What is Dropshipping and How Does it Work in The UK? (2024)
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Entrepreneurs keen on bootstrapping new ventures have started dropshipping companies, a low-cost business model.
So what really is dropshipping? It is a retail business where a seller sells the product but a third party fulfils the order. When a customer makes an order, it is received by a retailer who sends it to a third-party company or wholesalers who will fulfil the order and send/ ship it to the customer.
Businesses like Amazon and Shopify heavily rely on dropshipping. They offer an online platform where sellers can market and sell their products.
Let’s explore how dropshipping works, its pros and cons, and how you can start a dropshipping business in uk.
Who is a Dropshipper?
A dropshipper is an eCommerce merchant who markets products to customers without incurring huge running costs like a wholesaler or distributor would have. A dropshipper finds the niche of the business they want to venture into and outsources the products from companies, manufacturers, or distributors, and starts marketing.
When a consumer orders a product, they pay the dropshipper, who pays the distributor. The distributor then ships the goods to the customer.
How does a dropshipping business work?
In dropshipping businesses, eCommerce merchants outsource, market, and sell products. The dropshipper is responsible for setting up its online store and showcasing the products they want to sell.
Here is a breakdown of how dropshipping works.
Find a niche
Research and find the products you want to sell online. Narrow down your choices and choose an industry you are knowledgeable or passionate about. You can choose an industry like fashion, technology, telemedicine software, food, or fitness.
Identify the problem you want to solve within that industry. Your product should address a specific need or desire. Understand the profitability of your chosen niche. Calculate costs, including sourcing, marketing, and shipping.
You can also conduct competition research and look at what others are doing right and where they fall short. Read customer reviews to identify areas for improvement. Check whether you can create a better product or offer superior customer service.
Partner with a supplier
Find a reliable dropshipping manufacturer/ supplier of the products you want to sell. Evaluate factors such as product quality, shipping times, and customer service when choosing a dropshipping supplier.
You can find a dropshipping supplier through a Google search, eCommerce platforms, local suppliers list, and contact manufacturers.
Once you find a supplier, seal an agreement with them and start selling products. Suppliers/ manufacturers are responsible for storing the products, packaging, and shipping to the customers.
A dropshipper is not tied to one supplier or manufacturer.
Set up an online store
The dropshipper is responsible for setting up an online store, showcasing products they want to sell. Choose an eCommerce platform such as; Shopify, eBay, Amazon, or Wix.
Suppliers in Europe can use a dropshipping app, Spocket, to store, keep product listings updated, and automatically forward orders to suppliers.
Customer order
The merchant receives payment when a customer orders at the dropshipping store. The customer will receive an order confirmation to wait for delivery.
Order forwarding
After receiving an order and payments, the dropshipper forwards the order details (including payment) to the supplier.
Supplier fulfillment
The supplier processes the order, packages the product, and ships it directly to the customer.
Customer receives product
The customer receives the product, and the dropshipper earns a profit from the sale.
What are the pros of dropshipping?
Minimal investment - Unlike other traditional businesses, dropshipping does not require a lot of upfront costs. A merchant does not need to purchase products in advance, making the setup cost minimal.
A dropshipper is not responsible for inventory, warehousing, labor costs, picking, packing, and shipping reducing operating costs.
Easy market entry - The low barriers to entry make dropshipping an attractive option for new entrepreneurs. Dropshipping businesses can be set up quickly with no complexities of inventory management.
Increased customer base - Dropshipping enables you to reach a global audience. There is no need for a merchant to set up a physical storefront making it easier to expand the business globally.
Diversity – A dropshipper is not tied to selling products from one supplier making them sell different products of their choice at no extra cost.
Saves time and effort – With dropshipping, all you have to do is source for products, market them, and sell them while the suppliers handle the hard staff.
Flexible – As a dropshipper, you can operate your business from anywhere with an internet connection making it flexible and allowing them to adapt quickly to changing trends and customer preferences.
What are the cons of dropshipping?
Low-profit margins - Although dropshipping reduces inventory costs, it also leads to lower profit margins. Most of the revenue goes to the supplier, leaving minimal room for your profits.
Customer dissatisfaction - When a customer is dissatisfied with either late delivery, broken products, or missing items they will question the dropshipper, not the supplier.
Shipping complexities - Coordinating shipping from different suppliers can be time-consuming and confusing for start-timers.
Limited control over product quality and packaging - Since you don’t handle the products directly, you have limited control over the consistency of quality assurance and packaging.
Lack of inventory control - Keeping track of inventory levels across various suppliers can be challenging. If there is an issue with the order, there will be back-and-forth communication with suppliers to find a solution making it an inefficient way to solve issues.
Market saturation – Since the dropshipping setup is low, there are a lot of online sellers making the market competition high.
How to start a dropshipping business?
Choose a niche
Target a specific audience by choosing a niche of your online store. Choose a niche that you are knowledgeable or passionate about and has a high market demand with low competition.
Research competitors
Once you settle on a niche, you can analyse what other dropshipping stores in your chosen niche are doing. Learn from their mistakes and check customer reviews to know what customers want or what they are complaining about. Understand their pricing strategies, product offerings, and marketing tactics.
Choose a supplier
Research and find reliable manufacturers/ suppliers for your products. Consider factors like product quality, shipping times, and customer service.
You can find suppliers from platforms like AliExpress, Oberlo, and SaleHoo.
Select products and set prices
Create a product catalogue and set competitive prices. When setting product prices, allow a reasonable profit margin while remaining attractive to customers.
Set up your online store
Choose an eCommerce platform where you will operate your dropshipping business. Popular platforms like Shopify, eBay, WooCommerce, Amazon, TikTok, and Magento exist. Customise your store design, add product listings, and set up payment gateways. For users' better experience, optimise your website for mobile devices and use high-quality images.
Decide on a business structure
Register your business and choose a legal structure such as sole proprietorship, limited liability company (LLC), limited liability partnership (LLP), or limited partnership (LP).
Icon Offices can help dropshipping businesses register a UK limited company. With our company formation services, we can advise on the best company structure that suits your business and help you set up your business.
With its flexibility, dropshipper can get an address to register their business through our virtual office services. We have a variety of prestigious addresses they can choose from at an affordable rate.
Set up finances
Open a business bank account to keep your personal and business finances separate. Set up payment gateways to process transactions securely.
Icon Offices have partnerships with banks such as Tide where you can get up to £70 cash back once you open a business bank account. With our banking partners in the UK, you can open a UK business bank account without a physical meeting for UK or non-UK residents.
For more information click here.
Market your dropshipping business
Use digital marketing such as social media, content marketing, email campaigns, and influencer collaborations to attract customers. Optimise your website for search engines (SEO) to improve visibility.
A dropshipping business is easier and more affordable for entrepreneurs to venture into. Its structure is simple and easy to manage as long as you have a good agreement and partnership with suppliers or manufacturers. It is easier to navigate the disadvantages when you do your market research properly.
Icon Offices can help you set up a UK limited company and get a professional address for your business. We also provide a variety of other services such as VAT registration, EORI Number Application Service, UK Virtual Mobile Number service, USA Virtual Mobile Number service, UK Voip Landline Service and much more.
For more information about setting up a dropshipping UK limited company, contact us at [email protected].