What Is Dropshipping and How Does It Work in The UK? A 2024 Guide

Ryan Patrick

• 11 min read
What Is Dropshipping and How Does It Work in The UK? A 2024 Guide

The Internet has provided much-needed support to businesses by creating numerous opportunities for everyone. It's an excellent tool for e-commerce businesses and an opportunity for everyone to grow in the competitive landscape.

Today, dropshipping is one of the most popular business ideas powered by the internet.

A dropshipping business involves a third-party supplier working with a drop shipper to fulfil an order.

Many e-commerce sellers have opted for dropshipping, especially in the UK, because most Brits shop online. Thus, it's essential to understand what dropshipping is and how it works in the UK. Incorpuk, in this guide, will help you make an informed decision if you plan to start a dropshipping business in the UK.

What is Dropshipping?

Dropshipping allows a business owner to sell products online without a physical location. When an order is placed, the website owner diverts it to a dropshipping supplier who handles all other details like:

  • Selection
  • Packing
  • Shipping

Under dropshipping, a website owner delegates inventory, storage and the shipping process to a drop shipper.

Unlike the traditional business arrangement where the Seller must source the products to sell, dropshipping is an excellent alternative. A drop shipper uses a third-party supplier to ship the product to the customer. Hence, there's no need for warehouse space or shipping logistics. Leasing a warehouse for inventory can be costly, but a drop shipper can make this investment without making this investment.

What makes the business idea worth considering is that, as a business owner, you have no active involvement in product delivery or warehousing. It's an excellent option for entrepreneurs with limited capital to start a business.

Who is a dropshipper? A drop shipper is a person or business entity that uses the business model of buying inventory and order fulfilment from a third party. Instead, a drop shipper avoids warehousing and shipping products, like in the traditional business model. Multiple employees or single business owners can manage a dropshipping operation.

How Dropshipping Works

A drop shipper's primary role is to ensure an order gets to the customer on time and in good shape. The owner must partner with a third-party supplier to run a successful dropshipping business since they'll handle all orders.

Once a drop shipper receives an order on their website, AI tools forward it to a supplier who manages shipping and delivery. The customer pays the entire product amount, but the drop shipper retains the profit margin agreed upon between the supplier and business owner.

So, how do you get started? If you're wondering how to approach the dropshipping business model, you can do so in two ways:

  1. Search a supplier database and choose a wholesale supplier
  2. Use an app to find a vast number of suppliers

Generally, dropshipping depends on the precise agreement between the Seller and the chosen third-party supplier signed to fulfil the order. Here's the general dropshipping process:

  1. Seller of Record and drop shipper signs an agreement
  2. A customer order is placed online
  3. Seller receives order
  4. The customer confirms the order
  5. Dropshipper receives the order
  6. Dropshipper ships the order
  7. The customer gets their order

A seller can also decide to have automation solutions send pre-written messages to customers at each stage of the order fulfilment. These messages include order confirmation, product dispatched, and a final confirmation once the product is delivered to the chosen address.

Understanding the Dropshipping Relationship (Seller, Manufacturer, Wholesaler)

Anyone can be a seller in eCommerce – a large company, an individual, or a startup can sell products online. The terms seller, manufacturer, and wholesaler are popular when dealing with drop shipping. Here are the definitions of these three terms in dropshipping:

  1. The Seller (Seller of Record) chooses the products to sell, sets the price, and receives the final payment. They also agree to remit necessary taxes or surcharges, depending on local rules and regulations. Although the Seller of Record doesn't handle inventory, packaging, shipping, and delivery, they're still the product owner.
  2. The manufacturer can be an individual or a business making product (s) for sale. They sell these products to a wholesaler or retailer in bulk and not to the end customer in pieces. Manufacturers sell products in bulk and only allow the purchase of a certain minimum quantity. New entrepreneurs or individual sellers should only purchase a few products at a time due to financial burdens and the need for storage.
  3. The wholesaler is the entity that buys products in bulk for sale from manufacturers and then resells them with an added margin to retailers or other sellers. Some wholesalers may offer dropshipping services to retailers or sellers who purchase products.

Benefits of Dropshipping

In the dropshipping process, most roles are outsourced to a third party. Depending on the specifics of the arrangement with your chosen third party, your business can enjoy potential benefits. Here are reasons why you should consider the dropshipping business model as an established business or startup.

1. Low Capital Upfront Capital

You can launch an e-commerce store with little capital, and your business will be up and rolling. In a typical business, a business owner needs money to lease premises and purchase inventory to start trading. These activities require huge amounts of capital before a business can take off.

However, with the dropshipping business model, there's only a need to purchase something if the customer has placed an order and paid for it. Thus, you don't need an upfront amount to stock up an inventory and start dropshipping with little capital. You're exposed to no risk without the commitment to sell from an inventory in dropshipping like other businesses.

2. Easy to start

Starting and running an e-commerce store is straightforward. You don't have to worry about the physical products you'll sell, only an agreement with a third-party supplier. Here is a list of things you don't have to worry about in dropshipping:

  • leasing an inventory space and managing it
  • Packing and shipping orders
  • Inbound shipments and handling returns
  • Tracking inventory for accounting purposes
  • Ordering products continually and managing stock level

Some online marketplaces make it easy for anyone to start a dropshipping business without the trouble of managing inventory, packaging, or shipping. What happens? The orders are sent by the wholesaler directly to your customers. Thus, you have more time to concentrate on other aspects of the business, like sourcing your products, marketing, and providing reliable customer support.

3. Low Overhead

Dropshipping doesn't require purchasing inventory or managing fulfilment centres. Hence, the overhead expenses are minimal. Surprisingly, most successful dropshipping stores are run from home meaning they only require a laptop, internet, and a few operational costs. As your business grows, the operational costs might increase yet remain low compared to a brick-and-mortar business.

4. Flexible Location

With dropshipping, a successful business can be run anywhere with an internet connection. You can run and manage your business if you can communicate with suppliers and provide timely service and support that meets customer expectations.

5. Wide Products to Sell

Since dropshipping doesn't require you to pre-purchase items for sale, you can parade as many products as you wish on your e-commerce store. How do you know which products to offer potential customers? You look for trending products, put them on your e-store for potential customers, and change them anytime without worrying about unsold inventory. Whenever suppliers list a new item, you can include it in your catalogue for sale at no additional cost.

6. Easier to Test

Dropshipping allows new store owners to launch a business and test customers' appetites for more products. The model is helpful to all parties, as they can benefit from listing and selling products before committing to purchasing a large inventory.

7. Easy to Scale

In a traditional retail business, you must put in more work and resources when orders increase. However, in dropshipping, you leverage suppliers who do all the heavy lifting for additional orders.

As a result, you can expand your business with little to no growth pains and less incremental work. Growth in sales will always bring in more work, especially in customer support, but in dropshipping, the supplier takes all the heat. Plus, you can sell the same products on different platforms like Shopify, Amazon, and eBay.

8. Dropshipping Challenges

Besides the handful of benefits of dropshipping, the business model has some drawbacks. For a start, the profit margins are low, especially if you have to rely on paid advertising channels to get traffic to your website. Let's discuss more challenges you might encounter in the dropshipping business.

9. High Competition

Due to low overheads, the dropshipping business is highly competitive. Once you open your online store, you'll be competing with established businesses in the same space, selling the same products. So, why would a customer trust you? Thus, you need to work harder to stand out amidst the competition.

10. Lack of Product Control

In dropshipping, you sell products stocked and delivered by a third party. Hence, you have no control over the fulfilment process, from storage quality control and packaging to inventory management. As a result, the lack of these aspects can cause untrustworthiness from customers, leading to the derailment of your business. The worst part is you can't do anything about it because all these processes are out of your control.

11. Bulk Discounts

Bulk discounts are offered to retailers who purchase products in large quantities, leaving them room to negotiate for low prices. Buying at lower prices allows retailers to pass on the same benefit to customers. However, if your e-commerce store is unable to buy and store products in large volumes, you can't get bulk discounts. As a result, the products you sell may end up being expensive in a competitive platform.

12. Incoherent Orders and Deliveries

Listing different products on your eCommerce store means different dropshipping suppliers will handle the orders. So, when a customer orders several products, they'll be delivered separately and in varying packaging. WHY? All products are stored, packaged and shipped from different locations by different people.

Factors to Consider Before Joining the Dropshipping Business

Now that you understand dropshipping, it's time to discuss some of the factors you must consider before you decide to join the business.

1. Brand Identity

Whenever you sell any product, your customers will be drawn by various aspects like the look, feel, and design. Dropshipping gives you little control over these aspects, meaning you may need help to deliver what your customer needs. Getting your products customised can be a significant drawback for your business.

2. Control of Product Quality

In dropshipping, you need more visibility into the products your drop shipper stores and minimal control over the product quality. Hence, your customers can drop you for another seller who delivers the quality end product as promised.

3. Delivery Times

The delivery and fulfilment process in dropshipping is out of your hands. Hence, keeping many work prompt deliveries to your customers may take time and effort. So, how do you ensure your customers receive their orders on time? You can use delivery services like Forwarded by Amazon (FBA), as they may be free, fast, and reliable if the order meets specific terms and conditions.

4. Funding

If you have minimal capital to start your dropshipping business, other alternatives exist to lower your expenditure. Some activities include sourcing products, procuring, and storing them before you start selling.

Addressing these pain points will help you make the right decision about whether or not to use dropshipping for your e-commerce business.

Best Products for Dropshipping

Dropshipping profit margins are low. Therefore, you need to opt for products that are unlikely to be returned.

How do you determine this? You can determine if products are hard to return because of their prices, simple, and not easily breakable. Selling these goods will save you time when dealing with customers. Some of these products include clothes pegs and storage containers.

Through dropshipping, you can test the popularity of different products and niches. The business model is cost-effective because you don't have to spend on inventory upfront.

If a product is slow-moving, you retain everything and can always add other products to your list. When business is going well, you can stock up and fulfil orders to increase your profit margins. Here's a list of more products you can explore selling online.

  • Apparel
  • Sports
  • Beauty and Fitness
  • Home and Garden
  • Health
  • Toys and hobbies
  • Pet and animals
  • Babycare products
  • Kitchenware
  • Furniture products
  • Mobile covers and accessories
  • Fashion apparel
  • Footwear
  • Travel backpacks and accessories

How to Start a Dropshipping Business in the UK

Now that you know the niche and product you want to sell in your dropshipping business, it's time to create an e-commerce store. As you consider market trends, remember to choose a product you know sufficiently about and an option with a high profit margin.

Targeting the right audience with relevant products is crucial for your dropshipping business. Start by analysing your competition and make strategies based on potential customer preferences.

Whether you're looking to start a side hustle, start a new full-time enterprise, or change your business model in your online store, dropshipping might be the solution you seek.

Follow these steps to start your eCommerce store:

  1. Choose a niche and products
  2. Select a suitable marketplace for your eCommerce store, like Amazon, eBay,
  3. Find a dropshipping supplier - A reliable supplier should deliver your order to your customer on time and in good shape. There are many dropshipping suppliers, and you need to choose someone who gives value to your customers and the business by fulfilling orders effectively.

As you search for a supplier, find one with a good reputation, reliable, and ageing with the business. You'll realise that many suppliers are willing to work with drop shipping businesses that purchase in bulk.

However, this shouldn't discourage you. Instead, look for a supplier who can handle a minimum order to suit your needs to avoid straining financially. Ensure that customer service is exceptional because this is where everything can turn awry.

4. Identify an E-commerce Website - You need a website to create an eStore and start your dropshipping business. Purchase a domain and hosting, then build a website. Choose an ecommerce-rich feature from the many available online platforms, such as Shopify, BigCommerce, Magento, and WooCommerce. Consider incorporating interactive web designs and current technology to ensure you provide your potential customers with the best shopping experience.

5. Register your dropshipping UK business - Registering your business in the UK is essential to make it legal. A registered business with an operation licence can avoid legal problems and sign contracts with suppliers to prevent future conflicts. You should also have in place terms & conditions and a privacy policy like all other legal business entities. With these aspects in place, you can handle returns hassle-free under clear terms.

6. Manage finances and taxes - without the need to stock up and fulfil orders, dropshipping business saves you a lot of money. Making a proper structure to manage expenses and taxes. Open a bank account under your dropshipping business name and use it only for business transactions, payments from customers, and paying suppliers.

7. Market your business - at this point, your dropshipping business is ready for operation, and you need to announce it to potential customers by developing a marketing strategy. Effective marketing of your business on various social media platforms will help it grow to reach more customers. You can use email marketing, blogging, or referral marketing. These strategies will tell more people about your business and increase orders, eventually establishing your brand.

Frequently Asked Questions

Can I open a dropshipping business in the UK?

You can open a dropshipping business, a form of e-commerce in which a customer places an order, and a seller forwards it to a supplier who fulfils the order. The Seller works with a third-party supplier responsible for storage, packaging, and shipping. As a seller, you don't need inventory; you only sell products to potential customers and manage your online store.

In the UK, dropshipping is legal. However, the business must be registered to comply with taxes, including VAT, Income Tax, and  Customs Duty.

Must I get a licence to dropship in the UK?

To dropship in the UK, you need a valid business licence. A business licence is necessary for all UK businesses to ensure they operate within the law and comply with government regulations and standards.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

In Summary

What is dropshipping, and does it work in the UK? Dropshipping is a business in which the Seller forwards orders to a third party for packaging and shipping to customers. The business is easy to start and run since the Seller doesn't have to stock an inventory or lease a storage warehouse to store goods for sale.

Although dropshipping has many advantages, it also comes with several complexities you must address as an entrepreneur. Some of these challenges include low profit margins, and a need for more control over product quality, packaging, and shipping to the customer. However, with meticulous planning, you can anticipate the challenges and create a thriving dropshipping business.

As the Seller, you have the choice to enter into an agreement with a supplier who will fulfil your orders or do it yourself. Since you dropship all orders to a third party, outsourcing makes your job easier, leaving room for you to market your products.

As tempting as the business idea may sound, do your research before indulging. Arming yourself with the right information will not only help you venture into dropshipping but also help you make good business decisions. Do you have any questions about dropshipping? If yes, kindly contact one of our experts here for help today.