modified according to performance. - No unsold goods
Not having a warehouse means that goods don't go unsold because products are only purchased once a sale has been made. This allows sellers to focus on other activities such as marketing to develop their e-commerce business. - Wide variety of products
Since in most cases there's no need to pre-purchase an inventory, it's possible to sell a wide variety of items, thus increasing your earning potential. - Scalability
Using suppliers allows you to accept more orders without this increasing the inventory you have to store, package and ship.
Drawbacks of dropshipping
Despite the countless positives outlined above, dropshipping also has its downsides. Generally speaking, convenience and flexibility come at a price. Here are a few disadvantages to consider.
- High competition
Multiple sellers can sell identical products and this generates particularly high competition, resulting in reduced profit margins.
Considering the ease of starting to sell through dropshipping and the low overheads, many competitors open online stores and sell items at bargain prices in an attempt to increase their revenue.
Furthermore, since the initial investment is low, they can afford to operate with minimal margins.
Many sellers will have low-quality websites and poor customer service; while these weaknesses can be exploited to differentiate your business, this won't stop customers from comparing prices.
This increase in fierce competition will quickly hurt potential profit margins in a niche market.
Fortunately, this problem of concentrating on a specific market niche can be mitigated by focusing on customer needs. - Low profit margins
The mark-up that can be applied to products will obviously not be the same as the manufacturer's, otherwise you could risk setting prices that are out of step with the market and not having competitive products. This means that, to make good money with dropshipping, sufficiently high volumes of business are needed to enable you to recover your management and marketing costs and make a profit.
This makes it essential to find one or more valid products that a supplier is selling at an honest price and that are ideal for a specific market niche that is not easily filled; this will make it easier to achieve the necessary sales volumes to make a real profit. - Inventory issues
If you have all your products in stock, it's relatively easy to keep track of which items are available and which aren't.
But when you get supplies from multiple warehouses that are also fulfilling orders for other sellers, the inventory can change every day. This poses the risk of a product selling out without the seller's knowledge. Fortunately, to mitigate this risk, there now are several applications that allow you to synchronise with suppliers and receive real-time updates. - Shipping complexity
In most cases with dropshipping, products in the online store will be sourced from a range of different suppliers. This complicates the shipping costs because if the same customer buys items that are only available from different suppliers, they should logically pay each supplier for shipping — to avoid this, the dropshipper often has to cover these costs so as not to lose the customer. - Supplier mistakes
Even the best dropshipping suppliers make mistakes when processing orders, mistakes for which sellers then have to take responsibility and apologise.
Mediocre and low-quality suppliers can lead to frustration due to missing items, incorrect shipments and poor-quality packaging, which damage the reputation of the dropshipping company. - Product quality
Dropshipping reduces your involvement in the order fulfilment process and this consequently reduces your ability to monitor and guarantee product quality. - Supplier willingness
In Italy, awareness of dropshipping is still very low and companies are often poorly organised in managing requests from intermediaries, which frequently results in mistakes that impact the end customer. - Limited customisation and branding
Unlike companies that make products, companies that use dropshipping don't have much control over the product itself. The product is generally designed and branded by the supplier.
Some suppliers are able to adapt to the company's product changes but, even in this case, the supplier has more control over the product itself.
Any modifications or additions to the product itself usually require a minimum order quantity to make it viable and affordable for the manufacturer. - Customer service
Customer satisfaction is a key element of online sales. With dropshipping, however, being able to guarantee good customer service becomes very challenging because when a customer has to return or exchange a product, it's difficult to coordinate the return with the supplier.
How do I start dropshipping?
To start a dropshipping business, the first step is to choose a sales channel where customers can see and buy your products. There are several sales channels available on the market today, but the key is choosing the right supplier.
In a world where online shopping is the norm, there's no shortage of dropshipping suppliers, but they will often be located in different regions of the world. This means you need to have good knowledge of English and excellent negotiation skills.
Knowing how to negotiate is a broad concept that refers not only to the ability to convince a supplier to lower their price but also to the ability to maintain a relationship with the supplier themselves, including through follow-up calls or visits to verify the products.
Choosing your suppliers will get you off to a good start, but it's not enough on its own. Since there are millions of products on the market, you'll need a clear process for sorting through them. The goal is to identify the products that customers are most likely to buy.
Products that are unattractive or in low demand are unlikely to generate sales. Selling attractive products, by contrast, leads to high sales and repeated purchases — often even from the same buyers.
Finding the best products is one of the most important tasks when running a dropshipping store and can make the difference between success and failure.
Lastly, you need to have good knowledge of the aspects related to shipping and importing products that often arrive from non-European countries, being fully aware of the possible customs fees, costs and shipping times.
Another fundamental aspect that must be taken into account before embarking on this adventure is tax.
This necessitates finding out about the taxes that apply to this type of commercial activity.
The invoicing methods for dropshipping and traditional e-commerce are the same. The necessary payments and documentation will vary only according to the geographical location of the operators involved. Consequently, given that three parties are involved in the sale/purchase, dropshipping is considered to be trilateral trading from a tax point of view and, as such, is subject to very specific VAT rules.
There are three different types of trilateral trade depending on where the three sale/purchase transactions take place:
In a world where online shopping is the norm, there's no shortage of dropshipping suppliers, but they will often be located in different regions of the world. This means you need to have good knowledge of English and excellent negotiation skills.
Knowing how to negotiate is a broad concept that refers not only to the ability to convince a supplier to lower their price but also to the ability to maintain a relationship with the supplier themselves, including through follow-up calls or visits to verify the products.
Choosing your suppliers will get you off to a good start, but it's not enough on its own. Since there are millions of products on the market, you'll need a clear process for sorting through them. The goal is to identify the products that customers are most likely to buy.
Products that are unattractive or in low demand are unlikely to generate sales. Selling attractive products, by contrast, leads to high sales and repeated purchases — often even from the same buyers.
Finding the best products is one of the most important tasks when running a dropshipping store and can make the difference between success and failure.
Lastly, you need to have good knowledge of the aspects related to shipping and importing products that often arrive from non-European countries, being fully aware of the possible customs fees, costs and shipping times.
Another fundamental aspect that must be taken into account before embarking on this adventure is tax.
This necessitates finding out about the taxes that apply to this type of commercial activity.
The invoicing methods for dropshipping and traditional e-commerce are the same. The necessary payments and documentation will vary only according to the geographical location of the operators involved. Consequently, given that three parties are involved in the sale/purchase, dropshipping is considered to be trilateral trading from a tax point of view and, as such, is subject to very specific VAT rules.
There are three different types of trilateral trade depending on where the three sale/purchase transactions take place:
- National, where the three parties involved in the transaction are located in two different European countries.
- Intra-Community, where the three parties involved in the transaction are located in three different European countries.
- Extra-Community, where the three parties to the sale/purchase are located in three different countries — and at least one of the three is located outside the EU.
Given the different settings in which each of the trilateral trade situations outlined above occurs, it goes without saying that different VAT rules governing the levies to be paid are applied for each of them.
There are countless websites that offer dropshipping and Amazon allows dropshipping too, but on the condition that its guidelines are followed.
Some limitations that are often found due to the guidelines are:
There are countless websites that offer dropshipping and Amazon allows dropshipping too, but on the condition that its guidelines are followed.
Some limitations that are often found due to the guidelines are:
- Dropshippers must have an agreement with the manufacturer that identifies them as the exclusive seller and this must be stated on all invoices addressed to customers, transport documents and external packaging.
- Before shipping orders to customers, suppliers must remove any shipping documents, invoices, external packaging or other information that identifies them as the primary seller.
- Dropshippers must accept and process returns from customers, not suppliers.
Fulfilment by Amazon (FBA)
A valid alternative to the dropshipping model is Fulfilment by Amazon, also known as FBA.
This service covers the entire picking and shipping process, from storing the products in a warehouse through to packaging them, labelling them and shipping them to customers. Customer support services are also managed by Amazon. The only thing sellers need to do is send their items to Amazon's fulfilment centres.
Fulfilment by Amazon is by far the most attractive choice for most Amazon sellers, as it reduces all the issues related to fulfilling the shipment.
The way the system works is fairly simple.
The process is as follows:
This service covers the entire picking and shipping process, from storing the products in a warehouse through to packaging them, labelling them and shipping them to customers. Customer support services are also managed by Amazon. The only thing sellers need to do is send their items to Amazon's fulfilment centres.
Fulfilment by Amazon is by far the most attractive choice for most Amazon sellers, as it reduces all the issues related to fulfilling the shipment.
The way the system works is fairly simple.
The process is as follows:
- The seller ships the products to an Amazon fulfilment centre.
- Amazon classifies and stores the products. Once Amazon receives the products, it orders them and adds them to its inventory. The products are securely stored in Amazon warehouses. If anything is damaged in the warehouse, Amazon will provide reimbursement.
- Customers buy the products. Amazon handles the entire transaction, accepting payments and automatically updating the seller's inventory.
- Amazon ships the products to customers. One of Amazon's warehouse workers is responsible for picking and packaging the product and shipping it the customer.
- Amazon takes care of customer service. Once the customer receives the product, Amazon monitors the situation to ensure that they are happy with the shipment. Amazon also handles any returns or customer requests. Needless to say, as with any other comment or review that you receive on your product listing, it's your company's responsibility to respond and act accordingly.
- Every two weeks, Amazon draws up a total of all sales, deducts the commission due and deposits the relevant amount directly into the seller's current account.
Registering for Fulfilment by Amazon is very easy: First, register as a seller on the Amazon website.
Second, create an account by choosing your login details and entering all the information about your business, including your personal data.
After completing all the steps, you can customise Amazon Seller Central, which is the page where you can keep track of everything from product stock to customer communications.
Second, create an account by choosing your login details and entering all the information about your business, including your personal data.
After completing all the steps, you can customise Amazon Seller Central, which is the page where you can keep track of everything from product stock to customer communications.
Conclusions
This article clearly explains what dropshipping is. Starting with a definition, all the aspects to be considered positive are then elaborated in a straightforward manner, without neglecting the negative aspects that this system entails either.
Fulfilment by Amazon constitutes a valid alternative to this system, with the article explaining how it works and how to register to join the scheme.
Fulfilment by Amazon constitutes a valid alternative to this system, with the article explaining how it works and how to register to join the scheme.
FAQ
What is dropshipping?
The term dropshipping is a combination of the words "to drop" and "shipping". It is a retail method that enables a seller, known as the dropshipper, to ship a product from the wholesaler's or manufacturer's warehouse directly to the customer's home without having to worry about fulfilling the logistics operations themselves.
How does dropshipping work?
The idea behind dropshipping is very simple: Don't buy the goods you want to resell until the sale has been made. The advantages of this are immediately obvious: You don't have to keep products in stock, you don't have to pay for the goods in advance and, most importantly, you don't need to operate any kind of warehouse because the warehouse used belongs to the supplier.
With this sales method, sellers focus solely on marketing their products and, once orders start to come in, all they have to do is order the products from their supplier who will handle shipping.
In summary, sellers simply have to advertise the products, leaving suppliers to cover the costs related to warehousing, packaging and shipping to the end customer.
With this sales method, sellers focus solely on marketing their products and, once orders start to come in, all they have to do is order the products from their supplier who will handle shipping.
In summary, sellers simply have to advertise the products, leaving suppliers to cover the costs related to warehousing, packaging and shipping to the end customer.
What are the main advantages of dropshipping?
- Low initial capital (no need to buy products in advance)
- Easy to start and manage
- Low overhead costs
- Flexibility
- Easy to test
- Easy to test
- No unsold goods
- Wide variety of products
- Scalability
What are the main drawbacks of dropshipping?
- High competition
- Lower profit margins
- Inventory issues
- Shipping complexity
- Supplier mistakes
- Product quality
- Supplier willingness
- Limited customisation and branding
- Customer support
Does Amazon offer dropshipping?
Yes: Like other companies, Amazon offers dropshipping as long as you follow the guidelines. The Amazon dropshipping guidelines state that:
- Dropshippers must have an agreement with the manufacturer that identifies them as the exclusive seller and this must be stated on all invoices addressed to customers, transport documents and external packaging.
- Before shipping orders to customers, suppliers must remove any shipping documents, invoices, external packaging or other information that identifies them as the primary seller.
- Dropshippers must accept and process returns from customers, not suppliers.
Are there any valid alternatives to traditional dropshipping?
Fulfilment by Amazon (FBA) offers an attractive alternative to dropshipping. With this service, sellers get Amazon to manage the entire picking and shipping process, from storing the products in a warehouse through to packaging them, labelling them and shipping them to customers. Customer support services are also managed by Amazon. The only thing sellers need to do is send their items to Amazon's fulfilment centres.
How do you become a dropshipper?
Those starting a dropshipping business should follow the following steps:
- Choose a product to sell. Always keep in mind that, when starting a business, the most common mistake people make is basing their choice of product to sell on a passion or personal interest. This strategy only works if your primary concern is your interest in the product rather than the success of your business.
- Research potential competitors who are already active on the market.
- Choose your dropshipping supplier or suppliers.
- Build your e-commerce store.
- Decide on a business structure.
- Get your financial situation in order.
- Start selling products in your dropshipping store.
- Conduct analyses to help you improve your offering.
Is dropshipping legal?
Yes, in general dropshipping is perfectly legal in Italy. However, all the rules imposed by tax and customs regulations must be followed. Furthermore, if you conduct your dropshipping business via an existing e-commerce website, you must always observe all the rules imposed by the guidelines of the site itself.
Can I deliver products worldwide using dropshipping?
With dropshipping, there are no geographical restrictions on where products can be delivered. Nevertheless, the product you intend to sell must be taken into account because there may be restrictions on selling it certain parts of the world. Consequently, sellers must always keep themselves up to date with the regulations of the countries in which they intend to deliver their products.
What's the difference between manufacturers, wholesalers and dropship retailers?
A retailer operates in a single-level channel that contains only one intermediary. In this channel, the goods are transferred from the manufacturer to the retailer, who sells the product to end consumers. A wholesaler is present in both two-level and three-level channels.
To summarise, the main figures are:
To summarise, the main figures are:
- Manufacturer: The company that makes the products.
- Distributor: The agent that sells the manufacturer's goods to wholesalers or retailers.
- Wholesaler: The company that buys from the manufacturer or distributor and resells the products to the retailer at an advantageous price.
- Retailer: For-profit business that sells products directly to end customers.
In the specific case of dropshipping, manufacturers are also responsible for shipping their products to end customers, but they do not have a direct relationship with customers — they only interact with the sellers that sell their products.
How can I incorporate dropshipping into my business?
Dropshipping can be easily incorporated into an existing business. If you own an online retail company, you can expand the range of products you sell by opting for dropshipping with certain products. In this case, when a customer orders from your store, the dropshipping company then ships the product directly to the customer. This system is particularly useful if you want to test a product's potential.
How profitable is dropshipping?
The earning opportunities from selling dropshipping products are almost limitless — it all depends on the product sector, the time and the resources you decide to use for your dropshipping business.
Does using a dropshipper increase costs?
No, using a dropshipper doesn't increase costs and the dropshipping method was invented precisely to reduce or eliminate overheads such as those related to warehousing. As the manufacturer takes care of shipping, they take full responsibility for the warehouse too. Costs are therefore generally reduced and in some cases fully eliminated — but do bear in mind that unexpected situations can arise and sellers must still take responsibility for any mistakes made by suppliers, which sometimes means having to repay the shipping costs themselves. In short, using a dropshipper does not increase costs as long as the dropshipper is chosen correctly and has a sufficiently high level of professionalism to guarantee a limited number of mistakes.
Do I need to buy the products in advance?
No, there's no need to buy the products in advance — that's one of the main advantages of dropshipping. Sellers don't sell the products until after the sale has been made. This means they don't have to pay anything in advance to buy the products, which will be stored in the manufacturer's warehouse until sold and then shipped to the end customer from there.
Do I need to register my business to use a dropshipping supplier?
From a tax point of view, dropshipping contracts fall into the wider category of e-commerce. In practice, using dropshipping as a selling method has no effect on the tax regulations that e-commerce companies are required to observe, namely those pertaining to e-commerce. Selling online is always considered an entrepreneurial activity. This means that companies are obliged to register for VAT, regardless of their annual sales volume. Tax legislation can sometimes be complicated and it's therefore advisable to employ a consultant to avoid penalties.
Some websites that offer dropshipping offer a six-month trial period during which you don't have to register your business. This option allows you to test the product that you intend to sell. If you generate a decent volume of sales during this trial period, you can proceed with the next step and register your business by registering for VAT, thereby legally formalising your tax situation.
Some websites that offer dropshipping offer a six-month trial period during which you don't have to register your business. This option allows you to test the product that you intend to sell. If you generate a decent volume of sales during this trial period, you can proceed with the next step and register your business by registering for VAT, thereby legally formalising your tax situation.
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