How does dropshipping work and is it right for your business?

Dropshipping is an e-commerce business model where sellers offer products without keeping them in stock. Instead, an external wholesaler or manufacturer handles storage, shipping, and often even packaging—leaving the online store to act merely as an intermediary between customers and suppliers.

What is dropshipping?

The term dropshipping comes from logistics. In the world of online retail, it refers to a specific distribution model based on a very simple principle where an online store offers and sells products that it neither stocks nor ships itself. This changes the distribution through the online store: Instead of having all products on hand, the business primarily coordinates between wholesalers and manufacturers.

In dropshipping, there are three parties involved:

• the customer
• the seller
• the wholesaler or manufacturer

How does dropshipping work?

The functioning of dropshipping can best be understood by looking at the different steps:

1. The customer places an order for goods in the online store.

2. The online store then orders the products specified in the customer’s order from a cooperating wholesaler or manufacturer.

3. The shipment is then carried out by the manufacturer or wholesaler, who ‘drops’ the goods directly to the customer.

An online store with dropshipping acts as a kind of intermediary that sells products online but does not ship them. Customers can order goods from them. Once the online store receives customer payment, it forwards the order to a wholesaler or manufacturer, who then takes care of the rest.

Technological advancements have greatly professionalised the dropshipping business. With the help of artificial intelligence, trends can be automatically analysed or prices dynamically adjusted. Even customer service can be handled via intelligent chatbots for online marketing. Many successful stores already use AI-based systems to personalise recommendations or monitor inventory in real-time.

What are the pros and cons of dropshipping?

Customers of online retailers using dropshipping will hardly notice the difference from a traditional online store, at least when ordering, as these stores respond immediately once they receive payment. However, for online store operators and wholesalers or manufacturers, the model offers several pros and cons.

Advantages of dropshipping

By definition, dropshipping offers numerous advantages for retailers. However, it also provides clear benefits for manufacturers and wholesalers: they can concentrate entirely on shipping their goods without needing any in-depth knowledge of e-commerce. Their attention can remain fully on products, shipping, and handling returns.

From a store operator’s perspective, the greatest advantage of dropshipping is the ease of entry when launching a new online store. Normally, starting out requires substantial initial capital to maintain a stock of goods for fast order fulfillment—yet unsold inventory can quickly turn into dead stock. With dropshipping, these concerns disappear. Retailers don’t need to purchase goods upfront, pay for storage, or cover insurance premiums. If an item sells poorly or not at all, it can simply be removed from the product range. This also makes creating a business plan far easier.

Additionally, dropshipping can boost revenue since online shops can offer an almost unlimited range of products. Another key benefit is location independence: neither the company headquarters nor the store’s operations are tied to a specific place. With just a reliable internet connection, dropshipping becomes an ideal model for digital nomads who want the freedom to work from anywhere in the world.

Disadvantages of dropshipping

Alongside these advantages, dropshipping also has some disadvantages. With dropshipping, online retailers have no control over the crucial factors in the customer experience and must rely entirely on their partners. This starts with shipping, includes ensuring the quality of ordered goods, and extends to the returns process. If something goes wrong at any point, the online shop is held responsible by the customers, even if the errors were with the wholesaler or manufacturer. Reputation and brand trust grow slowly but can quickly diminish due to the shortcomings of others.

The major advantage of not having your own inventory is also a significant disadvantage. In dropshipping, multiple online shops source stock from a manufacturer or wholesaler. As a result, items can be sold out before the online retailer even notices. This leads to extra work since in such cases, all customers who ordered that item must be promptly informed about the delay.

Finally, shipping can become a disadvantage. When customers order multiple products from different manufacturers and wholesalers through a single shop, they typically expect one consolidated shipment. In dropshipping, however, such orders often lead to multiple packages from various carriers, arriving at different times and with varying shipping costs.

An overview of dropshipping advantages and disadvantages

What are the main areas of application for dropshipping?

In the end, evaluating the pros and cons reveals three primary ways to use dropshipping:

1. As a standalone online store.

2. Through an online marketplace such as Amazon or eBay. This approach offers access to a large customer base, but comes with the drawback that the platform dictates the rules.

3. In brick-and-mortar retail—in both directions: retailers can expand into online sales via dropshipping, while store owners can offer products beyond their physical inventory.

Which products are best suited for dropshipping?

A first point to consider when choosing products for dropshipping is to avoid returns whenever possible. Clothing – typically associated with a very high return rate – is therefore not ideal for dropshipping. An exception is if you have been able to negotiate uniform and favourable terms and conditions with manufacturers and wholesalers in advance. Particularly popular in dropshipping are products from the following categories:

• Subscription products: Offer providers predictable revenue and give partners reliable order forecasts.
• Niche products: Feature low competition and reduced price pressure, with manageable costs for search engine optimisation.
• Bulky products: Since manufacturers and wholesalers ship directly to customers without interim storage, dropshipping is especially advantageous for large or heavy items.
• Sustainable products: With growing demand for eco-friendly packaging, short supply chains, and fair production, partnering with green dropshipping providers can help you stand out from competitors.
• Personalised products: Although customisation requires closer coordination with manufacturers, it delivers higher customer satisfaction and often better profit margins.
• Digital products: Instead of physical storage, dropshipping uses digital server capacity, enabling customers to download their purchases immediately after payment.

While dropshipping means giving up much of the direct customer experience, you can still make a strong impact with high-quality product pages. An online store that offers detailed, well-presented content builds customer trust. Providing a wide range of convenient payment options also makes ordering easier. Finally, especially in dropshipping, fast, straightforward, and service-focused customer communication via email, live chat, or social media is essential.

How do you get started with dropshipping?

Dropshipping is typically suited for those with e-commerce experience, as it requires know-how, industry contacts, and an understanding of the online market. However, if you prefer to start small and take a ‘learning by doing’ approach, the following brief startup guide can help you get started.

Step 1: Choose suitable products

To choose the right products, you don’t need to conduct complex market research. If you want to test dropshipping, you should ideally select a product niche you are well acquainted with and, preferably, already have contacts with manufacturers or wholesalers.

Step 2: Set up your own shop

A personal online shop these days doesn’t necessarily require extensive programming skills. Pre-made templates allow beginners to set up a website in minutes. Providers of easy-to-understand and user-friendly site builders and CMS services include IONOS. Use, for instance, WordPress Hosting or WooCommerce Hosting to have all the essential building blocks for your own shop.

Step 3: Register your own domain

A suitable domain, including a hosting environment, also plays an important role. Registration and setup are now very easy and can be done in seconds. This way, the domain is registered, and the entire infrastructure for your own online shop with dropshipping is ready with just a few clicks.

Step 4: Content, marketing, and service

Of course, this guide is no guarantee of success. Creating an appealing online shop requires more than just a good template. It also takes high-quality images and all the information needed to convince customers to make a purchase. Anyone looking to promote their online shop should seek advice from experts rather than running Google Ads or social ads without a clear strategy. Good customer service and the right social media strategy can make all the difference.

Step 5: Use modern tools and platforms

To succeed in dropshipping, it’s important to leverage modern tools and platforms. Alongside dedicated dropshipping plugins, solutions like Oberlo, Spocket, or DSers automate supplier connections. AI tools such as ChatGPT or Jasper can assist with content creation, SEO, and customer service. Social selling on platforms like Instagram, TikTok, or Pinterest is also gaining importance, helping you increase reach and connect with customers where they spend their time each day.