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What is dropshipping? Pros and cons.

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What exactly is dropshipping? And what advantages and disadvantages are there?The article below gives you a great understanding of what dropshipping is, and with some important perspective.

There’s been increasing attention and interest in dropshipping – and understandably so.

Unfortunately, it has become a symbol of an “easy” way to create an eCommerce empire from scratch. We will not focus on those aspects. Instead, we’ll look into how existing and well-run eCommerce companies and suppliers use dropshipping to strengthen their businesses further.

What is dropshipping? Dropshipping is the fastest and most scalable way to increase the assortment of an eCommerce store with almost zero risk. The eCommerce store sells the item, pays the supplier, and finally, the supplier ships the goods. The eCommerce store is usually responsible for returns.

This allows eCommerce stores to offer a broader selection of products since it is impossible to stock every single item because of liquidity constraints and space requirements.

Some successful stores use dropshipping for all their orders, while others use it to supplement or test before committing to a more significant stock purchase.

What is dropshipping?

Dropshipping is a way to sell products you don’t have to ship yourself. And the best thing is that you pay for it only when it’s already sold.

This compares dropshipping to the traditional way of wholesale purchasing and reselling products.

The traditional way

The dropshipping way

Key takeaways are:

  1. Dropshipping allows you to sell a much more extensive range of products with almost no risk.
  2. You can start selling immediately if the supplier has the products in stock.
  3. Investing in extensive warehousing facilities or staff when dropshipping is unnecessary.
  4. Dropshipping is a great way to get data insights regarding product sales potential.
  5. Usually, the margins are lower on dropshipping items than on buying them wholesale.
  6. You have no control over shipping, but it is in the supplier’s interest to ship them in good condition and fast.

We’ll dive deeper into this and much more in the following.

What are the advantages of dropshipping?

We’ve established some very favorable aspects of dropshipping, but we need to dig a bit deeper to understand the value truly, and later on, we will cover the drawbacks and more concrete ways to make it work in practice.

Dropshipping allows you to have a more extensive product selection

First, let’s start with our favorite subject: math.

We’ll review some assumptions about purchasing and storing products in your warehouse (or a 3rd party’s warehouse).

The case

Imagine you’re an interior design eCommerce store.

You have 20 different suppliers.

On average, they have 1,000 different products/SKUs.

The average cost is 100 dollars.

The average minimum order quantity is five pieces of each.

If you were to buy everything they have, it would cost a whopping 10 million dollars. That is why most eCommerce stores carry a small percentage of their suppliers’ products.

On top of that, we have to pay for a large warehouse and staff as well as take the risk of not being able to sell the products in the end.

On the other hand, dropshipping has none of these restraints or costs. It is more a matter of whether the supplier will dropship a particular product.

Dropshipping is a highly scalable business model for eCommerce

One of the main blockers to successful eCommerce stores going to the next level is how well and fast they can scale their business.

Most can scale their marketing efforts but struggle to capture a broader audience and increase their fulfillment capacity.

They spend months expanding their product selection and 6 to 12 months expanding to new countries.

However, with the proper dropshipping setup, it’s multiple times faster, less cash intensive, and requires less effort to expand fulfillment to new markets.

This allows eCommerce businesses to scale their sales in otherwise impossible ways. Dropshipping enables a more extensive selection, local suppliers in export markets, more cash for buying new customers, and more time to create value where it really matters.

Dropshipping allows you to move faster than your competitors

Most of your competitors will be running their business the traditional way. This means they run a significant risk, have a large overhead, and struggle to gather data quickly and adjust to those data points.

Customers are constantly looking for new exciting products, and successful dropshipping businesses can start selling the latest products when the suppliers receive them.

Dropshipping gives you the ability to be truly data-driven

Not all data is created equal. A lot of valuable data can be obtained in different ways. Through page views, social media engagement, Google’s search data, SEO tools, competitor research, customer interviews, etc. But these are all just indicators. The best data is, by far, sales data.

Sales data is a concrete way to determine if potential customers are willing to pay for your products. It also gives insights into your customers – their behavior, geography, and the option to contact them through email.

The drawbacks of dropshipping

It all sounds good, right? Well, there are some drawbacks as well that are important to understand before starting your exponential growth adventure.

Not every supplier supports dropshipping

Dropshipping is quite different from the traditional way of purchasing in bulk.

Many suppliers have an excellent setup for shipping more significant quantities on pallets or containers, but they don’t necessarily have a structure for sending smaller packages to end customers. This could be a roadblock for them to overcome before offering dropshipping.

Besides the shipping, product B2B pricing is usually different when dropshipping because the supplier needs to incorporate the extra handling, warehousing, and potential shipping costs.

Finally, it could also be a strategic decision not to do it to maintain their high order value or appeal more to larger retailers that can keep a more extensive stock.

No control over shipping times and packaging

As a retailer, you always do your research and continuously monitor the shipping times and packaging, but in the end, it’s out of your control.

This could result in delayed packages or a higher rate of goods being returned because of inadequate packaging, so keep an eye on these two metrics. If there are any issues, address them immediately, or even better, include them in the contract.

Geographical limitations

Dropshipping is not great if the supplier is located too far away from your customers. There are multiple reasons for this.

    1. Longer delivery times.
    2. Higher shipping costs.
    3. Import taxes and duty.
    4. Challenging for the customer to return the product.
    5. Bad for the environment.

These are the main reasons for keeping your suppliers – more importantly, their shipping centers – reasonably within your geographical markets.

Potentially lower profit margins

No risk, warehousing, shipping, or huge product assortment must come with a price. And it does. The supplier usually has a different cost when selling their products as dropshipping compared to selling them in bulk.

This is natural because it is more demanding and thus expensive for them.

It is essential to compare these costs with those you would have to take on if you didn’t dropship.

Impossible to manage without the proper dropshipping software

Dropshipping can quickly become overwhelming without software because there are so many moving parts to manage – essentially hitting a brick wall before you even start.

You must track inventory levels, supplier availability, and shipping times. You also have to manage orders and returns. Before that, you need to publish all the available products you’re interested in selling.

Not only is it highly time-consuming to handle manually, but it also comes with more unforeseen issues.

You move slowly with new products and expansion. You get dissatisfied customers because you’re selling out-of-stock items. You have a hard time keeping delivery times down because you also have to manage orders manually.

All of this ends with a bad business.

Things to consider when dropshipping

Even though this is simply an overview of dropshipping (we’ll be going more in-depth with many subjects in future articles), it’s worth considering some extra parts immediately.

Returns

Even though dropshipping is relatively risk-free, it does usually involve returns. Unlike affiliate selling, dropshipping is like a regular eCommerce sale, but the difference is when the goods are paid for and from where they’re shipped.

This could be a potential negotiation subject, but most suppliers will require that the eCommerce store is responsible for and manages returns.

Consider your industry

Not all industries are good fits with dropshipping.

If you’re selling smaller and cheaper items, having them in stock can often be a lot more viable.

And if your orders usually have products from more than three or so suppliers, it could also mean that dropshipping is not optimal for your business.

Some industries are, in general, more suitable for dropshipping than others. It could be based on the average price per product, the industry’s margins, and how end customers expect their delivery.

Environment

Figuring out exactly how the environmental impact is can be tricky.

Some general rules:

  • Large items that are dropshipped locally can result in less CO2. Imagine if you purchase ten sofas to stock and then have re-distribute them all over the country. The dropshipping location could have a shorter last-mile delivery and with less delivery in total because it was never shipped to another warehouse in the first place.
  • Smaller items and more units per average basket will be better to handle from stock. Imagine if a customer buys smaller items (meaning: they don’t take much space in a truck) from 5 different suppliers. This results in 5 shipments instead of 1, which will likely be less environmentally friendly.

The bigger picture with the rest of your business

It’s essential to consider the processes you already have in your business. Maybe you carry stock or do cross-docking.

Be prepared to work with different warehouse locations, order management processes, cost prices, and multiple shipments. This needs to be fully prepared regarding your staff and IT systems.

Conclusion – is dropshipping worth it?

It depends on many things, a lot of which we’ve gone through in this guide.

It is essential to compare the costs of dropshipping with those you would have to take on if you didn’t.

The best answer is that the more prepared your team is and your IT setup, the better your chances are for creating a much larger business than you might currently have.

It’s also vital to understand that dropshipping is a way to buy and ship products. Most of your success will come from your marketing, website, customer service, etc.