As eCommerce continues to expand in popularity, one practice remains unfamiliar to many: dropshipping. Today, we’re going to demystify this business model and help you decide if it’s a profitable solution for your business.
Dropshipping Basics
Dropshipping is a fulfillment model where a store buys products from a manufacturer who ships them directly to the customer. Dropshippers, unlike conventional stores, don’t maintain or handle inventory directly. Instead, they function as a “middleman” connecting shoppers to products from third-party manufacturers.
Commonly Asked Questions About Dropshipping
How Does Drop Shipping Work? Instead of owning inventory or stock, the selling merchant purchases ordered products from a manufacturer. Then, the seller has them shipped directly to the customers from the warehouses, without first handling the products.
Is Dropshipping a Legitimate Way to Make Money? Yes, many online entrepreneurs have profited by utilizing this fulfillment method. When you think about it, most companies, whether online or in-store, don’t exclusively sell products that they manufacture themselves. So, dropshipping is similar in that manner, only differing in product handling and fulfillment.
How Do Dropshippers Make a Profit? Dropshippers, like other product resellers, rely on product mark-up to make a profit. By carefully considering customer acquisition costs and the price of shipping, business owners can set appropriate product costs to ensure a profit remains.
Dropshipping Pros and Cons
For new entrepreneurs wanting to get started selling online, dropshipping is a great business model with which to do so. However, the method, like any, isn't flawless. Carefully balance the pros with the cons to decide if dropshipping is a good fit for you.
Benefits
- Small Investment & Low Business Expenses: Typically, retailers need to invest in large amounts of stock before launching their online stores. With dropshipping, you only pay for the products after the customer purchases them. Plus, without needing to rent warehouse space, overhead costs are extremely low.
- Simple & Flexible Management: The fundamentals of dropshipping mean that you don’t have to worry about traditional business tasks like managing a warehouse, packing/shipping orders, handling returns, or managing/organizing stock. Plus, you can run your business from nearly anywhere - as long as you have access to the internet.
- Easy Product Testing: Not only does dropshipping allow you to offer your customers a wide array of products, but it also affords you the opportunity to test those products for popularity. Without the commitment to purchasing massive amounts of stock, you can more freely and more quickly offer potential items to customers - no commitment required.
- Scalability: Traditionally, an influx in orders brings the responsibility of more work - packaging, shipping, and stocking more products, just to name a few. However, since most of those aspects of business don’t exist with dropshipping, it means scaling your company comes with fewer growing pains.
Considerations
- Low Margins: Though it is very possible to run a profitable dropshipping business, the profit margins are lower than many new business owners may expect. Because of the low overhead costs and ease of setting up an online business, competition among dropshippers is high - driving down already slim mark-up costs.
- Inventory & Supplier Issues: While not manning your own warehouse has benefits, it also has some downsides. Keeping up with products in multiple warehouses can be difficult, especially when those warehouses are also serving other sellers, too. Plus, when the warehouse makes a mistake on the packaging or fulfillment of an order, unfortunately, customers expect you to make things right.
- Complex, Un-branded Shipping: As important as branding is throughout the sales process, dropshippers lose the ability to customize packaging since it’s handled by a third-party. Plus, let’s say a customer orders three items, all serviced by different warehouses. You will need to pay three different shipping fees. While this is an expensive aspect for you as the business owner to cover, it’s likely not a smart decision to charge all three shipping fees to the customer, either.
How to Get Started Dropshipping Today
If you’re interested in opening your own dropshipping business, there are a few things you’ll have to do. To start, find an eCommerce platform to host your store. Our eCommerce experts can help by recommending the best platform for your goals, setting up your shop, and getting the details in line (like your domain name and an SSL certificate.) Once that's set up, you'll have to run some test orders and start advertising.
Like anything in eCommerce, dropshipping isn’t perfect. However, you can make this business fulfillment model work profitably for you. With careful planning and hard work, dropshipping could lead your brand to success.
