Dropshipping is a business and retail fulfillment model that differs from traditional retail or eCommerce businesses, where companies would own and manage their products for sale.
Dropshipping is becoming all the more popular for small and large scale businesses and certainly presents several new business opportunities for entrepreneurs who would otherwise be priced out of traditional retail shipping models.
In this article, we’ll be sharing our insights into the business of dropshipping, how this retail fulfillment method can benefit a business and the potential drawbacks to be on the lookout for when choosing dropshipping for your business.
Here’s what we’ll cover:
What is Dropshipping?
Dropshipping is an inventory fulfillment model where the retailer does not store or ship the products they sell in their store. This is a common method of inventory management for eCommerce businesses. Using the dropshipping model, when a store sells a product to a consumer, the store purchases the product from a third party supplier who manages shipping this product to the consumer.
Under the dropshipping model, the store that sells the products directly to the consumer never actually handles the product directly. Consumers would most likely never know if a seller or store uses the this model or not as it does not impact their experience.
Contrary to a more traditional inventory model, where the seller manages the inventory and shipping directly, this model eliminates the need to own, operate and ship inventory. This is particularly beneficial for small businesses or online retailers who cannot afford to manage or physically store a large quantity of merchandise. In a dropshipping model, the third party dropshipping supplier’s role is to manage inventory and ship to consumers on behalf of sellers.
Who is Best Suited For a Dropshipping Business Model?
A number of entrepreneurs and businesses could easily leverage the benefits of a dropshipping business model. Some of the best candidates include:
- Aspiring entrepreneurs who lack the capital to significantly invest in a business upfront
- An eCommerce site that sells items that they do not make themselves. Dropshipping is not a suitable business model for creators or artisans.
- Someone looking to test products or a business idea
- An eCommerce website that accompanies a service-based business. For example, a lash extension technician who provides services in-person and sells retail products online.
What are the Benefits of Dropshipping?
For many small businesses or eCommerce sellers, dropshipping can be a great business model to start out with because it is affordable and easy to access. In fact, many businesses can grow their business through the dropshipping model and generate significant profit.
Aspiring entrepreneurs can dip their toes into the market without significant investment into inventory or shipping. In addition to its’ accessibility, there are several other benefits to dropshipping, including
Requires Less Startup Capital
The affordability of dropshipping is often considered to be its strongest advantage. Instead of investing thousands of dollars into inventory as a start-up, dropshipping allows entrepreneurs to launch an eCommerce business without significant capital.
Traditionally, retailers would need to invest in lots of inventory up front and sit on this inventory until it is sold.
Not only does this inventory cost the business money to store and manage, but it can also pose a significant financial risk. If the business fails and inventory remains unsold, the owner is now stuck with inventory that they are unable to sell.
With this model, a business owner often does not need to purchase a product until it is sold to the consumer.
This is a significant shift from traditional retail.
As a business owner using dropshipping, you can purchase the product using the money already paid by your consumer so there is minimal personal risk or investment. Without this risk, it is relatively easy to establish and maintain a successful dropshipping company with very little personal investment.
Low overhead costs
Another benefit of dropshipping is the ability to save money and resources through the use of third party inventory and shipping.
These types of savings (shipping infrastructure, inventory warehouse etc.) can be significant for businesses just starting out or small home-based businesses.
With this model, successful eCommerce businesses can be run from your home, requiring only a laptop, a website and a few other recurring expenses. Compared to traditional retail models, this model can be very cost-effective.
Not tied to a physical location
Because businesses that employ dropshipping utilize a third-party provider’s warehouse and shipping infrastructure, the online element of a dropshipping business can be established anywhere in the world and is not tied to a particular place.
Whether you move to a new place, change homes etc., your eCommerce business will be minimally impacted. This is an appealing option for business owners who do not want to limit their business operations to one place or building.
Additionally, large scale third party suppliers often have considerable access to international shipping that small businesses would have to pay a premium price for.
In today’s economic landscape, a physical store is often unnecessary. However, a temporary retail space, also known as a “pop-up shop” can help you help your business grow. Learn more in “How a Pop-up Shop Can Amplify Your Brand.”
Easier to test and try out new products
Whether you are a new eCommerce entrepreneur or a current store looking to expand product offerings, dropshipping is a great way to sell products on a trial-run basis.
As we shared above, dropshipping allows a seller to list and sell the products before committing to purchasing the inventory, which makes this the perfect, risk-free way to test your business model, products and overall viability as an eCommerce store without having to invest initial funds.
Anyone can do it
The ubiquity of CMS platforms such as WordPress and Shopify have allowed anyone to plan, develop, and launch an eCommerce website with ease. It has never been easier to launch an online business and have instant access to the world’s globalized markets.
With that being said, launching a business, online or offline, is never easy. It requires careful planning, dedication, and the willpower to never give up. For those wanting to get their feet wet without completely diving in, dropshipping presents a low barrier to entry approach that won’t break the bank.
Do you have a Unique Selling Proposition? A USP is essential in making your business stand out from the competition. Learn more in “Why What is a Unique Selling Proposition & How can it Benefit Your Business?”
What are the Negatives of Dropshipping?
As we shared above, dropshipping can have significant advantages, especially for those looking to establish an eCommerce business or looking to expand their current retail offerings online.
However, as a business grows and evolves, dropshipping can have considerable disadvantages and complexities, including:
Low profit margins
The convenience of dropshipping does not come without costs. By utilizing the inventory and shipping infrastructure of a third party supplier, the costs of products are higher than if a business managed the retail fulfilment themselves.
After all, this third party supplier needs to budget a profit margin into their services as well!
Since it’s easier to get started without significant upfront investment, businesses that use dropshipping often create a very competitive market for similar products.
These businesses tend to invest very little into creating and maintaining their business and can afford to take very small profits, which drives the competitive prices in the market down. There are ways to work around this drawback but it is not without investment in other business areas such as your website, social media, product offerings and customer service.
Lack of control over inventory and shipping
Another common headache when managing a dropshipping based business is contending with the lack of control over inventory and shipping. This is compounded by the fact that your consumers most likely don’t realize how you work with third-party suppliers so they could think shipping and inventory issues are your fault.
In many ways, this can feel like taking the blame and potentially losing customers over things entirely outside your control as the seller.
While many businesses tout the ability to pass over responsibility of inventory and shipping to a supplier as an advantage of dropshipping, if not managed correctly, this lack of control can be frustrating for business owners.
Supplier errors and no control over the product
Similiar to the lack of control over inventory and shipping that we shared above, control over the actual products can also be a concern in businesses using dropshipping as well.
As the seller, you have very limited control over the products and their quality before they are sent to your customers. If a supplier does not have stringent standards for quality, this can result in returns or requests for exchanges, costing you, the seller, money.
Limited options for customization
Another disadvantage for businesses using the dropshipping model is the lack of customization or personalization of the products.
Because a third party supplier might be working with lots of independent retail clients, the products you have access to through dropshipping will most likely be available in other eCommerce shops as well. This can make it extremely difficult for retailers to create a unique selling proposition for their products or brands.
Some suppliers may customize your products, but more often than not, these changes require a minimum order requirement, therefore costing you more money upfront.
As we’ve shared, dropshipping creates significant business opportunities for entrepreneurs who might not be able to afford or operationally manage a complete warehouse and shipping process on their own. However, dropshipping is not the answer to all retail businesses’ shipping and inventory woes.
While this business model does have significantly small start-up costs compared to a traditional business that relies heavily on shipping and retail, this model does create limitations on how much your business can truly grow and can pose additional complexities with inventory management and customer satisfaction.
By thoroughly researching and understanding these complexities, you can mitigate these concerns to create a profitable dropshipping business.
Thinking of starting your own drop shipping business or already have one? Want to launch your own website to take your business to the next level? Contact us at Advesa to see how we can help.