What is dropshipping?

What is dropshipping? How does it work?

Dropshipping is an “all-in-one” model that can help companies outsource the entire product delivery process — from the manufacturer to the customer. Find out exactly how it works for you.
This article is a guide with an introduction to dropshipping, presenting the individual variants and their advantages and disadvantages.
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What is dropshipping? How does it work?

What is dropshipping?

Dropshipping is a form of e-commerce in which online retailers often no longer have their own products in stock. Instead, the products are sent directly from wholesalers or manufacturers to customers. Dropshipping is one way in which online retailers can expand their product range with less effort and therefore offer customers a wider range of products. As a result, online retailers have more options to make optimal use of their start-up and operating costs.

How does dropshipping work?

The dropshipping business model offers online retailers more flexibility when purchasing goods, as they do not have to physically store the products themselves.

The task of the online retailer is to advertise their products, which are sold in their online shop. When an order is received in the online shop, it goes directly to the dropshipping partner. At the same time, the customer receives confirmation that the goods are on their way. The entire process of delivering the product is outsourced to the dropshipping partner. Depending on the dropshipping model, some providers also include customer service for returns. Dropshipping therefore offers several advantages over traditional e-commerce models. Startups or retailers in particular use this option to offer or expand their product range online.

The term “dropshipping” therefore refers to a logistics service provided by the wholesaler or manufacturer. The logo and sender address are often specified by the online retailer (dropshipper) so that it is not even revealed to customers that the goods come directly from the wholesaler or manufacturer. In the event of complaints, the dropshipper is contacted directly and not the actual sender. In German-speaking countries, this principle is also referred to as “Streckengeschäft”, involving manufacturers, wholesalers, and resellers or retailers. The manufacturer sends the goods directly to the retailer, bypassing the wholesaler, who only performs the commercial functions of ordering, invoicing, and handling transactions.

Here is everything you need to know about dropshipping for your business:

Dropshipping offers online retailers the option of starting a business and achieving better distribution of their goods with the manufacturer or wholesaler, even internationally. Online retailers also have the opportunity to be present on international marketplaces, even if their company is not headquartered in these countries, as shipping is carried out by the dropshipping provider.

This business model is driven by the increasing popularity of online shopping. The figures for retail sales speak for themselves; online retail is a growing market worldwide. According to a recent study by the UN Conference on Trade and Development (UNCTAD), the share of global online sales in the total turnover of all retailers rose by 19% in 2021. In Germany alone, the market share in online retail is over 80 billion euro. This corresponds to over 10% of total retail sales in Germany.

How do you find the right dropshipping partner?

Dropshipping can be very interesting for entrepreneurs who are just starting out with e-commerce. But which model can offer the greatest opportunities for your business and what is important when choosing the right partner?

Here are a few questions that you should definitely ask yourself in advance:
  • Is the dropshipping partner trustworthy?
  • What storage space is required for the order quantity?
  • Is it possible to exchange all necessary information online?
  • What are the conditions for delivery times and shipment tracking?
  • How and by whom is the shipment carried out?
  • How is product quality ensured?
  • What does the packaging look like? What data is shown on it?
  • How does complaint processing work?
To simplify these processes, there are already numerous automated solutions from the various dropshipping providers.
Illustration of a man standing next to a Prime Air plane and a delivery truck

Who can act as a dropshipping provider?

In dropshipping, there are three main players who can take over certain aspects or the entire process of delivery to customers. These are the manufacturers of the products, wholesalers, who establish the connection between manufacturers and retailers, and retailers, who take over the sale of products to customers.

Since online retail has become popular and online shopping is becoming increasingly common for customers, further variants have become established in addition to the traditional forms of retail distribution, which will be discussed in more detail in this document. But first, you'll find out in detail what function these three main players have.

Manufacturer

They produce the products, which they then sell to the wholesale company or, under certain conditions, to retailers. Purchasing directly from the manufacturer is usually only possible in large quantities, which is often not profitable for smaller companies.
More and more manufacturers are now offering dropshipping options to serve larger business areas and marketplaces.

Wholesaler

Wholesalers buy the products from the manufacturer and sell them on to retailers at a premium. They act as intermediaries, as manufacturers rarely sell directly to retailers in traditional retail. Until now, the function of a wholesaler was exclusively supplying retailers, rather than selling to end customers. But due to the growth in online retail, wholesalers are also increasingly offering dropshipping solutions with delivery directly to customers.

Online retailer

Retailers or online retailers sell directly to customers. Dropshipping offers you the option of not having to physically store the products yourself. You can focus entirely on your main tasks, creating product details, such as branding, pricing, marketing, and sales. Dropshipping is an option that can help you with all the processes of delivering products.
Here are other options that some wholesalers and manufacturers offer.

When it comes to dropshipping, there are two different models that are offered by wholesalers and increasingly by manufacturers as well: the wholesale warehouse model and the call-off stock model. At the wholesale warehouse, the dropshipper has access to the wholesaler's entire range of products and the wholesaler decides when to sell the goods and to whom. As a result, it may be that the goods ordered from your online shop are no longer available at the wholesaler, as they have already sold them to another retailer who was faster, meaning the goods can no longer be delivered to you (or your customers).

In the second model, call-off stock, the wholesaler provides the online retailer with their own storage area for their own stock. The stock stored there is kept exclusively for them and is only subject to charge when sold, with extra costs and minimum acceptance rates not unusual. This gives the online retailer the advantage of knowing their exact inventory so they can reorder in good time to maintain availability for customers.

Work with more than one dropshipping provider at the same time

After you've started your business with a dropshipper and gained some initial experience, you may have the idea of offering even more products, but for that you'll need more manufacturers and maybe even more dropshipping providers. How useful is it in reality to work with multiple providers rather than focusing on just one?

Working with multiple suppliers can contribute to more competitive prices and ensure that you don't run out of best-selling products. Read about the possible advantages and disadvantages here.

Advantages

  • Compensates for a supplier's delivery problems
  • Larger selection and variety of products for customers
  • Prices are easier to negotiate and balance
  • You don't just depend on one provider

Disadvantages

  • The customer assumes that all orders in a shop come together from one supplier, which is usually not the case.
  • The customer then receives several parcels from different suppliers at different times.
  • More enquiries and complaints
  • More effort for communication and data checks
  • Higher administrative burden
There is therefore a good case for working with multiple dropshipping providers in order to scale your business to be able to offer customers more.

So what are the most important things to look out for if you decide to work with more than one dropshipping partner?
  • Professionalism
  • Strong communication
  • Punctuality with delivery times
  • Flexible customisation (private label)
When dropshipping with multiple providers, the recommended model is to work with a dropshipping agent or a fulfilment centre. Communication costs can therefore be significantly reduced and, despite different manufacturers, deliveries all come from one sender. You can find out more about this in the text below.

Is dropshipping right for my business model?

Ultimately, you have to decide for yourself whether dropshipping is the perfect business model for your business. Here are some important aspects to consider and questions you should ask yourself when deciding whether dropshipping fits your business model.

Do you want to sell your products with your own branding?

Developing and establishing your private label helps customers easily recognise your brand, limits pricing pressure, and can contribute to customer loyalty.
When building your brand, it is particularly important to make the shopping experience as customer-friendly as possible, from the online shop to delivery to their front door. With dropshipping, you can outsource many individual steps to your partner, but this means product quality, packaging, shipping, and delivery to customers are no longer within your control. If quality suffers as a result, customers will say goodbye to the brand and buy from a competitor. In addition, the scope for product adjustments and branding in dropshipping is very limited.

How much control do you want to maintain when it comes to product quality?

The quality of your products plays a role in many factors in your business.

High quality can be promoted with positive testimonials and can support the recognition effect. However, if the quality promised in the offer does not match the delivered goods, a high return rate is to be expected. The result could be negative customer reviews and loss of customers. You should therefore carefully consider how important consistently high quality is for your customers.

With dropshipping, consistently high quality control is sometimes difficult to achieve as you have outsourced the process of delivering goods to a third party. Pay attention to who you choose if quality is important to you and is key to your long-term success.

Which delivery times are important to you for your products?

Customers who shop online usually expect fast delivery. According to surveys, 84% of all customers who used online shopping considered fast delivery an essential part of their shopping experience. Delivery times that are too long create a negative image of your online business and brand. When choosing a dropshipping provider, pay attention to the terms and conditions and timeframes of delivery, as well as the costs involved. Tracked delivery can be an added benefit if you get this service from your dropshipper.
A man and woman standing in a warehouse looking at a tablet

The advantages and disadvantages of dropshipping

It is important to consider whether outsourcing essential processes offers more advantages or disadvantages in online retail as well. Are the costs that may be saved from dropshipping, the stress of the processes that are out of your control, and the associated dependency compatible with your business goals? Here are a few advantages and disadvantages to think about when considering dropshipping before making your final decision.

Advantages

Dropshipping offers several benefits, especially for business starters, as long as it fits your business model. By outsourcing delivery fulfilment, you increase the chances of achieving a more optimal cost structure, which can be helpful for companies in the start-up phase. Another positive aspect is that with some dropshipping providers, you only have to pay for the products once an order has been placed. In addition, dropshipping can give you options, offer a wide range of products, and can be adaptable at all times. With an online business, you are also less bound by national borders and can buy and sell worldwide. Another decisive advantage for many retailers is that an online business can give you the prospect of simply running it from anywhere in the world with a laptop and an Internet connection.

An overview of all the benefits:
  • Possibly lower startup costs
  • Depending on the provider, products are only paid for when ordered
  • Reduced storage and shipping effort
  • Option for a wider range of products
  • Opportunities for worldwide purchasing and distribution
  • Flexible workplace location

Disadvantages

The mentioned advantage of dropshipping is also one of the biggest disadvantages. The online retailer doesn't get to see the products at all during the sales process and therefore rarely has control over quality, packaging, and shipping. Test purchases and random tests can help, but this does not completely solve this issue for each individual product. Transport damage and even loss of the goods can occur, especially if you offer products that are delivered by ship. This in turn increases the probability of delivery problems, which in turn can lead to dissatisfied customers and complaints.

It is important to be aware of where the products are purchased from. With products from Asia, longer delivery times and delivery delays are most likely, but the supposed price advantages are very tempting. For manufacturers from Europe, delivery times and quality problems are often reduced, but these options usually incur a higher purchase price and can result in a smaller profit margin. When calculating costs, you should definitely not underestimate the cost of sales, such as product presentation (in the online shop with pictures, videos, and a description) and advertising. In addition, there are the running costs of maintaining and optimising the online shop.

When working with multiple dropshipping providers, also consider the delivery options and the resulting impression on your customers. These higher shipping costs create dissatisfaction or cause your customers to cancel completely before the ordering process is even completed. Competition should not be underestimated. If you want to offer the same products, it is advisable to “imprint” your own branding on the product. Another factor that is often overlooked is returns management. Depending on the product, the number of returns can vary considerably. It is important to clarify who the contact person for this is and which address the products should be sent to.

Here are all the challenges at a glance:
  • Quality control will be difficult to monitor.
  • When it comes to remote suppliers, consider the likelihood of successful deliveries.
  • Shipping costs can vary greatly, especially with several providers.
  • More effort to create and maintain your own online shop
  • Processing returns can be more complex than you might expect at the start.
  • The effort required for your own branding should not be underestimated.
  • All legal requirements for products in other countries must be met.
  • Profit margins are sometimes very low and competition is fierce for some product niches.
  • Clarify and secure data exchange and data control processes with all parties involved right from the start.

What are the alternatives to dropshipping?

If you now think that dropshipping is not the best business model for your online business, you should definitely take a look at these alternatives. Here are a few options:

Alternatives to dropshipping

The alternative to dropshipping is purchasing products in large quantities from the manufacturer and, with the help of a third-party provider, storing, branding, packing, and shipping the products to customers. The easiest way to implement this is with what are known as product agents or a fulfilment centre (e.g. Amazon FBA).

What do these two options mean in detail?

A dropshipping agency is an alternative to a dropshipping supplier. It is a person or agency that represents a connection between the supplier and the online retailer. All contact between suppliers, purchasing, transport, storage, and shipping to end customers goes through the agency. Returns management is usually not included in this and must be organised by the online retailer separately.

Amazon FBA (Fulfilment By Amazon) is Amazon's own fulfilment programme. It allows online shop operators and retailers to sell their goods on Amazon. In addition to storage, Prime shipping, and customer service, Amazon also takes care of the entire returns management process. The most important difference between Amazon FBA and other dropshipping models is that you remain the sole owner of your products. But probably the biggest advantage of selling on Amazon is that you can reach millions of customers who use Amazon to shop.
A man and woman standing in a warehouse looking at a tablet

Is Amazon FBA an alternative to dropshipping?

Amazon FBA or dropshipping — which is the better choice?

Are you considering setting up an e-commerce company or at least giving it a try? Or do you want to expand your existing business with online retail? Find out the differences between the two options here.

Amazon FBA — Fulfilment by Amazon

Amazon FBA provides you with complete shipping services for all products on Amazon. Amazon provides storage capacity, takes care of packing and shipping, provides first-class customer service, and offers expertise in the time-consuming processes of online retail. Amazon FBA also offers a variety of other options and possibilities, including financing, selling used items, selling your homemade items or innovative products, brand building support, and more. Get an overview for yourself. Whatever niche you're in, whether you're just starting out or have been on the market for a few years, you'll find everything you need to know about Amazon FBA in the beginner's guide.

Dropshipping

Many dropshipping providers, on the other hand, only take over the delivery process from the manufacturer to the end customer. All activities for the distribution and marketing of the goods are carried out by the online retailer. Specifically, this means that you are tasked with creating the online shop with product images and descriptions and marketing media to attract customers to your online shop. In terms of time and money, this effort should not be underestimated. Returns management and customer service are also rarely part of the range of services offered.

How can you make the best use of Amazon FBA?

If you have opted for Fulfilment by Amazon, you become part of a network that has all types of sales partners. Small, medium-sized and large companies benefit from Amazon's logistical and commercial expertise. In particular, you can save time and personnel resources, which you can then use for your marketing. You can also easily list your products on Amazon.de. With just a few clicks, you can create promotions, special offers, or subscription services for your products. This helps you to test new products or even sell out stock. In this way, you can also create campaigns to attract new groups of buyers and draw attention to your brand.

Outsourcing processes to Amazon FBA also gives you an opportunity to stay in control of product quality. You can find out more about Fulfilment by Amazon here.

Amazon helps you promote your own branded products with your branding on Amazon. This helps you stand out from the competition, increases customer loyalty, and creates a unique shopping experience through the brand experience.

Another option would be to have the manufacturer produce large quantities of products with your brand's branding and arrange shipping directly to the Amazon FBA Centre. Your branded products are then in stock and you can use Amazon's fast Prime shipping, giving yourself an advantage on the competitive online market.

Amazon takes care of the complex and time-consuming customer management for you. Amazon acts as the seller and takes care of all customer communication. For you as an online retailer, this means that returns management can also be completely outsourced to Amazon and you will not receive any returns to your company location.

Driving internationalisation with Amazon FBA offers various opportunities. With Amazon, you can easily ship your products within Europe without having to maintain a company presence in these countries. The European Fulfilment Network (EFN) allows FBA sales partners to store their inventory in one of Amazon's local warehouses across Europe and sell them from there to all countries. In this way, orders from other European marketplaces can be fulfilled from the same local inventory. The entire process of providing goods, packing, and delivery is carried out in the respective Amazon marketplace.

Get complete cost control before your online shop with Amazon even starts. Use the cost calculator to get an overview of the cost structure right from the start.

Here is an overview of all the benefits
  • No need for your own warehouse
  • Fulfilment by Amazon” with Prime logo
  • Less hassle for product returns
  • Use free Prime shipping for customers with Fullfillment by Amazon
  • Higher visibility (through Prime)
  • The reputation of Amazon.de fills your customers with confidence
  • 24/7 local language customer service
  • Affordable shipping rates
  • Easy monitoring of inventory and number of items
  • Order status query for customers
  • Shipment with tracked delivery

Overall summary

The two business models pf dropshipping and Amazon FBA (“Fulfilment by Amazon”) aim to offer a simple and comparatively risk-free way to enter the world of online retail. Both models take advantage of the increasing demand to buy products online and offer retailers options for participating in global trade.

Amazon FBA means that sales partners can completely outsource the storage and shipment of goods to customers for certain fees. You send the products to an Amazon fulfilment centre and the logistics process is handled from there. Online retailers who opt for Amazon FBA can therefore focus on other tasks, such as developing or marketing products. If you have these ambitions, you will also receive support for your growth plans in Europe.

FBA sales partners not only benefit from attractive storage and shipping conditions, but also gain greater visibility due to free shipping and short Prime delivery times.

FAQ

Is dropshipping a legal business model?
Yes, dropshipping is a legal business model in Germany.

Find out more about dropshipping providers on the market and check the details of the contract terms thoroughly.

Also follow the regional guidelines when you start your company to avoid unpleasant surprises later on, such as when it comes to paying taxes and similar matters.

Find out more about taxes here!
Can I build a profitable business with dropshipping?
There is no clear YES or NO answer to that. Profit margins in dropshipping are low and competition is fierce. A permanent cost calculation, preferably before you start, shows you the cost structure for your business model and allows you to get an overview at an early stage.

With Amazon, you can use the cost calculator to calculate this figure before you even start.
Is dropshipping allowed on Amazon?
In compliance with Amazon dropshipping guidelines, you can use dropshipping for your business on Amazon.

Requirements for dropshipping services on Amazon:
  • You must be a registered selling partner and owner of your products.
  • You must be identified as the seller of your products on all delivery notes, invoices, and packing labels.
  • You are responsible for accepting and processing the customer returns of your products.
Read all Amazon direct-delivery guidelines in detail here.
Does Amazon offer dropshipping services?
Amazon FBA is an alternative to using a dropshipping provider. You buy the products from your chosen supplier, deliver the products to an Amazon service centre, and Amazon handles shipping, customer service, and returns on your behalf.

This also allows you to ensure multi-channel fulfilment by using your products with the Fulfilment by Amazon service, even if you sell via your own domain or other e-commerce channels.

Learn more about Fulfilment by Amazon
What is the difference between manufacturers, wholesalers, and retailers?
In dropshipping, the registered seller does not fulfil the products directly, but outsources this process to a third-party provider. Manufacturers, wholesalers, or retailers in the form of product agencies can be considered third-party providers. Manufacturers produce the products (which can usually only be purchased in large quantities) and sell them to wholesalers and not directly to retailers or end customers. Some manufacturers now also offer dropshipping models and take over parts of the supply chain to the end customer. Wholesalers buy their products from the manufacturer and sell them on to the retailer. With various offers, wholesalers are also taking on dropshipping functions to attract new groups of buyers. Retailers or online retailers buy products from manufacturers or wholesalers and sell them directly to end customers. The diverse range of dropshipping offers allows you to outsource complex steps such as storage, packing, and shipping through dropshipping.
What is the difference between dropshipping and retail arbitrage?
Retail arbitrage — products are purchased from a retailer and resold at a higher price. In principle, a seller sells products that are already available to everyone elsewhere in order to make a profit from them.
Retail arbitrage can sometimes be labour-intensive, as you constantly have to discover discounted items that you can “upgrade” to make a profit. It could be difficult for sellers to rely on retail arbitrage when combined with a dropshipping method to fulfil orders, as this business model often only yields low profit margins.
Do I need to register my company to use a dropshipping provider?
You need a business licence for your online shop, as you will certainly expect multiple sales and don't just want to sell once. As a registered and officially incorporated company, you also enjoy greater acceptance in business transactions with suppliers.
Can dropshipping providers also ship internationally?
Yes, various dropshipping providers offer a solution for this. The shipping costs and delivery times vary greatly depending on the provider. If you want to reach customers worldwide, you should carefully research the details of the international contract terms of dropshipping providers.

Amazon operates fulfilment centres around the world and theinternational FBA programme makes it easier to reach your customers in other countries.

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