Dropshipping is the practice of selling products which are then shipped to the customer directly from the manufacturer, distributor, or supplier. Retailers who sell via dropshipping don't keep inventory in stock or purchase products beforehand to sell — instead, customer orders are sent to the supplier for fulfillment, with the seller collecting the difference between the product's sale price and its wholesale price, minus any fees.
Many eCommerce retailers find dropshipping extremely tempting. The idea of selling products without having to stock inventory or worry about shipping appeals to many, especially those just starting out. With no need to invest in warehousing or products, and generally low starting capital required, a dropshipping eCommerce business often seems like a fantastic opportunity for a new entrepreneur.
But how profitable is dropshipping, really? Let's find out by taking a look at some numbers.
The Popularity of Dropshipping
- In 2017, approximately 23% of online sales last year were fulfilled via dropshipping, which amounts to about $85.1 billion.
- Dropshipping is the fulfillment model of nearly 33% of online stores.
- With eCommerce growing by about 17% every year, it's projected that the popularity of dropshipping as a fulfillment model will continue to increase alongside the industry.
- Amazon uses dropshipping too: 34% of Amazon sales in 2011 were fulfilled using a dropshipper, and that number has only grown since then.
Dropshipping Benefits for Suppliers and Merchants
Typical retailers who maintain onsite inventory can't buy as much product as the manufacturer wants to move — whether due to budgetary constraints, lack of warehousing space, or both.
- A traditional retailer's bulk purchase usually only amounts to about 13% of what the supplier would prefer to sell.
- Manufacturers who participate in dropshipping are 18.33% more profitable than manufacturers who rely on conventional channels, since they're not as dependent on the inventory space of retailers.
This works out for the seller too, of course: we've already discussed the reduced expenses involved in dropshipping since a retailer doesn't need to buy in bulk or maintain space for products. With these reduced expenses:
- eCommerce retailers who use dropshipping can potentially be 50% more profitable than retailers who deal with onsite inventory.
Of course, potential doesn't mean certain, and a business's profits will always depend largely on the dedication and business skills of the owner.
A smart entrepreneur will research potential suppliers and wholesalers before making any long-term decisions. It's important to work with suppliers who are capable of matching your ideals for quality and customer service — since you'll never be handling the products yourself, you're reliant on the supplier to produce a good product, pack and ship it safely, and handle certain customer issues.
The good news is that as hard as it can be to find a great supplier, the majority of eCommerce merchants find that first step to be the hardest:
- 84% of eCommerce retailers cite the initial stages of finding and securing a good supplier to be the biggest obstacle to getting their business going.
As with any other endeavor, you're probably best off starting small and growing slowly, but after establishing your first supplier relationship the next will be easier.
If you'd like more information on dropshipping and how to get started, we've created a free guide which you can download below.