Want to start a dropshipping business? Here’s everything you need to know to get started.
- Defining dropshipping
- Benefits of dropshipping
- Disadvantages of dropshipping
Defining dropshipping
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases it from a third party and ships it directly to the customer. As a result, the seller doesn’t have to handle the product now.
The most significant difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the seller purchases inventory as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.
Benefits of dropshipping
Dropshipping is a great business model for aspiring entrepreneurs to start with because it’s accessible. With dropshipping, you can quickly test different business ideas with limited downside, which lets you learn a lot about how to choose and market in-demand products. Here are a few other reasons why dropshipping is such a popular model.
1. Less capital is required
Probably the most significant advantage to dropshipping is that it’s possible to launch an eCommerce store without having to invest thousands of dollars in inventory upfront. Traditionally, retailers have had to tie up vast amounts of capital purchasing inventory.
With the dropshipping model, you don’t have to purchase a product unless you’ve already made the sale and paid by the customer. Without significant up-front inventory investments, it’s possible to start sourcing products and launch a successful dropshipping business with very little money. And because you’re not committed to selling-through any inventory purchased upfront, like in a traditional retail business, there’s less risk involved in starting a dropshipping store.
2. Easy to get started
Running an eCommerce business is much easier when you don’t have to deal with physical products. With drop shipping, you don’t have to worry about:
- Managing or paying for a warehouse
- Packing and shipping your orders
- Tracking inventory for accounting reasons
- Handling returns and inbound shipments
- Continually ordering products and managing stock level
3. Low overhead
Because you don’t have to deal with purchasing inventory or managing a warehouse, your overhead expenses are relatively low. Many successful dropshipping stores are run as home-based businesses, requiring little more than laptops and a few recurring payments to operate. As you grow, these costs will likely increase but will still be low compared to traditional brick-and-mortar businesses.
4. Flexible location
A dropshipping business can be run from just about anywhere with an internet connection. As long as you can easily communicate with suppliers and customers, you can run and manage your business.
5. Wide selection of products to sell
Since you don’t have to pre-purchase the items you sell, you can offer an array of trending products to your potential customers. If suppliers stock an item, you can list it for sale on your online store at no additional cost.
6. Easier to test
Dropshipping is a useful fulfillment method for launching a new store and for business owners looking to test the appetite customers have for additional product categories, e.g., accessories or wholly new product lines. The main benefit of dropshipping is the ability to list and potentially sell products before committing to buying a large amount of inventory.
7. Easier to scale
With a traditional retail business, if you receive three times the number of orders, you’ll usually need to do three times as much work. By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work.
Sales growth will always bring additional work—mostly related to customer support—but businesses that utilize dropshipping scale particularly well relative to traditional eCommerce businesses.
Disadvantages of dropshipping
All the benefits we mentioned make dropshipping a lovely model for anyone getting started with an online store or for those looking to expand their existing product offerings. But like all approaches, dropshipping has its downsides, too. Generally speaking, convenience and flexibility come at a price. Here are a few shortcomings to consider.
1. Low margins
Low margins are the most significant disadvantage to operating in a highly competitive dropshipping vertical. Because it’s so easy to get started, and the overhead costs are so minimal, many competing stores will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. Since they’ve invested so little in getting the business started, they can afford to operate on minuscule margins.
Typically, these sellers will have low-quality websites and poor (if any) customer service, which you can use to differentiate your business. But that won’t stop customers from comparing their prices to yours. This increase in fierce competition will quickly hurt the potential profit margins in a niche. Fortunately, you can do a lot to mitigate this problem by selecting a niche/vertical that’s well suited for dropshipping.
2. Inventory issues
If you stock all your products, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory can change daily. Fortunately, these days, there are a handful of apps that let you sync with suppliers. So drop shippers can “pass along” orders to a supplier with a click or two and should be able to see in real-time how much inventory the supplier has.
3. Shipping complexities
If you work with multiple suppliers—as most drop shippers do—the products on your online store will be sourced through several different drop shippers. This complicates your shipping costs.
Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three different shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer. And even when it does make sense to include these charges, automating these calculations can be difficult.
4. Supplier errors
Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway?
Even the best dropshipping suppliers make mistakes fulfilling orders—mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments, and low-quality packing, which can damage your business’s reputation.
5. Limited customization and branding
Unlike custom-made products or print on demand, dropshipping doesn’t give you a lot of control over the product itself. Usually, a product drop shipped is designed and branded by the supplier.
Some suppliers can accommodate your business’s product changes, but even then, the supplier has the most control over the product itself. Any changes or additions to the product itself usually require a minimum order quantity to make it viable and affordable for the manufacturer.