What Is Dropshipping and How Does It Work In Singapore: Pros and Cons

Written by the Amazon Team
This article is part of a series educating sellers about the basics of e-commerce.

Dropshipping is a retail fulfillment method where the seller (or dropshipper) accepts orders from customers but does not stock or own any inventory. This is how it works:
  • Seller receives an order
  • Seller informs supplier of the order
  • Supplier fulfills the order
A dropshipper is in charge of marketing the product and answering the customer’s queries. They do not handle the product directly and have no control over stock availability and order fulfillment.

A dropshipper’s profit is determined by the difference between the retail price paid by the customer to the seller and the wholesale price paid by the seller to the supplier.

Read on to learn more about dropshipping in Singapore! We will touch on the pros and cons of dropshipping, how to start a dropshipping business and tips and best practices for selling on Amazon.

Dropshipping process

How does dropshipping work?
  1. You make an agreement with the supplier to become their dropshipper
  2. The supplier manufactures and stores the products
  3. You create a website or e-commerce storefront such as on Amazon to market and sell your products
  4. A customer places an order
  5. You forward the customer’s order to the supplier
  6. The supplier packs and ships the product to the customer
  7. You inform the customer that their order is on the way
The Dropshipping Process
A dropshipper is not involved in the direct handling of the product. Instead, when an order is received from the customer, the order is forwarded to the supplier and the supplier is in charge of fulfilling the order.

Benefits of dropshipping

Since the dropshipper does not directly manage inventory or order fulfillment, it can bring about some benefits.

Low startup costs

As the goods are managed by the supplier, sellers are not required to purchase inventory or stock a warehouse, which means you may be able to start a dropshipping business with less capital.

Low inventory costs

If you own inventory, there may be problems with over and under-stocking. The former can lead to obsolescence especially if products are perishable, while the latter can lead to lost revenue.

Having an optimal inventory turnover will help you to make informed decisions about sales performance and markeintg.

However, with dropshipping, you do not have to deal with inventory costs as orders will be fulfilled by your supplier while you focus on increasing sales.

Low order fulfillment costs

Order fulfillment includes warehousing, packing and shipping orders. Your supplier will take care of all that when it comes to dropshipping.

Need an alternative to dropshipping?

At Amazon, you can store your products in our fulfillment centers and leverage Fulfillment by Amazon (FBA) to pack and ship your orders. Our Service Provider Network also provides inventory management and shipping services.

Sell and test products with less risk

Since dropshipping does not involve any inventory costs, you can change or expand your line of products quickly and easily.

Plus, if you know a product is doing well for another retailer, you can start selling it immediately. Here is a tip: check out these most loved products on Amazon for some ideas!

High scalability

As more orders come in, most of the work is still done by suppliers. Thus, it is easier for dropshippers to scale with less incremental work.

Disadvantages of dropshipping

Dropshipping has its benefits, but there are also some drawbacks to consider.

Limited branding

Products are typically made, designed and branded by the supplier. Hence, you have limited control over the branding and customization.

Less control over order fulfillment

Your supplier will fulfill orders on your behalf, which means you may have to deal with customer complaints if there are any delays or issues with the order.

Reliance on supplier’s stock

One key benefit of dropshipping is that you can offer new products instantly and stop selling less popular products at any time.

However, this also means that if your supplier runs out of stock, you run out of stock as well. This may impact your Cancellation Rate, Late Shipment Rate and On-Time Delivery score of your orders, leading to longer fulfillment times and negatively affecting your Account Health on Amazon.

Low profit margins

Dropshipping involves selling pre-made products, which means suppliers would have already considered their profit margin. Therefore, to increase profits, you may have to increase the selling price.

Additionally, with minimal profit margins, you may need to increase sales significantly to generate the same profit as retailers that adopt a regular retail fulfillment method.

Poorer customer service

If your supplier delays a delivery or sends an incorrect or damaged product, it may reflect badly on your business. And because you have no control of inventory and order fulfillment, you may not be able to solve customer issues promptly.

Is dropshipping suitable for you?

Before diving into dropshipping, it is important to evaluate if it is suitable for you. Here are some questions you might want to ask yourself.

How much capital do you have?

Dropshipping may require less upfront capital since there is no inventory management involved. If you have limited capital and would like to start a business, this may be a good option.

What is your ideal profit margin?

One of the disadvantages of dropshipping is the lower profit margins as compared to other retail fulfillment methods. If you are aiming for high profit margins, this may not be ideal for you.

How do you plan to build your brand?

Dropshipping may lead to less control over product packaging, product quality and the order fulfillment process.

If you prefer full control over branding, launch your own brand on Amazon using the tools we’ve created to help businesses build, grow and protect your brand.

How much control do you want over product quality?

You may be able to inspect the quality of the products before deciding to go into partnership with a supplier. However, you will not have full control over quality after the partnership begins as the supplier is the person overseeing the manufacturing process.

In cases where the product quality is not up to the customer’s standards, it may impact your Order Defect Rate. This may in turn affect your Amazon account health.

Amazon Definition: Order Defect Rate

The Order Defect Rate (ODR) is a measure of your ability to provide good customer experience. It is a percentage of the orders with one or more defects out of the total orders in a given 60-day period.

An order has a defect if it results in negative feedback, an A-to-z Guarantee claim that is approved, or a credit card chargeback. Our policy states that sellers need to maintain an ODR of under 1% in order to sell on Amazon. An ODR above 1% may result in account deactivation.

How quickly do you want to deliver products?

Consumers often have high expectations for fast delivery, but dropshipping does not give you full control over this.

Do you want to handle supply and inventory issues?

As a dropshipper, you will have minimal control over the supply chain and order fulfillment. This means that there may be situations where you have to inform customers that a product is out of stock and their order may be delayed.

How will you manage refunds, returns and replacements?

It is key to have a sound refund and return policy. However, the refunds, returns and replacement process tends to be more complicated for dropshippers since you do not have access to the inventory.

For Amazon sellers, the requirements for the return policy may vary for different countries. Depending on the country you are selling to, the return policy should match or exceed Amazon’s return policy requirements. Handling refunds and returns gracefully will likely lead to positive customer service feedback.

How will you handle customers’ questions and concerns?

Dropshippers do not handle order fulfillment, but you will still have to communicate with customers and answer their queries.

Should there be any miscommunication with your supplier, it may lead to providing misinformation to customers which may result in poor customer experience and negative reviews.

How to start a dropshipping business

If you are ready to start a dropshipping business, we have broken down the process into seven manageable steps!

Step 1: Find a profitable niche

The first step before starting a business is to do market research and find a profitable niche.

If you sell on Amazon, you will have access to over 300 million customers worldwide. However, it is also important to differentiate yourself from other sellers to attract customers.

Tips!

Find a balance between profitability and interest
To grow your business, you need a healthy profit margin. However, to sustain your business, you need to be passionate about what you are selling.

Consider selling products that have evergreen demand rather than trending products
Trending items may cause a spike in sales, but this spike will only last as long as the hype. It is advisable to sell products with evergreen demand to maintain a constant flow of sales.

Step 2: Analyze your competitors

After having an idea of what to sell, the next step is to analyze your competitors.

Consider doing the following:
  • Observe how they provide customer service and the effectiveness of their methods
  • Investigate what successful businesses are doing differently from others
  • Find out how your competitors are generating leads and sales
  • Learn about the kinds of promotions they are running to attract customers
By analyzing your competitors, you may have a better understanding of what works and what does not. Additionally, an effective pricing strategy can be developed to stay competitive.

Amazon Resources

Learn from sellers on Amazon via our Seller Stories to gain insights on their challenges and successes!

Step 3: Find reliable suppliers

A key factor to a successful dropshipping business is sourcing for the right suppliers with high-quality products.

Some things to note:

● Buy and test the supplier’s products yourself before selling them
Look out for quality and consistency across different order batches. A guideline would be to only sell products of good quality that you would use yourself.

● Consider ease of communication with your supplier
For a dropshipping partnership to be successful, you will need to have good communication with the supplier to manage orders, shipment issues and customer disputes. It is important to choose a supplier who is responsive and able to communicate in your preferred language.

● Check the supplier's processing and shipping time
This will likely affect the speed at which your customers receive their products. Ideally, orders should reach the customer within 5 - 8 days for local shipments.

● Look for alternative suppliers as back up
In the event that one supplier runs out of stock, it would be good to have an alternative supplier to fulfill your orders. This prevents any potential revenue losses.

Step 4: Register your business

Once you have decided on your business model and suppliers, it is time to register your business. This includes but is not limited to:
  • Naming your company
  • Deciding on executives and shareholders
  • Confirming your business address
  • Incorporating the business based on your country’s regulations
Note: Depending on the type of products you sell and the scope of your business activities, you may be required to apply for a license or permit under the relevant local legislation. Always do your due diligence or seek professional legal advice to avoid breaching local laws or regulations.

Registering your business is advisable to ensure financial safety should any issues arise.

Step 5: Set up your online store

Next, set up your online store to start selling your products! Amazon is a great e-commerce store to start with as there are already millions of shoppers.

To get started
  • Add a company description
  • List your products
  • Optimise product listings
You can get tips for selling on Amazon for free via our Seller University training videos once you create a seller account.

To improve customer experience and potentially boost sales, you can also consider adopting an omnichannel commerce approach!

Step 6: Market your business

After you set up your online store, increase visibility of your business by using various marketing tools. Some great avenues for marketing your products may include forums, Google Ads and social media platforms such as Facebook, Instagram and TikTok.

Amazon also has advertising solutions to help your brand get discovered and increase sales. With sponsored ads, you only pay for the clicks that your ads receive. Plus, you get to monitor your ad performance and improve your campaigns accordingly.

Step 7: Analyze and improve your store

The last step to this process is to use tools (such as Google Analytics) to analyze your online store. Amazon sellers can also leverage the Amazon Seller Central’s Brand Analytics feature which has useful data and insights to empower brand owners to make strategic decisions.

Alternative options to dropshipping

If you feel that dropshipping is not suitable for your business, here are some other options to explore.

1. Fulfillment by Amazon (FBA)

The closest alternative to dropshipping is to make bulk purchases for products and outsource storage and order fulfillment.

Fulfillment by Amazon (FBA) is an example of such a service. It is a service that
  • stores your products in fulfillment centres; and
  • packs and ships orders on your behalf.
In addition, customer enquiries, refunds and returns are also managed by Amazon.

The advantages of FBA are:
  • Amazon Prime members enjoy free* one-day delivery on domestic eligible items.
  • Your customers have access to Amazon’s trusted customer service and returns.
  • It is cost-effective as you only pay for storage space and orders as we fulfill them.
Outsourcing storage and order fulfillment to FBA allows you to save time, scale your business and reach more customers.

*Terms and conditions apply

2. Create your own brand

Dropshipping involves the sale of pre-made products, which gives you less control over packaging and branding.

For full flexibility, consider creating your own brand. This enables you to:
  • Differentiate your brand from others
  • Build brand identity and recognition
  • Gain customer loyalty
Building a brand can go a long way in capturing sales and retaining customers in the long run.

Amazon Resources

Check out the Amazon Brand Registry to unlock a suite of tools designed to help you build and protect your brand, and create a better experience for customers.

3. Affiliate marketing

Another business model to consider if you prefer not to handle any inventory, orders and returns is affiliate marketing. This is an advertising business model which does not involve selling products at all.

Instead, this involves promoting sellers’ products and collecting a commission when sales are generated through your unique referral link. This may provide benefits such as lower startup costs and allowing you to build a strong relationship with your audience who trust your recommendations.

Amazon answers FAQs about dropshipping

Is dropshipping illegal?
Dropshipping is a legal method of order fulfillment in Singapore, but it is important to ensure that your business is set up the right way and your suppliers are reputable.

Like any other business model, there are laws and regulations to abide by. For example, some things to take into account are:
  • Ensure that it is legal to sell your products in the country
  • Find out how to set up a dropshipping business
  • Find out how to file and pay income tax
It is crucial to do your research before starting a business to prevent legal issues.
Is dropshipping still profitable?
Dropshipping is generally considered as a low risk business model as running costs are lower. Thus, it is relatively easier and faster to be profitable.

However, the profit margin for dropshipping is usually lower so you may have to increase sales volume to generate the same profit as other retail fulfillment methods.
Is dropshipping allowed on Amazon?
Yes, dropshipping is allowed on Amazon as long as your business follows our dropshipping policy.

To use dropshipping services for your business on Amazon, you must:
  • Be the seller of record of your products
  • Identify yourself as the seller of your products on all packing slips, invoices, and external packaging
  • Be responsible for accepting and processing customer returns of your products
Can I do dropshipping without registering my business?
It is possible to dropship without registering your business. However, this may expose you to financial and legal issues along the way.

Thus, you are advised to register your business under a formal entity to reduce any liability. Additionally, this also shows potential suppliers that you are a legitimate business.

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