What is dropshipping
This fulfillment model commonly appeals to entrepreneurs seeking efficiency and low overhead, but it can come at a cost—especially when it comes to customer experience. This guide will cover what dropshipping is and explore how this fulfillment method can work. We’ll also look at a few dropshipping alternatives that can potentially save you time, lower your overhead, or simplify your business.
What is a dropshipping business model
The rest of the physical fulfillment process is out of your hands. In some dropshipping agreements, you may also handle customer service, while the dropshipping service manages the physical goods and fulfillment.
How does dropshipping work
- Seller signs agreement with dropshipper.
- Customer orders online.
- Seller receives order.
- Customer receives an order confirmation.
- Seller forwards the order to dropshipper.
- Dropshipper ships the order.
- Customer receives their product.
Entrepreneurs who aim to sell generic products might find dropshipping appealing, but it may restrict their ability to establish a brand and distinguish their products. By utilizing dropshipping, businesses may find themselves engaged in price competition, ultimately resulting in reduced profit margins.
Key players in the dropshipping model
Seller of record
For Amazon sellers, using a dropshipping service is generally allowed by Amazon dropshipping policy, as long as you’re the seller of record and identify yourself as such.
Manufacturers
Wholesalers
Determine which dropshipping providers could be right for you based on your business model and fulfillment requirements, among other factors.
Hard truths about dropshipping
If you own a business and want to ship products for your online store, such as t-shirts, without the inconvenience of managing inventory or adding new products, the dropshipping model can be an advantageous solution for your ecommerce store.
Once a customer places an order online, the dropshipping business proceeds to directly ship the product to the customer. This method enables both large and small companies to procure products, earn some profit, and simultaneously save storage space.
Before you invest all of your savings into a dropshipping store, it is important to be aware of the challenges involved, as this task is not as simple as it may sound.
1. Low profit margins
The overhead is low when you don’t have to manage or store your own inventory, but the returns are also low. Less money is put in, resulting in less money received. Therefore, in order to stay afloat and make a profit, a significant amount of business needs to be conducted, particularly considering that most of the money goes to the supplier.
These narrow profit margins barely suffice to meet the expenses and operating costs associated with marketing/advertising, site maintenance (including SEO), sales order management, and covering office hours.
These variables, which are averages and depend on your industry and situation, can be used to predict your income.
A margin of 20%.
A conversion rate of 2%.
Although it is suitable for a preliminary estimate, there are a few issues that you must also take into account when thinking step by step.
The discount you receive for purchasing from manufacturers and wholesalers might be lower than 20%.
The text above does not consider any of the extra expenses that you must pay on your own. It is not the ultimate profit.
In order to stay competitive with sales prices, you will generally need to sacrifice a portion of your profits for most products. If you insist on maintaining a 20% margin, other companies may offer lower prices, undermining your position.
Additionally, it should be noted that the amount of profit you generate is heavily reliant on the amount of traffic your website receives. This means that if you decide to establish an ecommerce brand from scratch on platforms like BigCommerce and Shopify, it will be a challenging process as you work towards acquiring a solid customer base.
Even though it may appear to be a hands-off approach, dropshippers still need to handle various aspects such as communicating with wholesale suppliers, managing orders, processing returns, and providing customer service.
When considering dropshipping, it is more sensible to have an established source of regular traffic beforehand.
2. Highly competitive
Some entrepreneurs who are excessively optimistic tend to only consider the advantage of “low overhead” and disregard the evident information provided above. Due to the minimal amount of capital needed to initiate a dropshipping business, this easy access leads to intense competition, particularly in highly sought-after markets.
The more extensive a company’s size, the greater their ability to decrease their markups and provide the most competitive prices. In addition, it is likely that you do not have an exclusive agreement with your suppliers, which exacerbates the situation.
If you are a small business just starting out, your competitors with years of experience have the advantage of resources that you lack, allowing them to undercut your prices. Moreover, it is possible that there are numerous competitors selling the same products as you.
If customers have the option to purchase the exact same product at a lower price from another vendor, what incentive do they have to buy from you?
3. No control over the supply chain
In traditional ecommerce, when customers express dissatisfaction with product quality, delivery speed, or return policies, you have the ability to handle the issues yourself. However, in dropshipping, store owners are somewhat dependent on their suppliers, yet it is still your responsibility to directly communicate with your customers.
Dropshippers find themselves in a situation where they have very limited options and can only rely on the supplier to solve any issues, all the while trying to reassure the customer about a matter that they cannot influence.
Additionally, the delay in communication occurs when the dropshipper engages in back-and-forth exchanges with both the customer and the supplier. In the event that either party responds slowly, all communication comes to a standstill, thereby prolonging the resolution of issues.
If customers express their dissatisfaction, especially on social media, negative reviews in the early stages can lead to the failure of your business before it even commences.
4. Legal liability issues
While dropshippers usually don’t encounter this issue, it is important to note that certain suppliers may not be as reliable as they assert and the origin of the products is sometimes uncertain.
When suppliers use a trademarked logo or another company’s intellectual property illegally, it is even more deceptive, and this occurs more frequently than usual. However, not every dropshipping beginner is aware that this issue can be resolved by implementing a reliable Dropshipping Agreement Contract.
When selecting suppliers, it is important to consider this point.
5. Difficult to build a brand
Similar to ghostwriters or anonymous songwriters, dropshippers must acknowledge that someone else will receive credit for their efforts. If the product you are selling is exceptional, customers will primarily be captivated by the brand of the product, disregarding the entire shopping experience.
Dropshipping makes more sense for already-established brands than new ones, as it is important to remember that the logo on the box does not belong to you.
The right approaches to dropshipping
Although dropshipping may not be a strong standalone business due to its drawbacks, it serves as a valuable supplement for ecommerce companies, enabling them to significantly enhance their operations.
When considering how to use dropshipping effectively, it’s helpful to think about these four approaches:
1. Market research
Using dropshipping as a means to an end is more effective than using it as the ultimate goal. Utilize dropshipping to reduce the risk associated with testing out new products and for conducting market research.
Instead of increasing your inventory expenses by filling up your warehouse with an unpredictable product, opt for dropshipping to test it out during a trial period. Not only will this help you determine its selling potential, but it will also provide a more accurate estimate of its selling price, enabling you to decide on the appropriate initial stock quantity.
It is crucial to carefully consider each step, especially when venturing into new product types as they always entail some level of risk. For instance, if you have achieved considerable success in selling dog products, will the same level of success be replicated while selling cat products as well?
You may encounter varying results, but you can determine the outcome by dropshipping a small number of products and assessing the response.
2. Protection from overselling
Experienced ecommerce brands are aware that market fluctuations cannot always be foreseen. Instead of increasing inventory costs by stocking up excessively to meet unlikely maximum demand, having a dropshipping supplier as a backup allows you to save money without sacrificing those sales.
This is particularly beneficial during times of seasonal overflow as it provides a reliable measure against the uncertainties encountered by all retailers.
You can also consider dropshipping options as a form of insurance in case of unexpected situations. For instance, if your warehouse space is affected by a natural disaster, you can still meet the pre-existing orders by dropshipping the items from another location.
The same principle applies to avoiding unexpected shipping delays.
3. Strategic shipping systems
When you expand your business, shipping complications can become an unfortunate outcome. As you move farther away from your warehouse or fulfillment centers, the expenses associated with shipping, such as costs and fees, will increase. However, dropshipping can be an ideal remedy for challenging areas that lie beyond your profitable regions.
Perhaps the reason for the high costs of shipping over such long distances is the possibility of exorbitant expenses, or it could be that the prices for storing goods are too steep to rationalize the establishment of a new shipping facility.
Relying on dropshipping for certain regions, such as when shipping out of the state or country, might be crucial in avoiding financial losses due to taxes or additional fees.
In addition, similar to its usefulness in market research, dropshipping can also be employed to experiment with new areas. Why not employ dropshipping as a trial phase in a new location to assess whether it is worthwhile to establish a new facility there?
4. High-maintenance products
When considering the cost of stocking and shipping various products, certain items may be more expensive to handle compared to others. In specific situations, it can be more financially advantageous for you to opt for dropshipping these products rather than storing them on your own. How do we define high-maintenance products in this context?
Any products that require additional charges for storage or shipping, such as:
Some products are so big that the sales they generate are not enough to cover the expenses of storing them.
If the cost of shipping a product is too high due to its weight, consider dropshipping from a manufacturer or wholesaler.
When shipping fragile products, it may be more suitable for the supplier or manufacturer to handle their specific shipping needs, as they have the necessary expertise and resources.
Valuables such as fine jewelry and antiques necessitate extra security measures, which not all warehouses can provide. Instead of jeopardizing their safety, entrusting these items to someone capable of ensuring proper protection is a wiser choice.
If you have items that require frozen storage or are sensitive to light, it may be more beneficial for you to opt for dropshipping instead of storing them yourself, considering the special conditions they require.
