Dropshipping has emerged as a popular business model in recent years, revolutionizing the way entrepreneurs conduct ecommerce business. This method allows retailers to sell products without stocking inventory, as the responsibility for warehousing and order fulfillment lies with the suppliers. While dropshipping offers numerous advantages that make it an enticing option for aspiring business owners, it is essential to consider both the benefits and drawbacks before diving into this venture. In this article, we will explore the pros and cons of dropshipping to help you make a more informed decision as to whether this is a business model for you.
What Is Dropshipping?
Dropshipping is a business model where the retailer does not keep products in stock. Instead, they partner with a supplier who handles the inventory and shipping. The retailer takes orders from customers and transfers them to the supplier, who then ships the products directly to the customer's doorstep.
This dropshipping business model allows retailers to focus on marketing and customer service while leaving the fulfillment method and logistics to the supplier.
Here's how dropshipping would typically work for you if you decided to use this business model
Set Up An Online Store
You would need to create an online store or platform to showcase the products you want to sell in your online business. There are many ecommerce platforms available like Shopify, WooCommerce, or Magento to set up your dropshipping store. Shopify is by far the simplest and easiest to setup, with ready made templates to get you started. If you get started and then feel overwhelmed by Shopify for your ecommerce store, don't despair, Side Hustle SEO can help you with your store design and build.
Partner With Suppliers
You would need to identify dropshipping suppliers or wholesalers who are willing to work on a dropshipping basis, and ship products directly to your customers based on customer orders as they arise. These suppliers usually have a wide range of products and are willing to ship individual orders directly to customers. The most common places to find dropship suppliers are in South East Asia through marketing channels like Aliexpress or Ali Baba, however there are opportunities to find more localized dropshippers depending on the country you are in, and the niche (range of products) you are wanting to sell.
List Products
The next step is to select the products you want to sell from the supplier's catalog and list them on your online store. The information you need to gather would include product descriptions, images, and the wholesale price of the products. You would need to determine your shipping costs, sales tax, and sell prices.
Market Your Products
This is pretty much the same as if you were holding your own inventory. You need to get people to see your store, be enticed by your products and decide to buy. Methods of marketing include SEO (Search Engine Optimization) to drive organic traffic, or Pay Per Click marketing utilizing Google ads, or social media advertising like facebook ads, instagram and tiktok.
When A Customer Purchases A Product
When a customer places an order on your online store, you would receive payment from the customer at the time the order is placed. However many platforms like Shopify can take 3-5 days to transfer funds to you, so you may need to be able to cover the cost of these products until you receive your payment in the bank.
Forward The Order To The Supplier
You would then place an order with the supplier for the purchased product, ensuring that you provide the customer's shipping details and not your own. You would pay your supplier at the time you place your order with them. Not the point above where I suggested you may need to cover this cost prior to receiving the funds in your account.
Supplier fulfills the order
The supplier receives the order details and ships the product directly to the customer. The supplier may include your branding (uncommon) or use generic packaging (most likely), depending on the agreement.
Shipping Notification And Tracking
The supplier provides you with the shipping information, including tracking details. You can then pass this information along to the customer.
Customer Service Enquiries
All customer service enquiries need to be handled by you.
Pros of Dropshipping
Low Startup Costs
One of the most significant advantages of dropshipping is its low barrier to entry. Unlike traditional retail models, dropshipping eliminates the need for substantial upfront investment in inventory. You can start an online store with minimal capital, focusing on marketing and customer acquisition instead.
Reduced Operational Complexity
Dropshipping simplifies the operational aspects of running an e-commerce business. You don't have to worry about inventory management, packaging, or shipping. By partnering with reliable suppliers, you can leverage their expertise and infrastructure, allowing you to focus on growing your customer base and marketing efforts.
Wider Product Range
As a dropshipper, you have access to a vast array of products from different suppliers. This versatility allows you to experiment with multiple niches and product categories without the financial risk of holding inventory. It also enables you to adapt quickly to changing market demands and consumer preferences, making adding a new product, or removing a poor performing product quite simple.
Flexibility and Location Independence
Dropshipping offers the freedom to work from anywhere with an internet connection. As long as you can communicate with suppliers and manage your online store, you can operate your business from the comfort of your home or while traveling. This flexibility is especially appealing to digital nomads and individuals seeking a flexible work-life balance.
Scalability
Since you are not constrained by inventory limitations, dropshipping offers excellent scalability potential. As your business grows, you can expand your product offerings without worrying about storage space or logistics. With effective marketing strategies and solid supplier relationships, you can increase your sales volume without major operational hurdles. Dropshipping is a low-risk business model that allows for flexible growth and minimal upfront investment.
Cons of Dropshipping
Lower Profit Margins
While dropshipping allows for low startup costs, it typically comes with lower profit margins compared to traditional retail models. Since you're not buying in bulk and benefiting from wholesale pricing, your per-product profit tends to be lower. Additionally, intense competition in popular niches can drive down prices, further impacting profitability.
Limited Control Over Product Quality
How do you know that the products you see in the images are actually what your customers are going to get? Unless you order one of every product to confirm the quality, you don't know. And how often to you need to check the quality by having orders shipped to you? Businesses change, quality control changes, and without holding the inventory yourself, you are at the mercy of the third party supplier's quality control processes every time an order is filled.
Limited Control Over Inventory And Fulfillment
When relying on suppliers to handle inventory and order fulfillment, you have limited control over these crucial aspects. Any errors or shipping delays in shipment can reflect poorly on your business, potentially leading to dissatisfied customers. It's vital to partner with reliable suppliers and establish clear lines of communication to mitigate these risks.
Flexibility And Location Independence
Dropshipping heavily relies on maintaining good relationships with suppliers. Any issues on their end, such as stock shortages or product quality problems, can directly impact your business. It's crucial to thoroughly vet potential suppliers, assess their reliability, and maintain open communication channels to minimize disruptions.
Intense Competition
The popularity of dropshipping has led to a crowded marketplace, making it more challenging to differentiate your brand and attract customers. Established players and large e-commerce platforms often dominate search engine rankings, requiring strategic marketing efforts and unique value propositions to stand out from the competition.
It is commonplace for new dropshippers to simply download the supplier's products and insert them in their store, with little regard for the fact that every other dropshipper has done the exact same thing. So when someone searches for a particular product, they find multiple duplicates of the same images, product titles and descriptions, with only the price differentiating them. This is not only bad for you to compete in an oversaturated market, it's also bad for you to build a strong store with regards to SEO (Search Engine Optimization).
If price is the only thing you can compete on, it's unfortunately a race to the bottom and a race to see who goes broke first.
Customer Service Challenges
As a dropshipper, you may face challenges in providing exceptional customer service. Since you don't directly handle the products, resolving customer complaints or returns can be more complicated. Timely and efficient communication with suppliers becomes vital to ensure customer satisfaction.
Customer expectations in today's world don't allow for extended delivery times, or even for multiple packages for one order if your customer has ordered multiple products from different suppliers you might be using. The amount of time required for you to deal with these expectations can be much longer than the time you would have spent packing and shipping the orders yourself. There is nothing more frustrating than for a customer to be demanding a refund because their order is taking too long, or only part of it has arrived. You know the products are on their way, you can see it with your tracking information, however your customers have lost confidence in your ability to service them as the delivery is taking too long.
Conclusion
The Dropshipping model offers a range of benefits, including low startup costs, operational simplicity, product variety, flexibility, and scalability. However, it also presents challenges such as lower profit margins, limited control over quality control, inventory and fulfillment, dependency on suppliers, intense competition, and customer service complexities.
Successful dropshippers best practice often involves selecting reliable suppliers which can be difficult in a sea of wholesalers and manufacturers all purporting to offer the best of the best. They also spend considerable time and money researching the product niche to offer unique products or value-added services that connect to a very defined market, and providing excellent customer support to differentiate themselves in that market.
It is my personal view that while dropshipping may be a business model to get you started into the world of e-commerce, your long term strategy should be to migrate to managing your own inventory and fulfillment processes.
Before venturing into dropshipping, it is crucial to carefully weigh these pros and cons against your business goals, resources, and capabilities. By understanding the advantages and drawbacks, you can make an informed decision and develop strategies to mitigate potential challenges, increasing your chances of success in the competitive dropshipping landscape.
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