Dropshipping is a fulfillment method for web shops where the online shop does not have the offered products in stock. Once a dropshipping store sells a product, it purchases the item from a supplier and has it shipped directly to the customer. The dropshipper never needs to have the product in his own hands.
So the main difference between dropshipping and standard retailing is that the seller does not require their own stock and no storage space. Instead, the seller does not purchase stock from a third party (generally a wholesaler or manufacturer) until an order comes in, who then fulfills the orders.
Dropshipping is an attractive business model for starting entrepreneurs because it is very accessible. With dropshipping, you can quickly test different business ideas without the need for a lot of investment, allowing you to learn a lot about choosing and marketing products that are in high demand. Below we list a few more reasons why dropshipping is such a popular business model.
One of the biggest advantages of dropshipping is that you can open a web store without having to invest thousands of dollars in stock up front. Traditionally, retailers always had to tie up large sums of money for it shopping of stock.
With dropshipping, you don't have to purchase any product before you have sold it and received payment from the customer. Because you do not have to make large investments in stock in advance, you can start a dropshipping webshop with very little money and the risks are less great. That's why dropshipping also offers opportunities in difficult times.
Running an ecommerce store is much easier if you don't have to deal with physical products. With dropshipping you don't have to worry about:
Because you do not purchase stock and do not manage a warehouse, your overhead costs are quite low. In fact, many successful dropship stores are becoming run from home. You can go a long way with a laptop and around € 100-150 per month for fixed costs. As you grow your costs will of course increase, but your costs are still very low compared to physical stores.
A drop ship business can be run from anywhere in the world as long as you have a good internet connection. After all, you only need to be able to communicate well with your suppliers and customers to run your business.
Since you don't have to pre-purchase the items you sell, you can offer a wide variety of products to your potential customers. If suppliers have an item in stock, you can offer it for sale in your webshop at no extra cost.
With a traditional store, you generally have to do three times the work if you receive three times the orders. If you use dropshipping suppliers, most of the work to process additional orders is done by them. This makes it easier and faster to expand.
Obviously, more sales always involve extra work - especially with regard to customer service - but companies using dropshipping can easily scale up compared to traditional ecommerce businesses.
All the benefits mentioned make dropshipping an attractive business model for both beginners and established store owners. But like all business models, dropshipping also has its drawbacks. In general, convenience and flexibility come with a price tag. We list a number of disadvantages below.
Low margins are the biggest drawback of working with the highly competitive dropshipping model. Since it is so easy to start a dropship store and the overhead costs are minimal, there are many competing companies out there start a webshop and sell products for very low prices to increase their sales. Since they have invested so little in starting the business, they can afford to operate with miniscule margins.
Most of the time, these sellers' websites are of low quality and have poor (or no) customer service. However, customers will always continue to compare their prices with yours. This increase in competition will quickly negatively affect potential profit margins in a particular niche. Fortunately, you can minimize this problem by doing select a niche which is perfectly suited for dropshipping. Furthermore, make sure you distinguish yourself with good customer service.
If you have all the products you sell in stock, it is quite easy to keep track of which items are in stock and which are low. However, if you purchase from different suppliers who also fulfill orders for other merchants, the inventory can change daily. Nowadays there are several apps with which you can improve the stock of your webshop with yours suppliers can synchronize, but these solutions do not always work perfectly and the suppliers do not always have the necessary technology.
If you work with multiple suppliers, as most dropshippers do, the products you sell through your webshop come from different suppliers. That makes your shipping costs more complicated.
Suppose a customer orders three products from you. They are all in stock, but from different suppliers. You have to pay three separate shipping costs to send the products to the customer, but it is not advisable to pass these costs on to the customer, because they think that you are charging way too much shipping costs. And even if you want to pass these costs on to the customer, it will be difficult to do this automatically.
Have you ever been accused of doing something you didn't do, but still had to be accountable for the mistake?
Even the best dropshipping suppliers sometimes make mistakes when handling orders. You must hold yourself responsible for these mistakes and apologize to the customer. Mediocre and poor suppliers will give you a lot of headache by losing products, damaging shipments and using poor quality packaging that can damage a company's reputation.
Unlike at homemade products of print on demand with dropshipping you don't have much control over the product itself. Often the product is designed by the supplier.
With some suppliers you can have changes made to the product and, for example, have your own logo printed on it, but even then the supplier has the most control over the product itself. In any case, you must have a minimum number of orders to ensure that it is profitable for the supplier to respond to these types of requests.
While it is difficult to predict the exact operating costs, there are a number of aspects that every dropship company must spend money on to get started. Be sure to assume a starting capital of around 1000 euros. Below is a brief overview of the most important fixed costs that you will have to deal with every month.
Estimated cost: € 30 per month
You have an e-commerce platform or website builder necessary to create and host your webshop. If you're starting a Shopify store, you can easily sync with the Oberlo marketplace to find products. You also get access to a extensive collection of themes and free marketing tools to get your business up and running quickly.
Estimated cost: € 5-20 per year
It is difficult to instill trust with your customers if you do not have your own domain name. We recommend a .com domain name that matches your brand. Find out how to can come up with a catchy company name.
Estimated cost: Variable
While you don't have much to do with the products themselves with dropshipping, you do need to set aside money and time to test the products you want to sell. If you don't, you may be placing a product in your webshop with too many shortcomings or defects, which will make your customers dissatisfied and you spend a lot of time dealing with returns.
Estimated cost: Costs increase as your business grows. We recommend a minimum budget of $ 500 to get started.
Every ecommerce business should look for ways to lower the average cost of bringing in a customer through organic channels such as content marketing, Search Engine Optimization and word of mouth. But in the beginning, online advertising is often an essential channel for most product-based businesses. The most common channels are search engine marketing (SEM), display ads, social media ads and mobile ads.
In addition to all these costs, you will also have to take into account the costs of providing customer service, the purchase price of the products at the supplier and product liability insurance (often part of corporate liability insurance). Consult an expert to find out what risks to cover at a drop ship company and what to look out for.
If you want to make a profit from your dropshipping business, it is a good idea to calculate how much it will cost you to bring in a customer and price your products with all these costs in mind.
In fact, dropshipping is just a fulfillment model used by many retailers worldwide, and completely legal. As with any business, you will only be able to build a business that is successful over the long term if you meet or exceed the expectations of your customers and build a brand that targets the right audience.
The question of whether it is legitimate often arises from a misunderstanding of how dropshipping works and from the negative image created by dropshippers acting negligently. Most brick-and-mortar stores you visit probably also don't sell products they manufacture themselves. In fact, dropshipping is nothing more and nothing less than a fulfillment model for an online business.
Obviously, there are a few basic things you must adhere to in order to run your business legally. Consult a lawyer who specializes in this topic to ensure that you are running your business legally.
As we mentioned, dropshipping is not a perfect or stress-free way to build a successful business in one fell swoop: you will always have to work hard first when starting a new business. The dropship model has a number of major advantages, but it also has disadvantages that you have to learn to deal with.
The good news is that you can solve most of these problems with good planning and detailed pros and cons. Then it is certainly possible to run a growing and profitable dropshipping business and reap the benefits of your hard work.
This is a translation of an original blog by Corey Ferreira