One of the most common questions people have when starting a dropshipping business is: Who pays first in dropshipping? Understanding how the payment process works is crucial to managing your cash flow and running a successful dropshipping store. In this article, we will explain the payment flow in dropshipping and who pays first — the customer, the supplier, or the store owner.

What is Dropshipping?

Before diving into the payment flow, let’s quickly recap how dropshipping works. In a dropshipping business model, the store owner (you) sells products without holding inventory. Instead, when a customer places an order on your online store, you purchase the product from a supplier, who then ships the item directly to the customer.

You, as the store owner, act as the middleman between the customer and the supplier. This setup allows you to sell products without the upfront cost of buying inventory.

Who Pays First in Dropshipping?

In a typical dropshipping model, the customer pays first when they purchase a product from your online store. After receiving the payment from the customer, you then use a portion of that money to pay the supplier, who ships the product to the customer.

Here’s a step-by-step breakdown of the payment process:

1. The Customer Pays You First

When a customer visits your online store and places an order, they pay you the retail price for the product, including any shipping fees or taxes. This payment is usually processed through a payment gateway like PayPal, Stripe, or any other e-commerce payment processor you have integrated into your store.

  • Example: Let’s say you’re selling a product for $50. The customer pays this amount upfront when they check out on your website.
  • Payment Gateway Fees: Keep in mind that payment gateways typically charge a fee for processing transactions. For instance, PayPal and Stripe charge around 2.9% + $0.30 per transaction. In this case, you’ll receive $48.25 after fees are deducted.

Key takeaway: The customer always pays first before you fulfill the order.

2. You Pay the Supplier

Once the customer has paid you, it’s your responsibility to place an order with the supplier. You’ll pay the supplier the wholesale cost of the product, which is typically lower than the retail price you charged the customer. The supplier then fulfills the order and ships the product directly to the customer.

  • Example: If your supplier charges $25 for the product, you’ll pay this amount from the $50 you received from the customer. This leaves you with a $25 gross profit before deducting other expenses, such as advertising or payment gateway fees.
  • Payment Methods to Suppliers: Most suppliers accept credit cards, PayPal, or bank transfers. Some may offer dropshipping apps like Oberlo or AliExpress that automate the payment and order fulfillment process.

Key takeaway: You pay the supplier after receiving payment from the customer.

3. The Supplier Ships the Product

After you’ve paid the supplier, they take care of the rest. The supplier processes the order, packages the product, and ships it directly to your customer. The shipping costs are usually factored into the amount you pay the supplier, or they may charge shipping fees separately, depending on the agreement.

  • Tracking Information: Many suppliers will provide tracking information once the product is shipped. You can share this tracking info with your customer to keep them informed about their order status.

Key takeaway: The supplier handles product fulfillment and shipping, so you don’t need to worry about inventory or logistics.

How to Manage Cash Flow in Dropshipping

Since the customer pays first in dropshipping, it’s possible to start your business with minimal upfront investment. However, effective cash flow management is essential to ensure you can cover your expenses, pay suppliers on time, and invest in growing your business.

Here are some tips for managing your cash flow:

  • Keep Track of Payment Gateways: Understand the delay in payment from gateways like PayPal and Stripe. These platforms may hold funds for a certain period before transferring them to your bank account, which could affect how quickly you can pay your suppliers.
  • Use Credit Cards for Supplier Payments: Many dropshippers use business credit cards to pay their suppliers, which allows them to fulfill orders without waiting for the payment to clear from the payment gateway. Just make sure to pay off your credit card balance promptly to avoid interest charges.
  • Watch Your Profit Margins: Always ensure that the retail price you charge covers the wholesale cost, shipping, payment gateway fees, and any marketing expenses. A healthy profit margin will help you maintain positive cash flow and grow your business.

Payment Flow in Summary

Here’s a simplified look at the payment flow in a dropshipping business:

  1. Customer places an order on your online store and pays you the retail price.
  2. You pay the supplier the wholesale cost after receiving the customer’s payment.
  3. Supplier ships the product directly to the customer.

Conclusion

In the dropshipping business model, the customer pays first before you pay the supplier. This process makes dropshipping an attractive business model for beginners, as it reduces the need for large upfront investments in inventory. However, it’s essential to manage your cash flow carefully, understand payment gateway delays, and always ensure your pricing allows for a healthy profit margin.

At Fulflix.com, we aim to provide all the insights and tools you need to run a successful dropshipping business. Whether you’re just starting or looking to scale, stay tuned for more helpful guides and tips!