Dropshipping is a business model based on the type of retail fulfilment. It doesn’t require the seller to keep any of the stock. The stock is purchased from a third party. The third party is then responsible for shipping the product. This means that the merchant never has to package and ship the product itself.
Dropshipping differs from the traditional retail business model in the sense that the seller doesn’t stock nor own any of the inventory sold on his online store, but instead purchases stock directly from the manufacturer or supplier in order to fulfil the order at hand, on an as-needed basis (without the need to store extra stock).
This retail business model has its own set of benefits and drawbacks:
Small capital requirement
This is by far the biggest advantage of this business model, the fact that the barrier to entry is quite low – its possible to launch an online store without upfront investment of thousands of dollars.
This is unthinkable with other retail models, where retailers have to invest huge amounts of capital in order to acquire a physical location, purchase the inventory, pay their staff, pay warehousing costs, etc.
The benefit of the Dropshipping model lies in the fact that you only have to purchase a product once the sale is made and you’ve received the payment. This completely negates the need for large upfront investment.
The fact that you don’t have to deal with physical products makes running an eCommerce business a lot easier than a traditional business. Dropshipping eliminates the need of:
- Order packaging and shipment
- Handling returns
- Managing stock levels
- Paying for a warehouse
Overhead costs are low
With Dropshipping, all you need to get started is a laptop, internet connection. Also, you need a few hundred dollars to cover basic business expenses such as running ads.
Overhead costs are minimal because you don’t need to manage a warehouse or purchase the inventory.
There are countless successful Dropshipping businesses are run from home offices. It is likely that when your business grows, you’ll need to expand further, but even then your expenses will never be as high as those of traditional brick and mortar enterprises.
There is very little that you need to get started, apart from a laptop and internet connection. This business can be run from anywhere, provided you can communicate with customers and suppliers with ease.
If a traditional retailer expands to the point where he receives four times more business, he’ll usually have to work four times harder, if not more. When it comes to Dropshipping, that’s not the case at all.
With Dropshipping you can hugely leverage on saving labour costs associated with the order fulfilment – a burden that your supplier or manufacturer has to carry. That’s not to say that additional sales will not bring additional work in the form of customer service, but that’s nothing compared with the additional burden that traditional merchants have to carry.
A wide array of products
Due to the fact that you don’t need to purchase items in advance, you can offer a wide array of products in your store, provided that you have a supplier for each product offered. This is a huge advantage, as you can test what products work well and discard those that don’t. Moreover, having an online store with a lot of products legitimises your business even further.
Whilst the benefits of Dropshipping are numerous, it does have its flaws:
Reduced profit margins
Low barrier to entry is a double-edged sword: Low overhead costs and little is required to get started means that a lot of merchants are drawn to this way of conducting business.
You can sell items at a rock-bottom price to stay competitive because it costs little to get started.
Without a shadow of a doubt, those are the types of sellers that will cut costs at every aspect of their business, such as having a good website and good customer services. Notwithstanding, this won’t stop customers from comparing their prices to yours, eventually destroying give niche’s profit margins.
Fortunately, these things can be avoided by conducting extensive market research and finding niches that are most suitable for Dropshipping. This can be done with tools like SaleSource, which gives an in-depth analysis of the key metrics (including profitability) of a given product or a niche.
The ability to list a wide selection of products in your store comes at a price.
If all of the products come from the same supplier, then shipping is very simple. However, a lot of the times you’ll have different suppliers for different types of products.
This sometimes makes delivery tricky and can potentially complicate your shipping costs.
When you don’t stock your own inventory. Keeping track of what items are in and out of stock isn’t always that easy.
In the warehouses, items are spread across which as well can cause Inventory changes.
Some suppliers offer ways that you can sync your store’s recorded inventory with the suppliers. However, not all suppliers have the necessary technology for this. It is important to pick your suppliers wisely.
Is Dropshipping worth it?
The perfect business model with 100% advantages and 0 disadvantages does not exist.
Dropshipping is no exception. Dropshipping has some definitive advantages, but also certain complexities.
It is the job of the business owner to overcome those complexities on the road to success. The good news is that nothing beats hard work and dedication.
with careful planning and consideration, all of these challenges can be overcome.