Dropshipping is a common e-commerce buzzword that more and more online entrepreneurs have explored—or at least want to. Some have found success and have truly leveraged its benefits; others, not so much. But while doing business is a trial-and-error journey, it’s better to start one with fewer risks than otherwise.
In this article, budding entrepreneurs and small business owners will learn how dropshipping works, its pros and cons, and whether or not it’s the right venture to take.
How Dropshipping Works
Dropshipping is a fulfillment business model that allows the seller to sell goods to customers without keeping inventory. Simply put, the dropshipping business acts as an intermediary between the supplier/manufacturer and the customer. This method follows this simple process:
- The customer places an order on the dropshipping online store and pays the retail price.
- The dropshipping business places the same order with its supplier, paying the wholesale price.
- The supplier will then prepare the order and deliver it straight to the customer.
- The customer will receive the package directly from the supplier.
- The dropshipping store will keep the profit from the purchase.
Dropshipping is a legit business model that many online business owners have found success in. But like any type of business, it has its pros and cons. Read on to explore them one by one.
Little to No Capital Is Needed
Many small business owners who are just starting often find success in dropshipping because it requires little cost to operate.
To launch an online store, they will only need a hosting, domain, and website. Unlike a brick and mortar business, there’s no need to spend on inventory, store rent, or employee salary, reducing overhead and other expenses. Traditional retailers can spend hundreds to thousands of dollars a month, but a dropshipping store may only cost less than $10.
The dropshipping model provides less risk to a business, making it an excellent business venture for those still testing the waters of e-commerce.
Get Started Easily
Once their online store is set up, dropshippers can get started instantly. While many e-commerce stores launch their brand and transact through their own site, this can take time. Aside from purchasing a domain and setting up their hosting, they’ll still have to hire a web developer to create their website.
Because of this, many e-commerce businesses prefer selling via popular marketplaces, such as eBay, Alibaba, and Amazon. This doesn’t only apply to direct sellers and suppliers but also to dropshipping businesses.
In fact, they can start a dropshipping store in Amazon for free as long as they acquire a seller’s permit and abide by Amazon’s terms of service.
No Need to Worry About Keeping Inventory
The problem with traditional retailing is that sellers spend a significant amount on inventory without the assurance that the products will sell out. This is a lot riskier for starting e-commerce stores thriving on little capital.
This makes dropshipping an excellent option for them. As there’s no need to procure and store inventory, business owners reduce the costs required to do so.
Unlike retailers, they don’t need to buy products in bulk to save on shipping costs. They’ll only be able to pay for an item when a customer places an order in their store. With this, dropshippers can quickly test new goods and see if they fare well with customers.
Freedom and Flexibility in Product Selection
A dropshipping business has complete control over its range of products. Dropshippers can freely change their products without worrying about clearing their remaining inventory.
For instance, they can create product listings of only those items that appeal to their current customers. While traditional retailers deal with selling out slow-moving products, dropshippers can sell hot items without worry.
Say a dropshipping store brands itself as a fashion retail business. The seller gets the freedom to sell on-trend pieces all year long. Meanwhile, a traditional brick-and-mortar store still has to try and sell the remaining pieces from last season to get a good return. Not only does it hinder the promotion of the latest collection, but it also takes up physical space in the store.
High Potential to Scale
A dropshipping store can easily expand its business to rake in more profit. Since the supplier handles order shipment, the seller won’t need to worry about shipping overseas. They’ll be able to cater to customers from all parts of the world, literally.
Dropshippers can opt to stick with their suppliers or partner with local ones in each country. For example, a US dropshipping store can get its supplies from a local manufacturer in India if they want to start selling there. This makes for faster shipping times and excellent customer satisfaction.
But before thinking about going global, it’s essential to learn which countries to sell to. Doing market research helps businesses keep their entry risk at a minimum.
Excellent source of passive income
Dropshipping is not entirely passive, but sellers can gain a ton of profit without having to break a sweat when all the initial work is done. The bulk of the work is establishing the business, which doesn’t take long.
With the dropshipping model, a business owner will only need to secure a reliable supplier, set up their online store, wait for orders to come in, and purchase it for them in a few clicks.
One disadvantage of dropshipping is the overly saturated market. Dropshipping sellers compete with fellow dropshippers, direct suppliers, and everything in between. This makes it more challenging for newcomers to start their own online business and drive customers.
Naturally, customers will gravitate toward online stores that have been in the business for years compared to newly launched stores. It’s much safer to transact with the former since they’re more likely to have gained a lot of customer reviews.
Because of this, dropshipping businesses need to focus on boosting their marketing efforts to upstage the competition.
Need for Advertising Knowledge and Budget
Most dropshipping businesses resort to advertising to drive more sales because of the tight competition. The saturated market makes it tough to get enough traffic for an online store, especially a new niche brand. They’ll need to run paid ads to get their listing across to their target audience.
This does not only take a chunk off their budget, but the advertising world can also have a steep learning curve for small business owners.
Many e-commerce businesses simply leave their advertising to professional Google Ads agencies that will create successful ad campaigns for them. This is an excellent solution for dropshippers that want to launch their store right away but don’t have enough advertising knowledge to get started.
Low Profit Margin
Dropshippers can’t profit from bulk pricing since they only pay for individual items. This is a significant disadvantage of dropshipping.
Wholesalers rely on large volume orders to turn a profit, but they have little choice but to increase their retail price for dropshipping businesses. After all, they’re already responsible for manufacturing, storing, and delivering the goods.
Dropshipping sellers pay for every unit at a much higher price than their wholesale counterparts. This means they’ll still have to increase that price when they sell it in their store to make a profit. The high price can turn off customers, who will likely turn to the next competitor selling it at a lower price.
No Control Over Supplier Operations
Having no inventory is a double-edged sword for dropshippers. On the one hand, it reduces the costs intended for procuring, storing, and delivering the goods. On the other, the seller has little control over quality, packaging, shipping, and the type of customer service on the supplier’s end.
The middleman is likely to receive backlash from unsatisfied customers due to poor product quality or late deliveries. And there’s only little that dropshippers can do to resolve these concerns.
Because of this, dropshipping stores should make sure to find a reliable supplier with years of experience in the dropshipping industry. This ensures they provide only quality products and brand of service to their customers.
Need to Establish Brand to Drive and Retain Customers
Establishing a brand is easier said than done. It’s tough competing against hundreds of similar brands that have long been on the playing field and have already gained a loyal following.
Because of this, it helps to have a good grasp on branding and marketing. Good marketing gets them the sales. Great branding sets them apart from the competition and retains their customers.
Launching a brand and making sure it sticks with customers does not happen overnight. It requires smart branding steps to achieve success, which entails researching the target market, coming up with the creatives, and aligning the product choices.
Is Dropshipping the Right Move?
Dropshipping is a lucrative business tactic when done right. While it can be tricky for those starting in business, it’s a great complementary source of income for already established e-commerce companies. Before jumping the gun, entrepreneurs need to weigh the above pros and cons and figure out what works well for their type of business.