What is Dropshipping and How Does It All Work in 2024?

There has never been a better time in history to start your own business. Every step from registration to inventory management can be automated, and nothing makes this easier than dropshipping.

Dropshipping is a widely used fulfilment method employed by a variety of businesses. It is beneficial due to its low risk and startup costs. The multitude of products and services available to you is virtually endless, so you don’t have to worry about finding the right niche - there is something for everyone.

If you are looking for a second income that doesn’t require you to hold your own inventory and offers flexibility, dropshipping might be an option for you.

What is dropshipping?

Dropshipping is an ecommerce fulfilment method where a retailer will purchase a product from a third party (such as a wholesaler or dropshipping supplier) as their customer places an order via their online store. The third party then ships the product directly to the customer, earning a profit margin. This means the retailer doesn't need to rent warehouse space, manage inventory upfront, or even interact with the product at all.

How does dropshipping work?

With dropshipping, the retailer essentially acts as a middleman between the consumer and a third-party supplier. Depending on the types of products sold, suppliers may be manufacturers, wholesalers, or other retailers. Retailers may have multiple suppliers, which can help mitigate inventory issues.

When a customer orders from a dropshipping business, they're essentially placing an order with a third party supplier. Upon receiving an individual order, the retailer will pay for the goods from the third party supplier at wholesale prices, and set their own selling prices. The third party supplier then ships the product directly to the end customer. With dropshipping, purchasing inventory upfront can become a thing of the past for retailers.

For suppliers, dropshipping is a great way of reaching a different subset of wholesale customers. It can also help empty overflowing inventories and move seasonal items by exposing them to new audiences. 

What is a dropshipper?

A dropshipper acts as an intermediary between the supplier and consumer. As a dropshipper, you leave the logistics of handling shipping, managing warehousing, and purchasing inventory to the supplier. This frees up retailers who dropship to focus on their core strengths, including building a brand, customer relationships, social commerce, and everything else involved in optimising the customer experience. The dropshipper is in charge of bringing the brand and product to the attention of your audience, while the supplier takes care of product quality and the fulfilment method.

The history of dropshipping

The dropshipping business model has existed in some form since the 1960s with the birth of the mail order catalogue, as shown by Do Dropshipping. Before ecommerce, this was a popular fulfilment model, where customers placed an order from the catalogue via phone and the order was delivered to their doorstep. 

The popularity of the mail order method reduced the requirement of holding excess stock in stores, which in turn led to the rise of product fulfilment centers holding large volumes of stock to fill mail orders and phone orders. The original ‘dropshippers’ benefitted from these centres, filled to the brim with stock, offering these same products in their own catalogue, albeit with a slight mark-up.

The rise of Amazon and eBay highlighted to business owners and investors how profitable ecommerce could be.  Naturally, everyone wanted a piece of the pie, especially as more people came online. In the early days, most dropshippers relied on US-based suppliers.

By the early 2000s, trade opened up further and it became easier to source from overseas. It also became easier to set up a storefront on marketplaces. In 2010, Aliexpress was launched, which made ordering products from Chinese manufacturers a lot more accessible and affordable. Between this and the advent of Shopify, it suddenly became easier to not only own and run a product-based online business, but more cost-effective, too. 

If you were looking for proof that dropshipping works, and how it can be a great business model, there are plenty of well-known retailers that either started as dropshippers or use dropshipping as a supplementary order fulfilment method. While not dropshipping businesses per se, Swedish mega-store IKEA, US department store JCPenney and US ecommerce company Wayfair have all utilised drop shipping in various capacities over the years to better manage business operations.

Is dropshipping profitable today? It's where the big business, and big money, is going. In 2021, Foot Locker announced that it was piloting a new dropshipping process in conjunction with Nike. This pilot dropshipping program aims to deliver more of the right product to the right customers in an appropriate time period, leading to fewer delays and faster restocking of sold-out inventory.

Major US department store Nordstrom is also buying further into drop shipping, announcing during an investor day in early 2022 that it plans to reduce traditional wholesale offerings by up to 50 per cent while increasing concessions and dropshipping.

Benefits of dropshipping

Sales are up!

Dropshipping as a business model has been growing exponentially over the past five years. This is largely due to the increase in online shopping and social commerce. In 2023, the market size surpassed $200 billion, with the biggest areas being fashion and hobbies. The market is continuing to grow and shows no signs of stopping.

Plenty of marketplaces and suppliers

There are endless platforms awaiting dropshipping entrepreneurs. You can sell on platforms like eBay or Amazon, build your own website through Shopify, WordPress, Wix or Squarespace, and there are hundreds of dropshipping suppliers ready to ship products. Your biggest hurdle will be choosing exactly what products to market and where to sell online.

Lower risk

Low overhead costs + low running costs + plenty of support available = a lower risk than many other business ventures. Compared to other business models, dropshipping is a capital-light way of starting a business, where you can begin with minimal investment.

Flexible business model

If you’re starting a dropshipping company alone, you have the benefit of being your own boss. Like with many small businesses, you get out of it what you put in. If you go hard and then need to take a break, you can! Since most of your work will be done online, you can work from home, rent an office space, or head into a coworking space. How you want to work is up to you!

All you need is an internet connection

There’s very little you can’t do over the internet these days. We’re always connected, which means you can always be ready to tackle the next challenge, whether it’s creating a content schedule or choosing your next big product. The internet is more available, affordable, and steady than ever before. Gone are the days of waiting for dial-up – you can get everything you need for your business at the touch of a button. 

Challenges of dropshipping

Standing out from the competition

One of the most attractive aspects of dropshipping is that it has very low overhead costs compared to other businesses. However, these low overhead costs aren’t just attractive to you, but to many other entrepreneurs stepping out on their own. You’re not the only person who is going to have a great idea! Not only that, but it’s rare to have exclusive deals with suppliers, meaning your competition can approach them and sell your exact same products.

This can be overcome by developing a detailed marketing plan before you start trading. It’s no longer enough to sell a good product at an affordable price – you may also want to develop a social media strategy, content marketing plan, and consider SEO and paid advertising. You will also need to invest in your website to make sure it’s visually appealing and ticks all the boxes for good UX design.

It may initially take time while you get used to your systems and grow your following, but the payoff will be a dedicated customer base who is happy to recommend your business to their friends, family, and influencers.

The public view of dropshipping and scammers

The low overhead costs may also attract an unsavoury crowd. Scammers may be attracted to dropshipping due to the low start-up costs, which can create a reputational problem for others using dropshipping.

Since we started Dropshipzone in 2012, we’ve seen dubious operators and practices come and go in the dropshipping space, including the following:

• Selling a product that is not as described.

• Advertising the business as an ‘independent boutique’ or ‘handmade store’ when the product is outsourced.

• Selling the product as ‘free – just pay shipping’.

• Scam dropshipping seminars that promise to teach you how to run your own business, but fail to deliver.

• Suppliers that demand unreasonable, additional fees.

• Suppliers selling products they are not allowed to – licensed products or products that are only illegal in certain countries.

According to Inc.com, a single bad review can undo the value of 40 good customer experiences, and we see how rogue operators have tainted dropshipping over the years. In a famous scandal, several famous YouTube influencers came under fire for promoting Kenza Cosmetics, a dropshipping makeup retailer. It was found that the company was engaging in shady practices, including plagiarising its policies and refusing to respond to customer enquiries. 

There are other high-profile cases like this that may have caused damage to the reputation of dropshipping. However, as more established, traditional retailers such as Foot Locker and Nordstrom give their stamp of approval and engage in dropshipping, the industry is becoming professionalised.

In terms of how to overcome these challenges, your brand strategy, including your social media presence and content marketing, will be your greatest asset. Dropshipping is not a 'get rich quick' scheme. Post regularly with an authentic voice, and make sure you respond to messages, comments and reviews in a timely manner.

You’ll also want to invest in good customer service, whether this means investing in software or hiring extra team members. Ultimately, you want people to feel that they are talking to a real person and that their concerns are being heard.

Shipping delays

As a result of COVID-19, the last few years have been difficult for every industry that relies on shipping products to customers anywhere in the world. There are still lingering supply chain issues and shipping complexities in 2023, which are expected to continue into 2024. 

At the same time, customers have come to expect a certain standard of service, even same-day shipping. A delay or shipping complications can be costly. 

But there are ways to approach shipping that help to keep the customer on your side. While you may not have control over the supply chain, when you’re coming up with your shipping plans, you can test the process yourself by ordering from your supplier. You'll be able to get a sense of how quickly the supplier fulfills an order, as well as discover any supplier errors. This will help you set realistic expectations about delivery with your own customers.

You may also want to consider offering free shipping or charging a flat fee for shipping costs. If there are delays, contact your customer and respond to any enquiries as soon as possible. Your customer might not mind long shipping times if they save money and you’re transparent about the process, but unforeseen delays almost always cause frustration, which may tarnish your online store's reputation. For more information, check out our comprehensive shipping strategy guide.

Returns and refunds

Dealing with returns and refunds is painful, especially if the refund is requested while the object is still in transit. Too many returns will hurt your business financially and in terms of reputation. There are all sorts of things you’ll have to consider such as restocking fees, shipping fees, whether the item is defective, and how you can come to a resolution in the shortest time. Regardless of whether the issue is the supplier, the carrier, or acts of god, the responsibility falls on you as the store owner to resolve your customer’s complaints.

When dropshipping and dealing with the challenges of returns and refunds, there are certain measures you can take to manage customer expectations. If the product is defective, you should always offer to pay for the return shipping. There’s nothing that will negatively impact the customer experience more than making a customer feel like they’re being punished for someone else’s mistake.

Many carriers give the option of sending prepaid shipping labels, so that’s an easy solution. If customers complain, it may be even easier to simply send out a new product and let the customer keep the original – this is an ideal solution for small, inexpensive products that would cost more to ship back than to simply replace. Your supplier may even pay the shipping for the replacement product. 

Requirements to start dropshipping

Investment

The first rule of business: you need money to make money. Of course, dropshipping means lower overhead costs, but you still need a small amount of capital to begin. Some of the initial costs may include:

• Product and shipping testing

• Web domain costs

• Cost of business name registration

• Legal or accounting fees if you wish to use consultants

• Paid advertising to grow your brand name early

Here are some things that you shouldn’t pay for:

• ‘Additional’ supplier fees (while supplier directories may have monthly or annual fees, your suppliers should not charge you a ‘subscription’ or exclusivity)

• Your ABN

• Followers or email lists

ABN

An Australian Business Number (ABN) is an 11-digit number that identifies your business for tax purposes. For businesses with an annual turnover of $75,000, an ABN is compulsory. If you aren’t earning over that amount, you should still have an ABN. It’s free to apply for, and most reliable dropship suppliers won’t work with you unless you have an ABN. For more details, check out our guide about registering for an ABN for dropshipping purposes in Australia.

Dropshipping agreement

A dropshipping agreement is a contract between a seller and manufacturer/supplier that outlines respective rights and responsibilities. In your dropshipping agreement, you should include information such as:

• Agreed price for goods

• Return policies

• Shipping terms

Australian Consumer Law

In Australia, when you buy most products or services you are entitled to certain guarantees, as set out under Australian Consumer Law and enforced by the Australian Competition and Consumer Commission (ACCC). These guarantees include expectations of reasonable quality and safety from products, as well as warranty protection. The ACL also prohibits misleading or unfair sales tactics, contract terms or business practices.

ACL consumer guarantees apply regardless of your own policies. For instance, even if your business states ‘no refunds’, a consumer may still be entitled to a refund if the product is faulty, not of acceptable quality, or not as advertised.

Before starting a business, you should have a basic knowledge of ACL and how it applies to your products. You can get started with resources on the ACL website.

Terms of sale and privacy policy

There are many important documents that you will need to start your business. Two very important ones are your terms of sale (or sales terms and conditions), and your privacy policy.

Your terms of sale outline the buying process and the rights and responsibilities of both your and your customers. Key features of a terms of sale document would be:

• How a customer can purchase your product

• How payment is collected

• What currencies are accepted

• How a customer can track the order’s process

• How or why your business might accept/reject an order

• Where the product is delivered from and estimated delivery times

• Cancellations, returns, refunds and exchanges

Your privacy policy outlines how your business will handle your customer’s personal information. While not all businesses are legally required to have a privacy policy, it is recommended that you do. If you’re not sure your business is legally required to have a privacy policy, you can use the Privacy checklist for small businesses created by the Australian Government.

Website and domain

Of course, an online business needs a website, and that website will need to be hosted by a platform or service provider. Unless you are a designer or IT professional yourself, you may also need to pay someone to build your website and act as tech support.

Luckily for you, there are plenty of easy ways to make a website. There are a variety of platforms such as Shopify, WordPress and Squarespace that make it easy to build a website affordably and will also cover hosting and support.

How to get started dropshipping

1. Do your market research. What kind of audience are you looking to target with your ecommerce business? What products are trending right now?

2. Choose a niche you’re interested in. Nothing can tank a business faster than your lack of interest. If you don’t know or care about the product, you won’t be good at selling it.

3. Do your supplier research. Thankfully, there are plenty of databases available to find your perfect dropshipping supplier. Consider their prices, fulfilment process, and whether products on offer are a good fit for your brand. If you're interested in finding out more, check out our dedicated guide to finding the right dropshipping supplier before starting your ecommerce business.

4. Do your due diligence. Make sure you have all the legal documents and details you need for a business, such as an ABN and registered business name.

5. Understand your platform. Each sales platform has its own policies and procedures, as well as different ways of interacting with search engines. Knowing your platform inside out will help you troubleshoot your website or storefront without always having to wait for support.

6. Meet your audience where they’re at. Generally speaking, social media is a must! Look for where your target audience is hanging out online and make sure you have a presence there.

Dropshipzone is your turnkey ecommerce solution

If you’re looking to start dropshipping in Australia, look no further than Dropshipzone. As a local B2B marketplace, our service comes with benefits that other platforms simply can't offer.

• Our local marketplace comes complete with a local customer service team offering prompt and personalised support.

• All suppliers on Dropshipzone must hold their inventory in Australia, which means fewer supply chain disruptions, faster delivery, and improved customer satisfaction.

• Fewer miles travelled also means reduced operational complexity. Did you know that last-mile deliveries account for as much as 41 per cent of the overall supply chain costs for retailers? It’s the most inefficient part of the journey, and we can help you navigate it.

At Dropshipzone, we take the stress out of dropshipping and provide a path to success for your ecommerce business. So, what are you waiting for? Get started on your dropshipping journey today with Dropshipzone.