What Is Dropshipping? Everything You Need To Know
Dropshipping is an online retail business model where the retailer does not need to maintain inventory of the items they are selling. If you love selling but are put off by the thought of maintaining and paying for a storefront, warehouse and other overheads, dropshipping could be the solution for you.
What Is Dropshipping?
Dropshipping is a business model primarily used by e-commerce retailers that do not stock the inventory themselves. It is a fulfillment method where a retailer receives orders for products listed on the shop front, which are then forwarded to the supplier for shipping.
This is a win-win situation for both retailers and suppliers as they can focus on just the business process they are expert in—retailers can nurture customer relationships and suppliers maintai inventory and ship products. Dropshipping is used globally by both wholesalers and manufacturers to sell their products.
Dropshipping Is Great for New Entrepreneurs
Dropshipping is a great business model for entrepreneurs who are good at selling because they do not need to worry about maintaining stock or handling shipping. They just need to choose the right supplier with the right processes in place for shipping the orders. And then they can go back to focusing on:
- Creating an awesome online store
- Finding popular products to list on their store
- Driving tons of traffic to the store
- Converting the visitors into customers and then repeat customers
How Does Dropshipping Work?
The dropshipping process consists of four simple steps:
- The customer places an order with the retailer.
- The retailer processes the order and forwards it to the supplier.
- The supplier fulfills the order in their warehouse.
- The supplier ships the order to the customer.
If the customer is satisfied with the product they receive, all is well. The retailer should use customer relationship management (CRM) software to cultivate the relationship and encourage future orders.
However, complications arise when the customer is not satisfied with the product and they want to return it. We will come to this in a bit, while discussing the limitations of dropshipping.
Pros and Cons of Dropshipping
Every business model has its advantages and disadvantages. Let’s dive into the pros and cons of dropshipping to see if it suits your business model.
Advantages of Dropshipping
- Lower startup costs. As a dropshipping business, you do not need to invest much in leasing a store, stocking inventory or paying staff. All you need is an online shop front where you can direct the customers and sell your products. This online shop could be your own website or on popular e-commerce platforms such as Amazon, Shopify or Squarespace.
- Easy to start. Running an e-commerce business becomes much easier when you don’t have to procure, maintain and supply products. You can set up an online shop in as little as 15 minutes. Setting up the background processes such as accepting orders, processing orders, forwarding to the supplier and accepting and making payments may take a couple of days more. But when you compare it with starting a physical retail store, it is much easier to start dropshipping operations.
- No inventory management. With dropshipping, you do not need to worry about maintaining inventory, handling shipping and returns, etc.
- Flexibility in business operations. Since your complete operations are online, you can set it up from anywhere. All you need is a laptop and a good internet connection.
- Flexibility in product offerings. As you are not maintaining the inventory yourself, it is much easier to diversify into other products depending upon demand.
- Scalability. Since the only thing you are doing is advertising and accepting orders, scaling up the operations is much easier. All you need is a robust platform that can handle traffic and accept orders. It’s the supplier who needs to worry about handling shipping and returns, so take care to choose a supplier who can quickly scale up as your business grows.
Limitations of Dropshipping
Many of the factors that make dropshipping a lucrative business proposition also have drawbacks. Be sure to consider these before committing to a dropshipping setup.
- High competition. Due to lower barriers to entry, competition is very high in the dropshipping business. Scores of businesses may be offering the same product as you. Product cannot be a differentiating factor, so you need to focus on things such as customer experience to stand out.
- Less control over inventory and shipping. As it is the supplier who is responsible for maintaining stock and shipping products, you do not have much control over product availability or its quality.
- Low margins. As there is stiff competition in the market, the margins are pretty low for dropshipping businesses. You need to operate on volumes to make a good profit.
- Limited customizations. As you are not the one handling the shipping of products to customers, you are in no position to customize products or provide value-added services to improve customer experience.
- Challenging customer support. As mentioned earlier, everything is fine when the customer is satisfied with the product received. However, the moment they need to return or exchange the product, it becomes difficult to coordinate the return with the supplier in a way that leaves the customer happy.
Is Dropshipping Right for You?
A dropshipping business is easy to start and operate. However, you need to reflect upon many things to decide if dropshipping is right for you:
- Do you have the right mindset to start a retail business?
- Are you willing to devote the time needed for success?
- Have you tested your business idea?
- Do you have the resources and skills necessary for running an online business?
- Are you ready to learn as you go and optimize your business accordingly?