In this article, we are going to look into dropshipping, and all bout its advantages and disadvantages.
What is Dropshipping?
Dropshipping is invisible to the consumer, so many people aren’t familiar with this model.
A dropshipper is someone who doesn’t actually hold any inventory. They have an online store, and they accept orders, but they don’t do any fulfilment, which is shipping the products to the customers.
Instead, they receive an order and then pass along that information to another company who sends the product directly to the customer.
So, a customer might buy an umbrella from you for ten dollars. Your store automatically orders that same umbrella from your supplier and sends it to the customer for eight dollars. You, as the dropshipper, get to pocket the difference.
Oftentimes, you will see dropshippers for manufacturers who don’t want to do any marketing. They just want to make goods and they will use dropshippers, resellers or others to move their products.
What are the benefits of dropshipping?
There are four benefits to dropshipping:
The first is a low barrier to entry
You don’t need any starting capital when it comes to dropshipping. You could start an online store for $30, accept orders, pass along that information to your supplier, who then fulfils those orders.
You very likely won’t need any outside capital like a loan from the bank to get you started.
If you are averse to debt, this model is great. And unlike other business models, you don’t have any order minimums.
Some other models require you to buy a few dozen or a hundred or all the way up to 10,000 units at a time. But for dropshipping, you’re not storing any product at all and you can order products as needed.
Second, there’s no fulfilment
You’d be surprised how much work it is to organize hundreds or thousands of boxes. Even if you have a giant garage, it is a lot of work to find the right products, pack them up and send them out.
And you also don’t have to worry about managing inventory. An inventory count can take days for larger companies, and with this model, you never have to do any of that.
Next is being location independent. Because you don’t manage any physical products, you can run your business from anywhere in the world, which is huge.
If you are a big fan of being able to work from anywhere then dropshipping makes that incredibly easy.
Dropshipping is scalable
Finally, one of the best parts of a dropshipping business is that it’s scalable.
If you get twice as many orders as normal, you don’t usually have to hire extra workers; you just make more money. Eventually, you’ll need to hire more customer support representatives, but you’re not as impacted by scale as other business models.
Dropshipping has a lot going for it, and lots of business owners love this model, but nothing is perfect, so let’s dig into a few of the challenges with this model.
What are the disadvantages of dropshipping?
Low barrier to entry
First is the low barrier to entry. You may have noticed that low barrier to entry is both an advantage and a disadvantage.
There is a reason for this.
It’s great for you to get your foot in the door. It’s not great when everyone else can also get in that door. If a dropshipper, or even worse, a community of dropshippers, discovers your profitable niche, they can copy what you did and start selling the exact same product and drive your sales, and even your margins down.
As an example, if you discover a company selling a product, but they hate running a website and taking online orders, you could dropship for them and take a cut of each sale. If a bunch of other dropshippers find similar products or even the exact same company, now you’re competing for those same customers, and your margins will go down.
Margins for dropshipping are smaller than other eCommerce business models. This will of course change from supplier to supplier and from industry to industry, but you’ll probably see around 20% margins.
So if you sell $100 worth of product, you can keep $20, and those $20 needs to cover all of your business expenses, like customer support, website maintenance, marketing, paper click and complicated shipping, which is the next challenge.
You might be lucky enough to work with one supplier, in which case this won’t affect you too much. But it’s likely that you’re going to work with a few different suppliers to offer all the products that your customers want. You then have to decide if you want to pass that cost on to your customer, or if you want to eat that cost.
High shipping prices is one of the biggest reasons that customers leave the checkout, so many dropshippers decide to cover some or all of the cost of shipping, which can very quickly turn slim margins into nothing.
The downside is you’ll have to handle complicated shipping logistics. If you have an order with four items, and each comes from a different supplier, that’s going to cost you four times as much as an order from one supplier.
Keep in mind, your customers don’t know that you’re shipping from four different suppliers. To mitigate this, you want to spend time finding a supplier that can supply as much of your inventory as possible, and if you’re fortunate, work with just one supplier, so you don’t have to worry about hiding multiple shipping costs.
Lack of control
Finally, is the lack of control. Not having to ship products saves you a lot of time but when the people shipping your product do something wrong, you get blamed for it, which is a bummer.
As a dropshipper, you have to accept that many things are out of your control.
With a good supplier, you can expect one to maybe two per cent of orders to have mistakes, and for you to offer a full or partial refund.
With a lousy supplier, it could be even higher than two per cent, and you will have to live with a bad reputation.
So pick your supplier carefully. As you can see, there’s a lot of advantages and disadvantages for dropshippers. If you find just the right niche, you can run a highly-automated business that makes money for you.
But you can also get into a niche and then other people follow and copy you, which drastically affects how much money you can make.
Let’s go through some examples for each of the models to give you an idea of what these businesses might look like.
One of the most well-known dropshippers is Wayfair. Currently, they have warehouses for some of their products, but back in 2012, that 90% of their products were being shipped directly from suppliers, and they worked with over 4,000 different suppliers to ship out 93,000 items each week.
They built an incredible infrastructure around those suppliers to effectively manage all aspects including shipping logistics and returns.
Wayfair is a great example of a company wanting to grow to a certain size and to offer products themselves, but they started with a much simpler model which didn’t require a ton of cash on hand.
Another somewhat well-known store is Trolling Motors, not because of the trolling motor markets, but because it was sold by Andrew Youderian, who talked about it on his eCommerce podcast and blog.
This store actually lost money in its first year. The owner invested in a lot of programming and SEO that took time and money, but by the third year, he was able to automate much of the business, and now he can operate the business with just two hours a day.
So if you’re willing to take three years to build a company which generates $65,000 a year for only two hours a day, then dropshipping might be right for you.
If you find this article useful then you might also like How To Choose An Ecommerce Model?