Dropshipping is a fulfillment method in which a store does not keep the products it sells in stock. As an alternative, the store buys the item from a third-party supplier and ships it directly to the customer. Because of this, the seller does not have to deal with the product directly.
The biggest difference between dropshipping and the traditional retail model is that the selling merchant does not keep stock or have inventory. Instead, to fulfill orders, the seller buys inventory from a third party — usually a wholesaler or manufacturer — as needed.
Advantages of dropshipping
Dropshipping is a great business model for aspiring entrepreneurs to start with because it is easily accessible. Dropshipping allows you to quickly test different business models with little risk, which teaches you a lot about how to select and market in-demand products. Dropshipping’s popularity can be attributed to a variety of factors.
1. Less money is required
Dropshipping’s biggest advantage is that it allows you to start an ecommerce business without having to spend thousands of dollars on inventory up front. In the past, retailers were forced to invest a significant amount of money in purchasing inventory.
It’s much easier to use the dropshipping model because you don’t have to buy anything until the customer pays you. It’s possible to start sourcing products and launching a successful dropshipping business with very little money and no significant upfront inventory investments. In addition, dropshipping stores and testing new product lines are less risky because you’re not obligated to sell through any inventory you buy up front, as in a conventional retail business.
2. It’s simple to get started with
Avoiding dealing with physical products makes running an ecommerce business much easier. Dropshipping takes care of everything for you, so you don’t have to stress about:
Running a warehouse and paying for it.
Order processing, packing, and shipping.
Keeping track of inventory for the purpose of accounting.
Managing shipments going out and coming in.
keeping track of stock levels by constantly placing orders for new products.
3. Low overhead
There is no inventory to buy or a warehouse to manage, so you have low overhead costs. In fact, many successful dropshipping businesses are run from home using only a laptop and a few recurring expenses. Costs like these will rise, but they’ll still be low compared to what you’d pay in a physical location.
4. Flexible location
If you have an internet connection, you can run a dropshipping business from almost anywhere. You can run and manage your business as long as you can easily communicate with your suppliers and customers.
5. Wide selection of products to sell
Because you don’t have to pre-purchase the items you sell, you can provide your potential customers with a wide range of current trends. Items that are already in stock at your suppliers can be listed for sale on your online store for no additional charge.
6. Easier to test
You can use dropshipping to launch a new store, or to see whether customers are interested in additional product categories, such as accessories or entirely new product lines, before investing in a full fulfillment strategy. Dropshipping’s main advantage is the ability to list and potentially sell products before making a large inventory purchase.
7. Easier to scale
If you run a traditional retail business and get three times as many orders, you’ll have to work three times as hard. It is possible to expand with less growing pains and less incremental work by using dropshipping suppliers to process additional orders.
While increased sales will always mean more work, especially in customer support, businesses that use dropshipping scale much better than those that don’t.
Disadvantages of dropshipping
Dropshipping is a very appealing business model for anyone looking to start an online store or expand their current product offerings for all the reasons we’ve listed. Dropshipping, however, is not without its drawbacks. Convenience and adaptability typically have a cost associated with them. Consider these drawbacks:
Low profit margins
Dropshipping in a highly competitive niche has low margins as its biggest drawback. Because it’s so simple to get started and there are so few overhead costs, many competing businesses will open shop and sell goods for rock-bottom prices in an effort to increase revenue. As a result of their low initial investment, they are able to operate on extremely thin profit margins. Dropshipping on Amazon alongside your Shopify store will result in a much thinner profit margin.
You can use the low-quality websites and non-existent (or minimal) customer service of your competitors to your advantage. However, customers will still compare your prices to those of your competitors. The narrowing of profit margins in a niche will be exacerbated by the increased level of fierce competition. Fortunately, choosing a niche or vertical that’s well-suited for dropshipping can do a lot to mitigate this issue. In Chapter 4, we’ll go over how to do that.
Issues relating to the inventory
You can easily keep track of what’s in and out of stock when you keep everything in-house. Inventory can fluctuate daily if you’re sourcing from multiple warehouses that are also fulfilling orders for other merchants. Fortunately, there are now a few apps that allow you to sync with vendors. With just a few clicks, dropshippers can “pass along” orders to a supplier and see how much inventory the supplier has in real time.
Oberlo also enables merchants to automate actions when the stock of a supplier falls to zero. You can, for example, unpublish a product when it’s no longer available, or you can keep it published but set the quantity to zero.
Complicated shipping methods
Products in your online store will come from a variety of dropshippers if you work with multiple suppliers, which is common among dropshippers. This adds to the difficulty of shipping and increases your costs.
Suppose a customer orders three items from three different suppliers because they are all the only ones available. You’ll have to pay three different shipping costs to send each item to the customer, and it’s probably not a good idea to charge them for these extra costs. Even if these fees are justified, it can be difficult to automate the calculations.
Mistakes in the supply chain
You were blamed for something that wasn’t your fault, but you still had to take responsibility for the error?
Even the best dropshipping suppliers make mistakes when it comes to fulfilling orders, so you must accept responsibility and apologize for any errors you may have made. Suppliers of mediocre or low quality will lead to a lot of frustration due to missing items, incorrect shipments, and poor packaging, all of which can harm your company’s reputation.
Customization and branding are restricted.
Dropshipping, as opposed to custom-made or print-on-demand products, gives you very little control over the product. The supplier usually creates and brands the dropshipped item.
However, even if your company’s product changes, the supplier still has the most control over the final product. There is a minimum order quantity required for any product changes or improvements in order for the manufacturer to make it economically viable.
So, is dropshipping worth it in 2021?
Even though dropshipping is a great way to start an online business, it’s not without its challenges. The model has some distinct advantages, but it also has a number of inherent complexities that you’ll have to deal with.
Next, we’ll look at how to deal with each of those problems, one at a time. But there’s good news: with careful planning and consideration, most of these roadblocks can be overcome, and you can go on to build a successful dropshipping company.