Dropshipping

What is dropshipping?

Dropshipping is a retail fulfillment method where you sell products through an online store without keeping them in stock yourself.

Instead, when a customer places an order, you forward that purchase to a manufacturer, wholesaler or dropshipping supplier and they ship the product on your behalf. You charge the customer and the dropshipper charges you. This allows you to avoid carrying and managing inventory yourself and dealing with the shipping and logistics side of running an eCommerce business.

But while dropshipping makes order fulfillment more efficient and accessible, there are some considerations to keep in mind. For example, even though you do not carry the products personally, you are still the seller of record for dropshipping orders. This means you’re responsible for the overall customer experience, including returns and refunds.

You also have to ensure you’re complying with any tax and consumer protection rules in your areas of operation. For Canadian dropshipping businesses, that means ensuring you understand when and how to collect sales tax like GST or HST, following consumer protection rules and adhering to language laws that dictate the need for product labels in English and French if you’re shipping domestically.

How does dropshipping work?

Dropshipping is a part of your supply chain – the network of suppliers, manufacturers and retailers involved in getting a product to your customer’s door. Instead of storing and delivering products yourself, you connect your online store to these suppliers who store, package and ship orders on your behalf.

In a typical dropshipping arrangement, there are three main parties:

• Manufacturers create the products. They usually don’t sell to the public but rather sell in bulk to wholesalers and retailers instead.
• Wholesalers buy products from manufacturers and mark them up before selling them to retailers. Wholesalers typically stock products from a variety of manufacturers.
• Retailers (that’s you) sell products directly to the public, at a markup from the wholesaler price, through an online store, social media or eCommerce marketplaces like Amazon.

Here’s how dropshipping typically works between these three parties:

1. Choose your niche and products

You, the retailer, decide what you want to sell and who you want to sell it to. At this stage, you’ll research demand, work on understanding buyer personas and needs, set price points, and determine how practical it is to ship these products to your target customers.

For example, if you want to start a dropshipping business to sell reusable water bottles, you’d do some market research to compare different styles and materials, and to dig into customer reviews to understand what potential buyers are looking for in these products. You can look at competitor websites and manufacturers to understand the market, and take note of average pricing. From there, you’d research potential dropshipping suppliers who offer the water bottles you want to sell, and ensure they ship to the areas that you are targeting for a reasonable fee.

If the margins look healthy, the product is of the quality you want, and the shipping timelines are reasonable, it’s a strong candidate for your first product.

2. Find dropshipping suppliers

Next, you’ll look for manufacturers, wholesalers or dedicated dropshipping suppliers who offer the products you want and can ship to your target markets. At this stage, you should compare things like product quality, shipping times, unit costs and how the dropshipping partner handles duties and taxes on cross-border shipments.

Note: If you’re shopping domestically within Canada, you’ll also want to ensure your suppliers can provide multi-lingual labels in English and French. This is a legal requirement when shipping into provinces like Québec.

3. Set up your online store

Next, create your online store using a platform like Square Online. This is where you’ll list products from your suppliers, take orders and accept payment from buyers. To list your dropshipping items, you’ll need to connect your store to a third-party dropshipping app like Spocket, which has an integration with Square. This will allow you to connect to suppliers, import products and sync inventory so that you only sell what’s available.

4. Receive an order and payment

Once you’re live, shoppers can visit your online store, choose a product and checkout. They pay the retail price listed on your site via your payment gateway of choice and you receive both the payment and order details.

5. Forward the order to your dropshipping supplier

Once the order is processed, you send the order information and shipping address to your supplier. This can be manual or automated, depending on your dropshipping setup. If you use an integration like Spocket, this transfer of information is automatic and instant once the order is placed.

At this stage, you pay the supplier the wholesale cost of the product plus any agreed upon shipping fees.

6. The supplier ships the product to your customer

The supplier picks, packs and ships the order straight to your customer, often using neutral or custom packaging so it appears to come from your brand. If the item is being shipped internationally, they may also handle customs paperwork and any import charges.

At this stage, the supplier charges you the agreed-upon wholesale cost (plus any shipping fees), which is typically processed automatically through your connected dropshipping app or paid according to the billing terms you set up with them.

7. You handle the post-purchase relationship

After the sales, your customer contacts you – not the supplier – if there are issues with the orders like delays, defects or a request for return/refund. You’re responsible for the overall customer experience and own the relationship going forward.

Generally, the shorter the supply chain (or the fewer partners involved in this process) the greater your profit will be. Fewer parties taking a cut out of your sales price means your retain more of the revenue. Because of this, it’s usually a good idea to deal directly with the product manufacturer, which will help you go directly from the production price to your markup price, without any intermediary cuts.

Is dropshipping right for you?

Dropshipping isn’t for everyone. It takes a combination of marketing skills, strong partner relationships and customer service to ensure a successful dropshipping business.

Here are some things to think about to help you decide if dropshipping is the right choice for you (and if it’s not).

Dropshipping might be a good fit if:

• You want to start with low upfront costs and would rather pay suppliers per order than invest in bulk inventory, warehouse space or packing materials upfront.
• You’re comfortable with slimmer profit margins in exchange for flexibility: While you know that you may make less per sale because suppliers handle fulfillment, you gain the ability to test niches, cycle through products quickly and avoid being stuck with unsold stock.
• You’d rather focus on marketing than logistics: In a dropshipping model, suppliers handle picking, packing and shipping, freeing you to spend your time on product selection, branding and marketing to customers.
• You’re prepared to manage customer services: Dropshipping requires you to answer questions about delays, defects and refunds for both domestic and international buyers, even when the issue originates with your supplier.
• You’re willing to learn the rules that apply to your business: This includes aspects like Canadian sales tax obligations and consumer protection expectations to ensure that your business is compliant.
• You’re patient and data-driven:You are comfortable testing suppliers, adjusting pricing and rotating products based on shipping times, customer reviews and real performance data — all of which change more frequently in dropshipping than traditional retail.

Dropshipping might not be the best fit for you if:

• You need full control over product quality and packaging: If you’re ruthlessly focused on product quality and want type control over packaging and inserts, then a traditional inventory model is likely better suited for you.
• You need to provide fast, guarantee deliveries: Shipping through suppliers and partners can be slower and more expensive than handling production yourself – especially if you’re sourcing from overseas. If you want to build your brand around fast and cheap delivery timelines, then dropshipping may not be the best solution.
• You’re aiming for high profit margins on every item: Because multiple parties are involved in the supply chain, profit margins from dropshipping can be lower. This makes it a sales volume game, which may not be suited for business owners that lean toward fewer sales with higher margins.

A dropshipping business would be an ideal jump for someone with a marketing or customer service background who can handle the heavy focus on promotion and sales volume. If you’re more of a product person, and focused on creating high-quality items for your customers, then dropshipping might not offer the product control you’d want.

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The benefits of a dropshipping business

Dropshipping offers significant benefits for individual sellers and small businesses, ranging from decreased risk to a greater access to products.

Here are four key benefits of a dropshipping business:

1. Lower startup and operating costs: You don’t have to buy inventory upfront or pay for warehouse space to start your online business. Instead, you only pay your supplier when a customer places an order, along with operating expenses to manage your online store and promotional channels.
2. Operate from anywhere: Because you’re not storing or shipping products yourself, you can run your dropshipping business from almost anywhere with a reliable internet connection. You just need to make sure you’re complying with tax requirements and consumers laws in your areas of operating.
3. Broader product selection: Without tying up cash in inventory, you can offer a wider range of products, respond faster to trends and update your catalogue more often. You can also try new products or niches with relatively low risk, and then double down on what sells.
4. No hands-on inventory management: Your suppliers handle stocking, packing and shipping, which can free up time for you to focus on marketing, customer service and other parts of your business.

The challenges of dropshipping

Dropshipping offers several upsides to business owners, but it also comes with challenges. Being aware of potential drawbacks is important to make sure a dropshipping model aligns with your business strategy.

Here are a few examples of why some sellers and businesses decide against dropshipping:

• Reduced profit margin and high competition: Because multiple parties may take a cut during the dropshipping process, and many sellers offer similar products, you may face slimmer margins and intense price competition – especially in popular niches.
• Inventory issues: When you own inventory, it’s easy to check stock levels. But when you get products from multiple suppliers—who in turn are working with other retailers—it’s more difficult to make sure that the products you need are readily available.
• Shipping complexities: If you’re working with several suppliers, your shipping costs can become quite complicated. A single order might include items from different suppliers with different rates, timelines and, in some cases, customs duties or brokerage fees, which can be expensive for you or frustrating for customers if not communicated clearly.
• Limited control over quality, branding and packaging: You’re trusting suppliers to ship products on time and in good condition, often in packaging you haven’t designed. If items arrive late, damaged or in packaging that doesn’t match your brand, it can hurt reviews and make it harder to stand out from other sellers offering similar products.
• Complex returns and customer service: Even though you don’t handle the products, your customers still come to you with questions about delays, defects, refunds and replacements. Return policies and timelines are often set by your suppliers, which can make it tricky to offer the simple, customer-friendly experience that your consumers will expect.
• Issues with suppliers: Your suppliers sit at the core of your business. If they make mistakes, change their pricing or go out of stock, your reputation is affected. It’s important to choose partners with a solid track record, ensure that you pay them on time and maintain clear communication so you can resolve issues quickly.
• Tax considerations: The tax obligations associated with dropshipping in Canada can get complicated, especially if you deal with international suppliers and customers. Navigating Canadian tax considerations such as when to charge the HST/GST or PST can get tricky when you’re importing or exporting goods and dealing with multiple currencies. This becomes even more complicated when you need to start accounting for tariffs when shipping into the United States. Educating yourself on tax compliance and maintaining rigorous accounting practices is essential.

This list isn’t meant to scare you away from dropshipping. Instead, it’s meant to paint a clear and balanced view of the benefits and trade-offs that come with launching a dropshipping business.

How to select a dropshipping supplier

The third party you choose as a dropship supplier will determine your supply chain’s success. So you need to do your due diligence during the selection process.

Generally speaking, you should try to establish dropshipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line.

Here are some questions to ask potential dropshipping suppliers:

• Can you reliably ship to my target customers? Ask where orders will be shipped from and what the typical delivery timeline is for the areas in which your target customers live. Look for a clear service level agreement (SLA) that outlines delivery timelines and policies related to late deliveries and lost items.
• How are products shipped and how are returns handled? Choose a partner that provides tracking numbers you can share with customers and has clear return and warranty policies. If returns aren’t accepted or products aren’t guaranteed, it’s usually a red flag.
• How much do you charge? Crunch the numbers before selecting a dropshipping partner. If the wholesale price isn’t enough for you to make a decent profit off of the products, look elsewhere.
• Are there extra fees per order? Find out whether they charge handling, packing or account fees and how those will affect your margins. Every additional fee and middleman affects your bottom line, so you want to streamline the process as much as possible.
• How do you handle customs, duties and taxes on cross-border orders? If products are shipped from outside Canada, ask who is responsible for customs paperwork and import charges, and how you’ll communicate any potential fees to customers.
• What is the billing process and currency? Confirm whether they charge your card per order or invoice you on a schedule, what payment terms they offer and which currency they bill in so you can plan for cash flow and exchange-rate impacts.
• How do you integrate with my online store and systems? Check whether they offer integrations or tools that can connect to your online store, so you can automate order forwarding, inventory updates and tracking information. If you’re a Square Online customer, look for a dropshipping supplier like Spocket who has a standing partnership and integration with Square.
• Is your packaging and documentation suitable for my market? If you sell into Québec or other regions with specific labelling expectations, ask whether packaging, instructions and documentation can support those requirements.

You’ll also want to ensure the products a supplier sells are suitable for your business. Request product samples for the items that you would like to dropship so that you can review quality, colour, style and any other attribute that will make it easier to market and sell.

Tips for a dropshipping business

Here are a few best practices to implement to ensure success for your dropshipping business.

• Make online shopping a pleasure: From ordering to delivery, you want to make the experience as seamless as possible. Invest in a user-friendly eCommerce experience that’s easy to navigate on any device, with clear product information, simple checkout and transparent shipping details.
• Be particular about products: While dropshipping allows you to sell a wide variety of products, that doesn’t mean you should sell everything. Do market research and analyze trends to determine what you should be selling in your store. Think carefully about what is marketable, what is easy to ship, and what is hard for people to find locally.
• Focus on quality: Even if you thoroughly vet a supplier, you should remain vigilant about the service once you’re working together. For example, if there are several incidents of damaged products, lost packages or late deliveries, cut ties with the supplier or risk losing the confidence of your customers.
• Build a trusted business: Your reputation is everything as a dropshipper. Not only do you need to follow through on your promises with reliable dropshipping partners and a great website, but you should also work to boost your online credibility and build customer rapport. From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your dropshipping business.
• Be transparent about shipping and returns: Clearly communicate shipping timelines, potential customs fees for cross-border orders and your return policy so customers know what to expect before they buy. This, along with your online presence and responsiveness, is what builds trust and drive lifetime value from your customers.
• Track the numbers that matter: Monitor key performance metrics like conversion rate, average order value, profit margin, delivery times, return rates and customer reviews so you can spot issues early and make informed decisions about products, pricing and suppliers.

Remember, as a dropshipper, your primary roles are that of a marketer and customer service touchpoint. Your focus should be on creating a nurturing and exceptional buyer experience, and supporting customers from transaction through the product delivery. This is how you differentiate from other sellers when you can’t necessarily differentiate on the specific products you sell.