How dropshipping works: Everything you should know

In recent years, dropshipping businesses have experienced remarkable growth in the Philippines, with average profit margins ranging between 15% and 20%. The market is projected to expand further, with an increased compound annual growth rate (CAGR) of 13.78% by 2029.¹

If you are an entrepreneur considering a venture into dropshipping, it is essential to have a clear understanding of how this e-commerce model works and what it entails. This knowledge will help guide you in making an informed decision about whether it is the right business opportunity for you.

What is dropshipping?

Dropshipping is an e-commerce model wherein entrepreneurs operate an online business without the need to manage physical inventory. Instead, customer orders are fulfilled directly by a third-party supplier, who ships products on the retailer's behalf. This is often used by entrepreneurs seeking efficiency with minimal overhead. 

Key players in the dropshipping model

The dropshipping business model relies on a seamless collaboration between several key players. For beginners looking to start a dropshipping business, understanding the functions of these players is crucial to selecting the right partners and ensuring smooth operations.

1. The Seller of Record (SoR)

The retailer or dropshipper is referred to as the Seller of Record (SoR). This means they are responsible for:

• Setting product prices and managing revenue: The seller determines the retail price of the products and retains the profit margin after paying the supplier.
• Recording purchases and handling sales tax obligations: It is the seller’s duty to maintain accurate sales records and ensure proper tax reporting and compliance.
• Adhering to marketplace policies: Platforms such as Amazon enforce strict dropshipping regulations. For example, when you sell on Amazon, your business must appear as the seller on packing slips and other information in connection with the products.²  Compliance is crucial to maintaining a positive seller reputation.
• Building branding and customer relationships: As the face of the transaction, the seller is responsible for customer satisfaction, brand image, and after-sales service.

2. Manufacturers

Manufacturers are the original producers of goods. For some dropshippers, working directly with manufacturers can lower wholesale prices. This can give you a competitive advantage in the market. Moreover, when you have a long-term working relationship with a manufacturer, you could ask the manufacturer to incorporate your branding and ask for changes in the design. ³

3. Wholesalers

Wholesalers are those who purchase items in bulk from manufacturers and then resell them to retailers. Many dropshippers choose to work with wholesalers due to the convenience and accessibility they offer. Unlike manufacturers, wholesalers typically allow for smaller order quantities, making them an attractive option for new and growing businesses. Additionally, wholesalers often offer a broader selection of products across various categories, allowing dropshippers to diversify their offerings. Many wholesalers also maintain established logistics and distribution systems, helping ensure timely and reliable delivery to customers.

How does drop shipping work?

This is a step-by-step process of how dropshipping typically works:

1. Choose a dropshipping supplier

Select a supplier who carries the products you wish to offer. This can be with a direct manufacturer or a wholesaler. After formalizing a partnership, the supplier will take responsibility for inventory management, order packaging, and shipping on your behalf.

2. Build your online store

After securing a supplier, the next task is to launch your e-commerce store. Here, you will showcase the supplier’s products at prices you set. 

3. Customer places an order

When a customer browses your store and completes a purchase, the transaction follows the usual checkout process, including payment collection and order confirmation.

4. Forward order information to your supplier

After receiving payment, the next step is to pass the order details to your supplier. 

5. Supplier fulfills and ships the order

Your supplier will prepare the product for shipment and dispatch it directly to your customer. Some suppliers also offer options like branded packaging or customized invoices to strengthen your brand identity.

6. The customer receives their purchase

Finally, the customer receives their order without ever knowing it was fulfilled by a third party. Meanwhile, your role as the retailer includes managing any follow-up support or customer service inquiries.

Choosing the right providers for your dropshipping business

Your manufacturers or wholesalers can significantly influence the success and sustainability of your dropshipping business. Since you will be relying heavily on third parties to manage inventory, prepare shipments, and deliver products to your customers, careful vetting of your partners is essential. Factors to consider when evaluating potential dropshipping providers include:

1. Pricing and order minimums

One of the most important considerations is the cost structure. Compare product prices across multiple suppliers to ensure that you can maintain healthy profit margins. 

It is also essential to understand any minimum order requirements. Some suppliers may expect a minimum purchase quantity even in a dropshipping setup. 

Ideally, select providers that offer competitive pricing without demanding large upfront commitments, allowing you to scale your business gradually without excessive financial risk.

2. Shipping speed and reliability 

The ability to deliver orders promptly and accurately can impact customer satisfaction and brand reputation. These days, customers expect fast and reliable shipping, and any delays or mishandled shipments could result in negative reviews and lost business. As such, before partnering with a supplier, assess their average fulfillment times, available shipping methods, and their historical reliability record. 

3. Customer service standards 

Efficient and responsive customer service from your suppliers is vital. In the event of order discrepancies, product defects, or shipping issues, you need a provider who can resolve problems quickly. Work with suppliers that offer dedicated support teams, clear communication channels, and transparent return and dispute resolution policies. Reliable customer service reduces operational headaches and enhances the overall shopping experience.

4. E-commerce platform integration 

Seamless integration between your supplier’s system and your e-commerce platform can significantly enhance operational efficiency. By automating supplier updates, order forwarding, and customer communications, you can streamline your workflows, reduce manual tasks, and minimize errors. Effective integration also ensures that customers have real-time access to accurate product availability and order tracking information, ultimately improving their shopping experience and building trust in your brand.

The advantages of dropshipping

Dropshipping has become an increasingly popular e-commerce model, especially for entrepreneurs seeking a low-risk entry into the online business world. Some of its key benefits include the following:

1. Build your brand and boost web traffic

When you eliminate the need to manage physical inventory, dropshipping entrepreneurs can dedicate more time and resources to strengthening their brand presence. This allows you to focus more on marketing activities such as content development, search engine optimization (SEO), and paid advertising initiatives. When you have more time to focus on creating an effective branding strategy, you could potentially drive higher web traffic, foster customer loyalty, and set your store apart in a competitive e-commerce landscape.

2. Save on operating and inventory costs

One of the primary attractions of dropshipping is the minimal upfront investment required. Since there is no need to purchase inventory in advance or maintain a warehouse, operating costs are significantly reduced. This enables new entrepreneurs, particularly those with limited financial resources, to start and operate their businesses without incurring substantial financial commitments. Ongoing expenses such as rent, utilities, and warehouse staffing are also eliminated, allowing for leaner business operations.

3. No order fulfillment costs

In traditional retail models, businesses must manage the tasks of picking, packing, and shipping products, which require time, labor, and financial resources. But with dropshipping, these responsibilities are typically passed on to the supplier. Once an order is placed, the supplier prepares and ships the product directly to the customer. This eliminates the need for in-house fulfillment teams and complex logistics management, allowing entrepreneurs to focus on growing their businesses.

4. Capitalize on growing e-commerce demand

The global shift towards online shopping continues to fuel the growth of the e-commerce industry. Dropshipping businesses are well-positioned to capitalize on this trend by offering a wide range of products without the limitations associated with physical inventory. Being able to quickly adapt to emerging market trends, launch new products, or pivot into new niches ensures that dropshipping stores can stay competitive and meet evolving customer demands. Additionally, the operational cost savings from the dropshipping model can be passed on to customers through competitive pricing while maintaining strong profit margins.

The Downsides of dropshipping

While dropshipping presents numerous advantages, it also poses inherent challenges that entrepreneurs must carefully navigate to overcome. Understanding these potential drawbacks is essential for building a sustainable and successful dropshipping business:

1. Customer experience challenges

A major limitation of dropshipping is the reduced control over the customer experience. Since the supplier is responsible for packaging and shipping, there can be inconsistencies in delivery times, product quality, and packaging presentation. When these occur, they can have a direct impact on your brand reputation and ultimately affect conversions and future sales.

Additionally, managing customer inquiries, returns, and complaints can become more complex when multiple third-party suppliers are involved.

2. Lower profit margins due to hidden costs

While dropshipping reduces upfront expenses, it often results in thinner profit margins compared to traditional retail models. Since you are purchasing products individually rather than in bulk, the costs of these products tend to be higher. Additionally, fees from e-commerce platforms, marketing expenses, and transaction fees can further erode profitability. Therefore, proper pricing strategies and meticulous cost management are crucial for maintaining a sustainable business.

3. Inventory and stock management issues

Since you do not directly control inventory, stock availability can become a significant challenge. It is possible for a supplier to run out of stock without notice, leading to canceled orders, delayed deliveries, and dissatisfied customers. Without real-time inventory synchronization with suppliers, managing customer expectations becomes more challenging, which could potentially affect your store's reputation.

4. Shipping risks and lack of fulfillment control

Shipping logistics can also present significant risks in the dropshipping model. Extended shipping times can lead to customer dissatisfaction, and errors in order fulfillment, such as shipping incorrect products, are difficult to control. Therefore, partnering with reliable suppliers who offer transparent tracking, fast shipping, and high-quality service is crucial for minimizing these risks and maintaining customer trust.

Partner with DHL Express for your logistics and shipping needs

The dropshipping business model offers remarkable opportunities for entrepreneurs in the Philippines to enter the e-commerce space with minimal upfront investment and operational complexity. However, success in this model depends heavily on effective supplier selection, proactive customer service management, and strategic logistics partnerships.

Integrating reliable logistics solutions, such as DHL Express, can provide a critical competitive advantage. By offering reliable logistics and shipping services, we enable dropshipping businesses to maintain optimal service standards, enhance customer satisfaction, and achieve sustainable growth.

Entrepreneurs considering dropshipping are encouraged to explore our range of shipping solutions to efficiently ship anywhere in the world and optimize their e-commerce operations for long-term success. Open a business account with us today to start shipping with DHL Express.