What is Dropshipping and How Does it Work in 2023?

After more than a decade of eCommerce, the most common question I still get is “What is drop shipping?”

The answer isn't so complicated. 

Follow along with me as I cover the ins-and-outs of this business model!

Section 1: So, What is Dropshipping?

I know a lot of people find out about my eCommerce course 'Drop Ship Blueprint' by searching for the term ‘drop shipping’. And that they aren’t really sure what it is or how it works.

Here's the definition for drop shipping:

Also, I know people wonder how drop shipping works.

It can seem confusing at first because there are many different ways to build a drop shipping business.

The truth is, some ways work and others don’t. 

To start, let’s go over this diagram which sales how this fulfillment method works:

So as simple as possible, this is drop shipping in 4 steps.

1. You list the supplier’s product on your store for customers to buy.
2. The customer purchases something from your online store.
3. You order that same exact item that the customer paid for from your supplier.
4. Your drop shipping supplier handles the order fulfillment and ships this item directly to your customer. 

To explain a little further, it all starts with building your own eCommerce store and listing products on your website. I recommend building this online store on Shopify and customizing it to fit your target customer.

But whose products are you selling? Well, these are different suppliers’ and brands’ products. You may be thinking, “why don’t these companies sell their products directly to customers?”

The thing is there are companies that only focus on innovating products that rely on retailers to sell them.

That’s where you come in as a drop ship retailer, you’ll be selling for these brands who don’t sell to the public. They look for people to sell their products, to make them money, and grow their business for them. You and your online store are one of these retailers.

You’ll want to focus on getting approved to sell for these different companies. After you’re approved you’ll put their products on your Shopify store. Then you will advertise to bring people to your store.

Customers come to the store, and after they purchase, you contact your suppliers. Then they ship the items directly to the customer. You aren’t buying any inventory. All you’re doing is making an agreement with the drop ship supplier to sell their products on your website.

You get their price lists and put their products for sale on your site. When someone buys, you place that order with the supplier.  You only order the product after the customer has paid you. Then you’ll contact that supplier, and say “ship item XYZ to customer ABC.” After that they ship it to your customer and charge you the wholesale price.

The difference between your retail price and what you pay your supplier is the net profit. From my experience, when you drop ship the right way,  you’re looking at about 25 to 30 percent average net profit.

That means if you sell a $1,000 item, you make $250. That’s the average I’ve seen in my experience. Sometimes it’s higher, sometimes it’s lower, but that’s a good goal to shoot for. It’s a realistic expectation.

One other thing, if you're wondering "Is Dropshipping Legal?" The answer is yes, of course! There are legal concerns that you want to be aware of, but that is true of every single business.

Section 2: Drop Shipping Advantages & Disadvantages

Now that I’ve covered the question, “what is drop shipping?” I want to go over the benefits and downsides of owning a drop shipping business.

It’s important to me to have transparency when it comes to your options.

That way you have the complete picture and can decide if you want to build a drop shipping business or if you’d prefer one of the other business models.

Advantages of Starting A Dropshipping Business

1. You're Location Independent

The first benefit and probably the one that’s most important to me with drop shipping is being location independent.

Over the past decade I’ve lived in Vietnam, South America, and Thailand. With a drop shipping business, you really can live and work from wherever you want. 

Drop shipping allows a level of location independence that not many of these other business models do. That’s why my coaching program is called “Drop Ship Lifestyle,” because you can be location independent.

2. No Inventory Costs

Another benefit is that there are no inventory costs. So when you’re starting out with drop shipping, you aren’t laying out any of your money for inventory.

The truth is that when you’re a traditional retailer, inventory is your biggest expense. You need to physically have the products to sell but with drop shipping, you don’t.

All you need is approvals from suppliers to have products. You only pay for items after you sell them and there are no warehouse costs.

Now in the previous section, I wrote about how I started in eCommerce by importing. When I first started, I actually had these inventory and warehouse costs. I was spending tons of money every month to store my products.

But if you use the drop shipping business model, you’re not paying for these expenses, someone else is.

All of your suppliers have their own warehouses and they’re paying to store these items. So it’s another cost that isn’t on your shoulders, something you don’t have to worry about when starting out.

3. No Handling Returns

Another benefit to drop shipping is not having to handle returns. To be clear, if your customer wants to return an item, you’ll still have to forward the return slip from your supplier to your customer.

But these items are not coming to you. If you own a drop shipping business, you won’t have returned products showing up at your house.

They’re going to be shipped back to your supplier, and then based on the policy of that supplier, you’ll get a refund or they’ll ship the customer a replacement item.

One thing that I go into detail within the Drop Ship Lifestyle course is how to find suppliers with low return rates. So ideally, you won’t even have to deal with emails about returns.

4. Gather Data While Getting Paid

This next benefit of drop shipping is gathering data while you’re getting paid.

Let’s say that you want to build a brand in the chandelier niche, you want to sell your own lighting fixtures or chandeliers. Also, let’s assume that you want to be an importer and build your own product line. We’ll also say that you even have the money to invest in it right now.

Well, before you throw money at an import business, have products manufactured, and start trying to sell them… I’d still recommend that you start a drop shipping business in that niche first.

As you’re drop shipping, you’ll be learning what sells. You will quickly be able to find out what your customer wants and building resources that you can use for your own product line. All while making money. Basically, you’re testing out the market while making a profit.

You’ll learn what types of products sell best, what price point you make the most with, and which features customers of your niche want most.

Then, after you’re successful in that niche, you can use all that data to launch your own brand with an importing business.

5. It's Easily Scalable

Another huge benefit of a drop shipping business is how easy it is to scale. 

For instance, if you are making $100,000 a year in sales from just one drop shipping store, it’s very easy to build more online stores with similar results. The best part is that you can do this over and over again.

I always recommend starting with one drop shipping store, so that you really learn the process, go through it and master it. But after you do it one time, it’s very easy to do it over and over again.

6. You’re Building A Sellable Asset

The next amazing benefit of building a drop shipping business is that you’re building a real asset.

Now when I first started this business, I didn’t realize it, but drop shipping stores are very valuable to a lot of people.

There are a lot of buyers out there that are looking for profitable eCommerce stores, especially drop shipping stores.

Because basically, these buyers could just plug themselves into your business and be making money the next day. All without having to take over your inventory or take over a warehouse.

Here’s an example of what a dropshipping business can sell for: 

So let’s say at the low end, you build a drop shipping business that’s making you $1,000 a month in profit.

That’s an amount that I think everyone could wrap their heads around, it’s very reasonable and attainable. That online store could be worth as high as $20,000.

That is what I mean here when I say drop shipping is one of the best ways to make money online, it’s in large part because you’re building a real asset.

One great resource for selling your drop shipping business is Empire Flippers. It’s a marketplace to buy and sell drop shipping stores in all price ranges, from a couple thousand to millions.

Here are some drop shipping stores for sale on Empire Flippers. You can see that having a drop shipping business is a huge asset.

The Disadvantages of Drop Shipping

Now let’s talk about some of the downsides of owning a drop shipping business when compared to owning your own brand.

1. Smaller Profit Margins

First off, there are smaller margins. Because you’re selling someone else’s products, profits are going to be less than if you created your own products.

If you go to China and have your products manufactured you can negotiate better deals for the product price. That’s because you’re doing a lot more work and taking on a lot more of the responsibility. But your profit margins will be higher.

So with drop shipping, there are usually smaller profit margins than with having your own brands. Later in this guide I will cover the exact margins, but on average, I aim for 25% profit margins with my drop shipping stores.

2. No Inventory Control

Another thing that’s not so great about drop shipping, and in my opinion it’s probably the biggest downside, is that you have no control over inventory.

Let’s say you have one supplier whose product sells well on your website, you’re making great money with them. Well, what happens if that supplier has supply chain issues and runs out of stock? 

Your customers are still going to want to order from you, but you won’t be able to fulfill these orders. You are going to lose potential money in that situation. All because you have no control over the inventory, or because maybe your suppliers aren’t so great about managing inventory and keeping every item in stock.

This is something that great suppliers know how to deal with. Regardless, it’s probably something you’ll run into at least a few times if you decide to build your own drop shipping business.

You’ll run into suppliers who don’t have great inventory management and who do run into supply chain issues and that will lead to lost sales.

I cover how to spot bad suppliers in a later section and in-depth with my course Drop Ship Lifestyle.

3. Increased Risk of Competition

The last thing that I could really think of as a negative with drop shipping is the increased risk of competition.

If you create your own brand to sell online, let’s go back to that chandelier niche, and you make ‘Anton Chandeliers’. No one else can go out and create ‘Anton Chandeliers’ because that’s your company and your brand.

When we’re drop shipping, we’re selling other people’s brands that are looking for retailers. And other competitors will likely come across the same supplier and become retailers as well.

So it’s competitive, but if it wasn’t competitive, it would mean there wasn’t money to be made. It would mean there isn’t a market for that niche and it’s probably a bad niche to enter.

Those are my benefits and downsides when it comes to drop shipping. But even with the drawbacks, I always recommend building a drop shipping business.

It’s what I’ve recommended to family and friends, It’s what I teach to people because it works.

It’s a great way to build a location independent business, for little money, with the potential of huge returns, and that could become a major asset.

Section 3:  Frequently Asked Questions

Now that we’ve covered some of the biggest mistakes new drop shippers make, I’d like to address some questions you might have at this point.

How much time and effort does it take to build a drop shipping store?

I’ve been building drop shipping sites, again, for years. I could do it myself in about a week to get to the very basic point where I start contacting suppliers. So for me, about a week to actually set up the store.

As for the members of my Drop Ship Lifestyle coaching program, some have done it in 2 weeks, some have done it in a month, some have done in 3 months. It really depends on how much time you want to commit to it.

What I will say is if you decide to work with me in my Drop Ship Lifestyle coaching program, we have a 22 video course that’s specifically about how to do this fast. It walks you through how to build your own highly converting eCommerce store with screen-share videos.

It could take a week or a couple of months to build your store. It all depends on how much time you’re putting into it and if you’re following the proven steps in the Drop Ship Lifestyle system or if you’re just trying to figure it out on your own.

How much can I make drop shipping? What will my profit margins be?

This one is kind of tough to answer because it varies so much.

I own stores now and have owned stores in many different niches. I’ve worked with hundreds of suppliers and I’ve been in situations where I’m okay making a 15% profit margin. I also have some suppliers where my profit margin is over 50%.

So on average, I’d say with drop shipping my profit margin is right around 25% – probably a little higher. Remember, that’s net profit.

Meaning, if you sell a $1000 item after you pay for the product from your dropship supplier, take into account your advertising costs, subtract your merchant account fee, and cost to ship, you can expect on average to be left with about $250 profit on a $1000 sale.

To sum it up, that’s around the margins you can expect and that’s one of the reasons that I recommend selling expensive items, so every time you get a sale it’s actually worth it.

The real reason I can’t tell you how much you’ll make with your drop shipping business…

The biggest reason is that I don’t personally know you and succeeding in drop shipping has a lot to do with personality. So some of what I’ll talk about in this section is what you can do to give yourself the best chances of drop shipping success.

Is drop shipping a proven business model?

The short answer is yes, definitely.

I’ve mentioned earlier that I’ve owned drop shipping stores for a number of years now.

I started off over 10 years ago with importing. And then a few years after that I transitioned into drop shipping.

To give you some idea of my success and business size, my stores alone have done over 8-figures in sales.

Drop shipping has done great things for myself and many of my students in my Drop Ship Lifestyle coaching program.

Because yes, this business model does work. We’ve already covered that in previous sections, so I really believe if it’s going to work for you or not comes down to a few personality traits.

Also, finding profitable niches is crucial for success.

Section 4: Two Different Dropshipping Schools of Thought

I’m going to cover 2 different scenarios. Like I talked about in previous sections, I find that the drop shipping average profit margin is around 25%, so I’ll use that in these scenarios.

1. Low Cost Items

Let’s say you’re drop shipping items that sell for $10 retail. The customer goes to your website and buy your product for $10.

There’s a good chance the product will cost you around $5 from your supplier and your shipping cost will be somewhere around $2 for a smaller item. So in this scenario, you’re left with $3 profit for processing an order.

In scenario 1, your profit per sale in this case will be $3, and that’s only if you didn’t spend any money on advertising. Not impressive, right?

Low ticket niches like this can be setup through websites like Oberlo or Aliexpress, it’s not what I teach in my program and not something I recommend.

2. Dropshipping High Cost Items

The second scenario involves selling more expensive items, what I like to call high-ticket drop shipping. You sell an item for $1000 and the item cost is $500 wholesale. Then your shipping cost is $200.

NOTE: Even though the supplier is going to ship your items directly to your customer, you still have to cover the shipping cost, but you can always reduce costs by charging the customer partial amounts.

So in this scenario, you’re left with $300 profit and that looks pretty good. Much better than $3 and it’s the same amount of work. The process is the same:

• You uploaded the same amount of products to your website
• You sent the same traffic to it
• You got the same order
• You processed it the same way on your end

But in one scenario, the high-ticket drop shipping model made 100x the amount of money than with the other one.

This example gives you an idea of realistic results with the right dropship suppliers and the right niche price points.

This is a pretty average scenario for me, I’m in scenario 2 and also teach this method. I’ve never sold in scenario 1. I always go for high ticket product niches and only work with legitimate suppliers.

Section 5: "What is Dropshipping" Recap

So now you know how dropshipping works:

1. You list the supplier’s product on your store for customers to buy.
2. The customer purchases something from your eCommerce store.
3. You order that same exact item that the customer paid for from your supplier.
4. Your drop shipping supplier ships this item directly to your customer.
5. The customer receives the item that they’ve ordered from you

You know the Advantages:

1. You are Location Independent
2. No Inventory Costs
3. No Handling Returns
4. Gather Data While Getting Paid
5. Dropshipping is Easily Scalable
6. You’re Building A Sellable Asset

And the Disadvantages:

1. Smaller Profit Margins
2. No Inventory Control
3. Increased Risk of Competition

You know the answers to FAQ's like:

1. How much time and effort does it take to build a dropshipping store?
2. How much can I make dropshipping? What will my profit margins be?
3. Is dropshipping a proven business model?

And you know the strengths and weaknesses of the two primary types of dropshipping products:

• Low Ticket Items
• High Ticket items

For a deeper dive into dropshipping, check out our Ultimate Dropshipping Guide!