Dropshipping is an online business model where a store doesn’t actually keep the products it sells in stock. Instead it has sold items shipped directly to the customer from a third party. Using this model the seller never actually sees or handles the merchandise.
One of the biggest difference between dropshipping and the standard retail model is that the store merchant doesn’t stock or own inventory. Instead, the inventory is purchased on an as needed basis and shipped from a third party. This third party is usually a wholesaler or manufacturer.
Dropshipping has both benefits and drawbacks:
Startup is usually less cost inhibited as less Capital Is Required. This is the biggest advantage to dropshipping as it’s possible to launch an e-commerce store without having to invest thousands of dollars in inventory up front. Traditionally, huge amounts of capital are tied up purchasing inventory.
With the dropshipping model, you don’t even have to purchase a product unless you already made the sale and have been paid by the customer. Without major up-front inventory investments, it’s possible to start a successful dropshipping business with very little capital.
It’s Easy to Get Started :
An ecommerce business is much easier to run when you don’t have to deal with physical products. With dropshipping, you don’t have to worry about such things as:
• Maintaining a warehouse
• Packing and shipping your orders
• Keeping track of inventory
• Handling returns and inbound shipments
• Ordering products and managing stock level
Low Overhead :
Overhead expenses are quite low because you don’t have to deal with the purchasing of inventory or managing a warehouse. Many successful dropshipping businesses are started and run from a home office with just a laptop and for less than $100 per month. As you expand your business, these expenses will likely increase but will still be much lower than compared to those of a traditional brick-and-mortar business.
You can run a dropshipping business form just about anywhere you can hook up an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.
Wide Selection of Products:
Because you don’t have to hold inventory, you can offer a wide variety of products to your potential customers. As long as suppliers stock an item, you can list if for sale on your website.
Easy to Scale:
Dropshipping lessens your work load. With a traditional business, if you receive three times as much business you’ll usually need to do three times as much work. By leveraging your dropshipping suppliers, most of the work will be borne by the suppliers. This allows you to spend more time expanding your business rather than spending it on grunt work. Don’t get me wrong, more sales will always lead to additional work, however this will be customer service related. Businesses that utilize a dropshipping model scale particularly well compared to other types of e-commerce businesses.
These are the benefits of dropshipping. It is a very attractive model for both the e-commerce beginner and the more savvy online seller. Unfortunately, dropshipping isn’t always all roses and sunshine. All this convenience and flexibility comes with some tradeoffs.
One of the biggest disadvantage to operating in a highly competitive dropshipping niche are low margins. But because it’s so easy to get started and the overhead costs are so minimal, many merchants will set up shop and load it with items selling at rock-bottom prices in an attempt to grow revenue quickly. Since so little capital was invested at startup, they can afford to operate on extremely low margins.
Yes, many of these merchants often have low-quality websites and poor, if any, customer service. But that won’t stop customers from comparing their prices to yours. This increase in cutthroat competition will quickly destroy the profit margin in a niche. The way to avoid this problem is to select a niche that’s well suited for dropshipping.
When you stock all your own items, you probably have a better handle of your inventory and which items are in stock. However, when you’re sourcing from suppliers, who are also fulfilling orders for other merchants, inventory changes on a daily basis. While there are ways you can better sync your store’s inventory with your suppliers’, these solutions don’t always work seamlessly, and suppliers don’t always support the technology required.
Most dropshippers work with multiple suppliers, because of this, the products on your website will be sourced through a number of different dropshippers. This can complicate your shipping costs.
For instance, if a customer places an order for three items, these can be available from three separate suppliers. If this happens, you’ll incur three separate shipping charges for sending each item to the customer. It’s probably not wise to pass these charges along to the customer, as they’ll think you’re grossly overcharging for shipping! And even if you did want to pass these charges along, automating these calculations can be difficult.
Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway? That’s what life is with dropshipping.
Even the best dropshipping suppliers make mistakes fulfilling orders – mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business’s reputation.
Should You Jump In ?
Dropshipping isn’t a perfect, stress-free way to build a successful business. It definitely has some advantages over some more traditional e-commerce models. It also has a number of inherent complexities and problems you’ll need to be able to address.
With some careful pre-planning, most of these problems can be resolved and need not prevent you from building a profitable dropshipping business.