What is Dropshipping?
Dropshipping is a type of business model which enables a company to operate without maintaining inventory, owning a warehouse to store their products, or even having to ship their products to their customers themselves. How it works is that the retailer partners up with a dropship supplier that manufactures and/or warehouses products, packages the products, and ships them directly to the retailer’s customer, on the retailer’s behalf.
In simpler terms, this is how dropshipping works:
- The customer places an order for a product on the retailer’s online store.
- The retailer automatically or manually forwards the order and customer details to the dropship supplier.
- The dropship supplier packages and ships the order directly to the customer in the retailer’s name.
Pros of Dropshipping
As a business model, dropshipping has several different aspects that prove to be beneficial, such as:
- It’s easy to set up: It doesn’t take an entire village to set up since it essentially involves just 3 steps – find the supplier, set up your website and start selling the goods! To someone who is new to the ecommerce industry, this business model is relatively easy to understand and implement.
- The cost of setting up your online business using the dropship model is next to nothing: In traditional business models, the majority of the costs are related to setting up and running the retail operations, i.e. purchasing the inventory. Since dropshipping eliminates that step, and thus the cost of it, all you have to pay for is the associated costs of running your website (hosting, theme, apps, etc.).
- You don’t have to worry about exorbitant overhead costs: As previously mentioned, the business owner is not required to purchase inventory thus the costs of renting or buying warehouse/office space and the other smaller yet substantial costs pertaining to it (electricity/phone bills, stationery, etc.) aren’t an issue. The fixed costs of managing the website is all that a business owner has to worry about.
- The risk of drop shipping as a business model is significantly lower: If the business doesn’t sell products it still doesn’t lose anything, so there is little to no pressure about having to sell your inventory.
- The business can be run from anywhere thus the business owner is location independent: No office, no warehouse, no employees and no hassles. Little to no commitment to a physical space means that you could be sitting at a beach, sipping on mojitos while still turning profits. All you need is your laptop and the internet.
- There is lots of variety when it comes to the products you want to sell: There is a drop ship supplier for almost anything that you would like to sell! You can rely on one great product, sell several products at once or mix it up; it’s all up to you. Find your niche and there is bound to be a supplier that caters to it.
- More time and resources to scale your business: In traditional retail business models, if you want more profits you have to do more work and invest that much more of your resource pool. With dropshipping all you have to do is send more orders to your dropship supplier and then let them handle everything else while you earn the profit and are left with more time to develop your business plans and scale!
- Reduced losses on damaged goods: Since the shipment goes directly from the supplier to the customer, there are fewer shipment steps involved which drastically reduces the risk of damaged items while moving from one physical space to another.
Cons of Dropshipping
Just like everything in life, there are some disadvantages that come along with the many advantages of dropshipping. Here are a few cons to the dropship business model:
- Slightly lower profit margins in comparison to sourcing from a wholesaler or manufacturer: Depending on your niche, location or requirements, suppliers and vendors will charge you higher prices for dropshipping products, which does eat into your profit margins.
- Complete liability when something goes wrong, even when it is the supplier’s fault: Since the customer is purchasing the product from the retailer’s website, if the supplier messes something up, it’s still the retailer’s fault as the brand is the face of the retail process. This is one of the reasons why it is incredibly important to choose the right supplier.
- The brand has a significantly lower level of control: Customer satisfaction is often linked to the details – personalized packaging and branding of the shipped products, freebies and notes accompanying the order – its almost always the smaller things that count. Unfortunately, the drop shipping model seldom affords retailers the opportunity to control how their brand is presented during the delivery and fulfillment process as the supplier is the one who ships the products. However, there are some suppliers who may be willing to go that extra mile – be advised, it may cost you though.
- Certain issues may arise due to complexities with shipping: selling multiple products may seem like a good way to drive up sales and make a substantial profit, but this could actually be counter-intuitive if the retailer has multiple suppliers for these products. Different suppliers will charge different shipping costs depending on factors like location, type of products, etc. If a customer orders multiple products which ship from different suppliers, the retailer will have to work out and pay the shipping costs separately. Transferring these varying shipping costs on to the customer may negatively affect conversion rates, thus, in turn, impact the profit margins.
- Level of competition is relatively high: The attractiveness and popularity of the dropshipping business model means more and more retailers in every segment and niche. Unless a retailer is catering to an extremely specific segment or niche, the competition could possibly be detrimental.
- Managing the inventory can be tricky: keeping track of the stock of the supplier is nearly impossible. Miscommunications can cause issues such as cancellations and having to place orders on back order. This aspect can, of course, be managed with software these days but those too come at a price and may increase your overhead and fixed costs