Dropshipping: What Is It, Is It Worth It & How To Start

If you’ve been spending any time at all on the internet recently, you’ve probably heard of the term dropshipping. As today’s challenging economic climate drives more people than ever to pursue creative side hustles, dropshipping is being lauded as one of the best ways to make money online, without needing to shell out loads of money up-front.

However, with so many myths surrounding dropshipping – from its mischaracterization as a get-rich-quick scheme, to claims around its legality, separating the fact from faction is imperative before you seriously consider pursuing the business model.

We spoke to over 40 current and former dropshipping experts to give you a clear overview of the practice, and to help you determine if its worth your time in 2024. The short answer? The concept has legs. But mostly as a crash course in business acumen, rather than a path to long-term financial stability. For the long answer, keep reading.

In this article:

• What Is Dropshipping?
• How To Start Dropshipping
• How Much Can You Make With Dropshipping?
• What Are the Disadvantages of Dropshipping?
• Dropshipping Case Studies: The Good And The Bad
• Final Thoughts – Is Dropshipping Worth It?

What Is Dropshipping?

In the typical retail process, a product goes from a supplier’s warehouse to a retail storefront or an ecommerce retailer’s own warehouse. Dropshipping, however, lets a retailer present a storefront, but without having to keep a warehouse full of inventory themselves – instead, the retailer arranges to ship sold products directly from a separate supplier warehouse.

It’s a popular business model for ecommerce, as a website or Amazon listing can be used to sell the product while it’s still sitting in someone else’s warehouse that you don’t have to stock or maintain.

Dropshipping is an umbrella term that can refer to two slightly different approaches to running an online business. A dropshipper can create the product themselves, but many dropshippers do not own or create the product. It’s much more common for them to partner with a third-party vendor, and make (almost) passive income that way.

In this latter case, the dropshipper is listing a marked-up version of someone else’s product online, and only once they have a sale do they buy and ship that product directly to the customer.

Interested in earning from the comfort of your bedroom? Check out some other creative online business ideas to make money from home.

How To Start Dropshipping

Are you interested in exploring the business model, but aren’t sure where to start? We break this process down into the core steps for the would-be dropshipper.

1. Pick a product niche — Granted, you could just pick random products, but you’ll see more long-term success if you can find a niche of products with high demand. This could be anything from bicycle gear to kitchen supplies, and bonus points if it’s a niche you’re knowledgeable about. If you’re stuck for ideas, we recommend conducting a little keyword research to show you what people are searching for online.
2. Find trustworthy suppliers — You’ll need a vendor that reliably delivers high-quality, inexpensive products because your customers will blame you for any flaws or slow delivery times. Lots of marketplaces let you search for suppliers online, including websites Doba, Spocket, and Modalyst. Its also worth considering if these platforms can integrate into your website builders, too.
3. Get an online storefront — A few of the best ecommerce website builders are Wix, Shopify, and Square Online, although there are plenty of others as well. Some dropshippers prefer stick to Ebay listings. Using AI to build a website is another solid option, if you want to stream down the process and make the build as straightforward as possible.
4. Reach an audience — Marketing and advertising are tried-and-trusted methods for reeling in customers. Specifically, email marketing and paid ads are a great way a huge number of eyes on your business. In 2024, it’s also worth considering how you’re able to use social media to your advantage. For examples, posting about your product can be an effective way to build engagement, especially if you already have a large following.
5. Perfect your customer service — A bad review has the power to make or break your business. Therefore, you’ll need to refund disgruntled customers and get back to them with the right message to assure them that you’re on top of things should they have an issue with a sale.

How to start dropshipping in five simple steps, starting by picking a product niche and identifying trustworthy providers. Source: Original graphic by Tech.co

Those five steps sum up the essentials of getting your dropshipping operation off the ground. But there’s one last “meta” step: you’ll need to re-think everything, all the time. Tactics that work today may not work tomorrow, and products that sell well today might be yesterday’s news as well.

There’s one last “meta” step: you’ll need to re-think everything, all the time

Dropshipping has evolved over the years. In 2010, Chinese tech company Alibaba released AliExpress, an ecommerce site that connected US customers with Chinese suppliers, streamlining the “find suppliers” step for dropshippers. In 2015, the Shopify app Oberlo launched, letting Shopify website owners essentially automate the process of placing an order with an AliExpress supplier to match each customer’s order on their site.

Since the dropshipping boom of the late 2010s, competition has become tougher, and new entrants to the business should expect some stumbles while trying to find the right niche and audience. Here’s how Aaron Agius, Managing Director & Co-Founder of Louder Online, puts it:

“Dropshipping is a unique approach to e-commerce that can certainly very profitable with the right approach. The golden age of dropshipping was between 5-10 years ago, but you can still make a profit if you find the right market fit. Two things are crucial to dropshipping success: market research and well-optimized shipping systems. You can’t succeed in dropshipping without those.”

In other words, you’ll have to stay on your toes at all times to keep earning a living month after month.

HeySilkySkin is a popular dropshipping website that sells IPL laser devices for hair removal. Source: Tech.co

How do returns work with dropshipping?

The retail industry’s average return rates can be anywhere from 18% to 23%. For a dropshipper, that’s a huge chunk of potential earnings that could vanish with every refund.

But the actual logistics behind product returns are another piece of the puzzle. Dropshippers will need to check suppliers’ return policies in order to know their options.

Beth Noll, owner of Gift Observer, got into dropshipping after Amazon dramatically reduced their affiliate commissions back in 2020, dropping commissions to an average of 3%, compared to the potential 40% to 80% profit margins of dropshipping. She added a store to her website with AliExpress products, but as she tells me, “things started to go wrong quick.”

Noll’s problems were all down to the unwieldy returns process:

“Many customers would place their orders and then get annoyed and fed up after a week of waiting. This lead to lots of canceled orders, but since I was sending the products from China, they had already been shipped. As a website owner, I had no return address for customers to send their items back, and the cost to return the item to China was around five times the price of the product.”

Within the first month, Noll faces hundreds of complaints, cancellations, and unhappy customers. She ended the experiment with a small loss. She says using local suppliers might have worked better, but they’re hard to find and more costly.

How Much Can You Make With Dropshipping?

The answer here: it all depends. On the surface, everything sounds like it’s perfectly designed for profit.

Dropshippers won’t have to stock products, so no storage cost is involved and you don’t need to buy in stock ahead of selling it. However, you’ll need some capital upfront to build a site. The amount you’ll need will vary, but most quality website builders offer plans from $16 to $59 a month while outsourcing the job to a professional will cost more.

Learn more about how much it costs to make a website.

Plus, the operation can potentially scale up quickly, allowing dropshippers to cut costs even more by buying in bulk and getting wholesale prices. But competition is increasing: the compound annual growth rate of dropshipping is estimated to rise 23.4% from 2023 to 2030.

How big can profit margins be?

On average, not very much. Harriet Chan, cofounder of CocoFinder, estimates the low end profits at just a few hundred dollars, which will likely come out to well under minimum wage for the hours you’ll put in setting up a dropshipping store:

“Initially, you can make profits from $200 to $3,000 on a small scale. Become an Amazon, Shopify or eBay dropshipping store to expand your business to the next level.”

The money earned can be difficult to track, as it varies hugely from month to month. Tanay Sankhe, web developer and founder of smartgadgetpick.com explains:

“One of my friends from Newark, US, made $24,990 in September 2020. This is the same guy who went into a $2,000 loss in April 2020.”

While dropshippers have reported boosting their monthly earnings into the millions, no one who I spoke to reported similar numbers except for one entrepreneur who was also selling a service for dropshippers. If dropshippers are multi-millionares, most of them are too busy to talk about it.

Can you lose money with dropshipping?

In a word, definitely. The numbers lost by former dropshippers who eventually decided to get out of the business looked similar to the numbers earned by those who stayed in the business, and in some cases were higher.

Austin Fain, CEO, Perfect Steel Solutions, sank a total of $3,500 into dropshipping across three months:

“Lost $2,000 initial capital and an additional $1,500 incurred on advertising along with three months’ worth of my time.”

Natalia Lucci, Marketing Manager at WheelieGreat, has no plans to stop dropshipping, but has yet to break even after half a year and three online stores:

“I started dropshipping about 6 months ago, $1,000+ loss so far — that’s after subtracting some of the money I made back from sales. I ran two stores that failed and I’m running my third one currently.”

Lucci notes that the learning curve is extensive, from driving traffic to your site and figuring out how to optimize for conversion to all the “the nitty gritty taxes, currency exchange, chargebacks, processing fees issues that eat up your profit.”

WheelieGreat, the site where Natalia Lucci serves as a Marketing Manager

The fact that the world of dropshipping doesn’t take much starting capital can be a double-edged sword, Lucci points out. If you don’t have much money to spare, you won’t have the confidence it takes to make the right decisions instead of the safe ones.

“If you’re trying to make it with a couple of hundred dollars, you will never make decisions that are good because you’re just too scared to lose it all. Even then, sometimes, you have to make bad decisions to learn. Read more, learn more and most importantly, do more.”

What Are the Disadvantages of Dropshipping?

So, you’re not guaranteed to earn big with dropshipping, and its even possible you might make a loss. We explore a few more cons associated with the process next, to make sure you’re got a full understanding of the risks involved.

1. Slow shipping times

Noll’s experience highlights a big dropshipping speed bump that’s related to product returns: shipping times.

Since dropshippers typically place their orders through international suppliers, shipping times may be weeks – they could even be a month, or more. And in a world where Amazon has set a mere two days as the baseline shipping time, that’s a big problem.

To some of the experts I spoke to for this article, slow shipping times were such a downside that they make dropshipping entirely unacceptable. Here’s Austin Fain, CEO at Perfect Steel Solutions:

“The business model of dropshipping is flawed because the average shipping time (to the U.S) is between 20-30 days and you’re basically asking customers to pay 20%-30% more than what they would have to pay for if they simply searched the product on Amazon. It simply doesn’t make sense why an informed consumer would want to pay extra and wait that long for a product when Amazon can deliver the same product to you within 2-5 days at a lower cost.”

2. High advertising costs

Fain, a former dropshipper himself, also called out the centrality of marketing to the dropshipping business. Costly ads are so expensive that they run the risk of erasing your margins, he says.

“Facebook and Instagram advertising doesn’t come cheap and if you want your ads to reach a wider market you have to have either extensive knowledge of advertisement or spend as much as you can to cast a wider net. After 3 months of advertising with only 3-5 orders, I gave up. I couldn’t incur any more costs because it just didn’t seem to work for me so I backed out.”

3, Stock availability

Outsourcing your stock to third-party sellers might save you money, time and resources, but it also takes the availability of the stock out of the dropshipper’s hands.

Legal and intellectual property rights concerns

Andrew Fox, founder and CEO at Aim Workout, points out another potential pitfall to relying on suppliers: legal concerns. If third-party sellers step on the intellectual property rights of other companies or use an illegal trademark logo, the dropshipper could be responsible.

4. Low profit margins

Finally, many dropshippers face low-profit margins. Amazon entrepreneur Jonny Golding lays it out:

“Traditional dropshipping on marketplaces like Amazon and eBay is a race to the bottom, where whoever can’t calculate their profit margins correctly just ruins it for everyone! Bold statement – but, it’s a reality.”

Dropshippers aren’t providing a unique product, so their control is limited to the price point that they can sell it at — and it’s tough to beat Amazon’s prices.

Granted, there’s a solution: dropshippers can build up brand awareness over time, as long as they offer great products (that are in stock), speedy delivery times, and satisfactory customer service. This can allow them to justify their prices, but they’re all tough fronts to compete on.

When you look at the spiel put forward by ecommerce brands such as Amazon, Ebay, Wix, or Shopify, then dropshipping may sound like the smartest business model ever (as a case in point, see the Shopify video, below). But, for dropshippers, the sober reality can be far removed, and it can be a brutally tough business model to see long-term profits.

“Dropshipping initially requires full-time attention, but many new dropshippers think they can do it part-time. I had a similar misconception, so I had to juggle my responsibilities in running my business while doing dropshipping. The stress I accumulated from performing both obligations affected my productivity, which was counterproductive for my mental health, business, and dropshipping venture.” – Stephen Light, CMO and co-owner of Nolah Mattress.

Dropshipping Case Studies: The Good And The Bad

A dropshipping store can earn you a profit as long as you have a product that’s inexpensive to ship, is high in demand, and has a decent profit margin. But, there are a lot of potential problems that can crop up, and taking a look at a few case studies is the best way to know what to look out for. Here are a few successes to glean information from.

Dropshipping success stories

Marc Bromhall’s story

Entrepreneur Marc Bromhall currently operates Surf Gear Lab as a dropshipping operation. He uses the classic approach: a Shopify store with suppliers from AliExpress.

“The beauty of dropshipping is that it’s the most passive form of commerce. The downside is that you don’t control the complete customer experience. When things go wrong, such as an item getting sent to the wrong address, I end up taking the hit for it (financially).”

Bromhall cites three core areas to excel at in order to succeed as a dropshipper:

1. Source your products only from sellers with stellar reviews
2. Factor in that there will be financial losses due to logistical errors that you cannot control — work this into your margin.
3. Have a clear process on how to manage customer expectations. Dropshipping tends to have delivery times way longer than Amazon, and so letting your customers know this upfront is very important.

The homepage for the dropshipping website Surf Gear Lab

Alice Anderson’s story

Today, Alice Anderson is the founder of the Mommy To Mom blog. Before she started that site, she ran an Etsy shop selling print-on-demand phone cases.

These cases cost $3.25 to ship. Anderson paid around $11 for each case, and was able to charge $24.95 (with free shipping) for each case — making a gross margin of around $10.70 per sale.

“My thought process was that people shopping for phone cases just spent hundreds of dollars on their phones, so $25 probably isn’t that much to them. I was happy with the profit I made selling them since I earned enough money to go on a few vacations and start my own website!”

Tanay Sakhe’s story

Tanay Sankhe’s case study dates from February 2018, when the entrepreneur created a dropshipping store for home and kitchen appliances, using the Shopify platform. The total process took an investment of $950.

“It took me four hours to build the store. Later, I started the marketing campaigns for that store on Facebook ads and also promoted the store on forums. The first four days went as expected, with no traffic hits. I woke up and checked the stats on the fifth day, and boom, someone purchased two robotic vacuum cleaners worth $350 and $399 respectively, and dining set worth $99.”

The store continued turning a profit for three months, before Sankhe choose to take the store down, saying “the payment method I used gave me a hard time getting the money I earned directly to my bank account.” The total amount earned from that drop shipping store was $4,500.

Sankhe’s experience offers two great takeaways. First, selling more expensive items will offer larger profit margins (although this also boosts the risk of money lost on returns and refunds). Second, even an unqualified success doesn’t mean your days of hustling are over.

Dropshipping failure stories

What about the failures? Many dropshippers lose a few thousand dollars, even if they gain experience in the process.

Plenty of part-time dropshippers have moved on to better things, like Dejon Brooks, whose store took off while he was still in high school — only for disgruntled customers to demand refunds when about 60% of sold items broke during shipping. The business wasn’t his passion, so he now runs his own software startup instead. You might succeed, but as these case studies reveal, you just might not.

Kathrine Brown’s story

One example from Katherine Brown, Founder & Marketing Director at Spyic, indicates that dropshipping can be profitable, with a proper marketing strategy in place. “I failed to register much success in that venture,” Brown explains, “because I had a limited marketing budget of just 5% of my initial capital.”

“I focused too much on logistics, not realizing that marketplaces like Amazon can help with that and even perform it more efficiently than I ever could. Reflecting on that experience, dropshipping is profitable with a marketing budget of at least 30% of your working capital.”

Brown also recommends investing time in sourcing the best suppliers. You’ll want suppliers who can help you get high-quality products but at a low enough price to boost your profit margins. After all, you don’t want a poor product — all that marketing would go to waste.

Seth Bywater’s story

“I have been a full-time seller on eBay for the past 5 years and have tried to make dropshipping work twice. Both times were a failure,” says Seth Bywater, cofounder and editor of ResellingRevealed.

The business model? Using paid software, Bywater would import listings in bulk from Amazon, Home Depot, and Walmart. Then, he would tweak the listings and post them to eBay. Once one sold, he’d manually visit the origin site, buy the item, and ship it straight to the customer’s address.

But the downsides piled up fast. Here’s the full list, in Bywater’s words (the bold type emphasis is our own):

• Profit margins were razor-thin. Less than 5% on many sales after we paid fees.
• Because of the low barrier of entry, the market is saturated.
• Many influencers claim to make millions of dollars dropshipping, which brings in thousands of new sellers. The course seller just pads their pockets with course sales.
• We were responsible for customer service.
• A single return can wipe out a week’s worth of profits. We had a foosball table that we dropshipped from Walmart returned to us. We ate the cost because trying to return it was a fiasco.
• To be competitive dropshipping on eBay you have to have tens or hundreds of thousands of listings
  eBay new managed payments systems has pushed most casual dropshippers out. Because you don’t get paid instantly, you have to pay for the drop-shipped item out of pocket.

Despite all this, Bywater doesn’t feel that dropshipping isn’t worth doing at all. But, he argues for starting a “real” dropshipping business — the type I’ve outlined in this article, in which you’ll need to seek out and contract with a wholesale supplier and then create a sales channel.

Simply flipping items from retail locations to other retail locations won’t pan out. And even then, you’ll face an uphill battle, as someone is always willing to undercut your prices. The lower the barrier of entry, the lower the potential profit, Bywater says.

Maximilian zur Muehlen’s story

Maximilian zur Muehlen, Product Development at Custom Plastics, had operated an Amazon store for two years before getting into dropshipping. His takeaway after getting back out of the business? You can’t rely on ads to replace the value of an online presence with its own audience and thriving engagement.

“Without having a strong website/traffic/social media account that generates loads of traffic, you are left with ads. Even though we had our own product, own manufacturing and labelling, it became a numbers game that we eventually did not like to continue. The profit margins were just not as attractive as they could be and the dependency on Facebook/Instagram ads feels even worse than Amazon.”

To be truly successful and make it a sustainable business, he says, you must be sure to build up your brand in order to get either organic traffic or a consistent referral traffic. It’s a story similar to Katherine Brown’s case study, in which she found the cost of marketing to be too high, and evidence that the need for audience engagement is a tough speedbump that drop shippers tend to run up against.

Bogdan Krstic’s story

Bogdan Krstic, owner at RepairSprout, sums up dropshipping as a viable model that will always remain one… even if he’s not in the business any more.

“People should know that dropshipping should only serve as a transition from zero to a legit ecomm business with its own branding and products, not ones from AliExpress. While the market is indeed saturated, most of the competitors one will face throughout their journey will not be there in a few months because all of them have entered the market to ‘get rich quick.'”

While Krstic didn’t personally find success, he says he gained “a ton of valuable experience with Google Ads,” and he was able to build off of that knowledge to further develop his entrepreneurial skills.

This is a common theme from respondents: While their dropshipping experiments didn’t pan out as they had hoped, they were able to gain valuable experience in real-time problem solving.