You are here because you may have heard about the potential of dropshipping as a business. You may be curious if this is something worth trying. Is it true that you do not need a product to setup a business? This means not managing inventory and being freed up even from having a POS and employees to keep track of product movements. This means not having to be concerned about expiry dates and non-moving items which generally affect cash flow. If this is the case, it is something that you can venture into. But wait, what are the risks of doing this?
Before dwelling into the details of entering the business, it is necessary to understand the background of dropshipping, understand the process and know its requirements.
The Background
While today you can order items directly through the web, in 1950s until the 70s, companies have product catalogues, send them through mail to their customers, customers order and the seller ships the products directly from the warehouse. This is through a mail-order catalogue that became popular during those years. This is the first model of dropshipping where the orders can be processed by mail or by phone and the logistical requirements are handled outside the place where the order was placed.
Because of the popularity of this setup, fulfillment warehouses were built to store the capacity needed as dictated by the demand of the mail-order or phone-order setup. It was easy for the staff to just process the order and deliver the items to the customers without having to bother the company that’s taking the orders.
This later on evolved with a model that allowed other companies to choose products from fulfillment warehouses and created their own product catalogues, with marked up prices and shipped to the customers. Eventually, this became known by the larger companies but only after the dropshippers already have earned a good profit from the orders using their catalogues.
When the Internet was born in the 90s, the mail-order companies have transitioned to the first online shopping platforms. It was not as elegant and user-friendly as what we see now but the purpose of having customers have their products without them sending their orders was met. With the available products in warehouses, it turned out well at that time. For some companies, the opportunity to offer the products that they did not manufacture sprang out and the dropshipping model from the mail-order setup to online shopping rose fast. There were some skepticism though considering that the payment method had to be done online. At this time, this was something new and issues about security of transactions were big. Still, this did not stop the dropshippers to operate and there were customers that believed in the model that it progressed and made companies gain more profit. This was also the time when a payment method we now know as Paypal was born through its older name Confinity.
Later on in mid 90s, Amazon was born with it serving almost 50 countries and shopping was never the same again. Despite the challenges of the millennial bug and all the dot com threats, Amazon continued to thrive with E-bay dominating the online shopping marketplace.
Today, e-commerce has become a normal activity and platforms like Alibaba, Facebook, Instagram, Tiktok, among others are commonly used depending on the countries where the platforms are popular. There are even counterparts of the major e-commerce platforms in countries.
Moreover, ready to use e-commerce platforms like Shopify in 2006 have emerged. Although it became known in 2008, Shopify has made e-commerce implementation easier with its easy to customize stores for merchants. There are various templates to choose from depending on the nature of the products that are sold in the shopping site. With the availability of this software, setting up an e-commerce platform no longer would require technical programming or graphical user interface design competencies. The user-friendly interface with a strong technical support system have made the software become a default choice for e-commerce entrepreneurs. This also attracts those who are serious with their dropshipping business model.
With China as the center of supply in various fields of trading, the dropshipping industry has become more popular these days. As Amazon and Ebay are the popular shopping sites for non-Asian countries, China has also dominated the e-commerce arena in Asia with Alibaba, Lazada and the like.
A new popular player in dropshipping with sellers that are only expected to provide the capital for the merchants to ship the products to the customers has emerged. This is South East Asian Taoo with taoo translated to great find. The profit ranges from 7% to 12% depending on what the seller chooses from a range of products from the platform’s warehouse. To know more about SEATAOO, you can click here.
With all the developments in the dropshipping business model, it clearly has evolved to be a venture for business minded people who can define their risk appetite. For with its implementation, the limit is the capital availability and the level of risk that the seller is ready to take.
The Process
The General Dropshipping Process
There are three major entities involved in the dropshipping process: the customer, the supplier, the seller and the platform.
The customer places the order for products sold by the seller. The payment is settled through a secure e-commerce platform incorporated in the platform.
The supplier has the products available for customers to order through the site. The products are stored in a warehouse and duplicated in a virtual warehouse where the seller picks from. The supplier may receive the payment from the seller or from the customer depending on the store setup. If the seller chooses to just display the product link directing to the supplier’s store, the payment is sent to the supplier. However, if the seller posts the products on his/her site, the seller places the order directly to the supplier and processes the payment on behalf of the customer.
The seller provides the interface where the supplier’s products are displayed for the customers to choose from. The products displayed are picked from the supplier’s warehouse and orders are received either from the supplier’s site or the seller’s site. The seller earns from the product mark-up or the affiliate link commission.
The store is the virtual platform where the products are displayed. If the seller maintains his own store, the responsibility of posting the products for sale is his. There are available platforms designed specifically for setting up e-commerce sites. Shopify is a common platform used by dropshippers posting products of suppliers. On the other hand, there is a site that already takes care of the interface and the products for the sellers to choose from. It is an all-in-one platform that contains every seller’s dashboards that monitor sales, profits and processing rates. This platform is SEATAOO, South East Asian Taoo (great finds in Chinese). Although the acronym explicitly states its geographical coverage, its implementation though also covers the rest of the world.
Given below is the SEATAOO model, a variation of the general dropshipping process described above.
In the SEATAOO model, the seller provides the capital for funding the payment for the products ordered from the suppliers. This allows the supplier to ship the products to the customer. Once the item is received and confirmed by the customer, the platform releases the fund to the seller with the corresponding profit.