Dropship or dropshipping, you often hear and see that word, especially if you are an online seller or own an online store. If you plan to do online selling and are researching how to start, you probably have come across this method. But, what does dropshipping mean? How is it going to help you with your online store? Let us tackle them one by one in this post.
Dropshipping is an order or retail fulfillment method where a store or a seller does not keep the products in stocks. Instead, the store or seller that sells the product passes the sales order to a third-party supplier (dropshipper). The third-party supplier would then ship the order to the customer. Thus, the seller does not have to handle the product directly. And, there is no need for a warehouse or a room to stock products.
Difference between Dropshipping and Reselling?
Reselling and dropshipping are both similar types of business; however, both have contrasting differences. We can summarize their differences in these five categories:
How they work
Sellers do not need to stock a product to sell. The seller forwards the sales order to their supplier or dropshipper. The dropshipping company takes care of packing and shipping the product directly to the buyer.
The seller needs to stock a product first before they could sell. The seller can get products from a supplier or distributor. The seller also does packing and shipping.
Almost zero capital other than marketing activities.
It would require more significant money since you need to purchase the inventory.
For dropshipping, usually, the purchase price is the same as the purchase unit. Although, there are instances that sellers would get a minimal discount of $0.10 – $0.20 of the purchase unit.
Resellers would be more profitable since they can get a product cheaper than the purchase unit.
No buyer is interested in the product you offer. The costs you spent on advertising or marketing, if you spent any, do not get any results.
Instances of shipping delays since sellers in the dropshipping method do not have control over shipping.
Almost have the same risks as dropshipping but greater. Aside from marketing/advertising costs, resellers would also incur a fee to buy product stock. So, if the product is not sold, it would be a significant loss.
In terms of a product return or replacement, the seller would need to coordinate with the dropshipping company for returns. And, this could sometimes take a while.
Resellers can process a return or replacement right away since they have control over the product stock.
Advantages and Disadvantages of Dropshipping
Because of its accessibility, dropshipping is a good business model to use for those aspiring entrepreneurs. Testing different business ideas can be done efficiently at a minimal loss. But, in everything we do, there are always advantages and disadvantages. Knowing these things would help you plan how to approach your business.
Advantages of Dropshipping
Here is a list of the advantages of the dropshipping method as a business model.
1. The capital required is less.
Unlike in traditional retail, where you need a considerable amount of capital to purchase inventory, you only need very little in dropshipping and probably nothing at all. Since you do not need to buy a product to stock, you do not need to up-front inventory investments to start your store. And less risk is involved in creating a dropshipping store because you are not stressed to sell any inventory purchased up-front.
2. Low overhead & less stress
Dropshipping has low overhead since you do not have to deal with purchasing inventory or managing a warehouse. It requires little or few recurring expenses to operate, and you can work at home on your laptop.
Although your business grows, the cost will likely increase but will still be low if you compared it to the traditional industry.
You will also have less stress with the dropshipping method since you do not have to worry about any of the following:
1. A business you can do anywhere Running a dropshipping business would be easy since you can do it anywhere as long as you have access to the Internet. The important thing about this business is to be able to communicate with suppliers and customers.
2. You have a wide selection of products to sell In dropshipping, you can offer a wide variety of products to your potential customers since you do not need to pre-purchase the stocks of the items you want to sell. If the product you need is in stock with the supplier, you can list it without additional cost and without waiting for it to be available in your inventory.
3. It is easy to test Suppose you have no online selling experience, which is your first time setting up an online store. In that case, this method is an excellent way to test a customer’s appetite for additional product categories. And, you can do this test without committing to buying a large amount of inventory.
Disadvantages of Dropshipping
There is no such thing as a perfect business model, so knowing these imperfections would help you plan a business owner’s strategy.
1. The profit margin is low.
This statement is the hard truth of dropshipping – low overhead so as the returns. Most of your sales money goes to the supplier, and you only get a small percentage (20% margin) out of those sales. And, that small percentage may not be able to cover the cost of marketing and advertising, maintaining your website, and not to mention the time you spent managing orders.
Your traffic mainly determines the profit, so it will equate to less profit if you have less traffic. It is primarily true for those building an eCommerce brand from scratch; it will take a while to build a client base. And like any other eCommerce store, you will have to deal with wholesale suppliers, order processing, returns, and customer service.
2. Highly competitive
Since the capital to start this method is small, it would mean that there would be a lot of competition. And, the best way to beat the competitors is to lower the product price. Price adjustment can be made easily by those big companies; however, it would be difficult for dropshippers. It would be a double edge sword for dropshippers – if they keep lowering their price, they may end up having no profit at all, and if they stubbornly hold for that 20% margin, the other companies can easily undercut them to get the sale.
Additionally, several competitors could be selling the same products you are selling from the same supplier. If your competitor is already well-established, they would have the resources to undercut your prices.
3. The seller has no control over supply-chain
In traditional retail, retailers can quickly address customer problems related to product quality, fulfillment speed, or return policies.
In dropshipping, it is entirely different. If a customer complains about an item, they will talk to you directly. Then, you will coordinate with the supplier regarding the complaint. As the dropshipper, you are trapped in between, hoping the supplier addresses the issue while reassuring the customer that their problem is being addressed.
Going back and forth delays the communication, which could sometimes drag the fix if one of the sides answers slowly. The slow resolution could hurt your business if customers left that as a bad review.
4. Possibility of legal liability issues
Unfortunately, we cannot deny that some suppliers are not as legitimate as they claim to be. And, you do not always know where the merchandise comes from. Also, some dropshipping companies illegally use a trademarked logo in their products.
Although this is uncommon, it could still happen. So, always make sure to check the integrity and legitimacy of the supplier. And have a substantial dropshipping contract agreement.
5. Brand building difficulty
It is a bid hard to build your brand in this business method. If customers love a product that you are selling, they will focus mainly on the product’s brand instead of their shopping experience on your site.
And it is the reason why already-established brands flourish in dropshipping rather than the new ones.
When to use Dropshipping?
If you start an eCommerce business and a little low on capital, you can create your business with dropshipping; however, do not limit your business to this method.
Look at these ways on how to use dropshipping in your business correctly.
1. For market research
If you are trying out a new item to sell in your store, it would be wise to use dropshipping rather than purchasing inventory.
It will not incur extra cost, and it will not congest your warehouse. Market research is also a way for you to gauge if the product would sell or not and how much it sells. It will give you accurate figures of how much to buy for the initial stock – an essential step for traditional retailers to do.
2. Protection from overselling
Market fluctuation is not always predictable, so rather than overstocking to meet unlikely demands, have a dropshipping supplier as a backup. It will save you money since you do not need to raise inventory costs and not lose any sales.
The dropshipping option is a safeguard and insurance for your business against uncertainties like a natural disaster that affects your warehouse.
3. For strategic shipping systems
Let us face it; shipping products entails cost, especially if the location falls outside of your prosperous region. And a perfect solution for this is dropshipping.
You can also use dropshipping to test if it is worth shipping to new locales before opening a new facility.
4. For high maintenance product
Some products cost more to stock and shop – high maintenance products. Products that are large and heavy, fragile and valuables or products with special conditions are considered high maintenance products.
These products cost extra to store, ship, or pack. If you are a small business, it does not make sense to pay additional storage and shipping fees; instead, offer these products through dropshipping – create customer happiness while minimizing cost.
Before venturing into dropshipping, make sure you understand how it works. Familiarize yourself with the advantages and disadvantages this method has. And once you have decided, then look for legitimate suppliers then start building your dropshipping business.
I'm someone who loves to do research and loves to write. I love to impart the things that I have read and learn to friends and families so, reading and flipping to pages and contents are sometimes a pastime for me.