Benefits and challenges of dropshipping for online merchants
No overhead and no warehouse, but lots of profit potential. Dropshipping provides a powerful business model for people who want to start an ecommerce business or expand the inventory that their ecommerce business sells at a low price without investing in logistics or storage.
However, this is not a perfect approach to e-commerce. Potential business owners and current marketers who want to use dropshipping should be aware of the pros and cons of this approach.
What is drop shipping?
Dropshipping is a business model where the merchant does not own or store the items they sell. Instead, a network of suppliers provides the items and ships them directly to the merchant’s customers as needed.
The merchant only operates an online storefront, delivers orders and manages frontline customer service, acting as a liaison between customers and suppliers.
The approach allows business owners to run an e-commerce business without having to own a warehouse, manage logistics, or manufacture products. It also allows existing businesses to expand their offerings without investing in additional storage space or logistics capacity.
Benefits of drop shipping
1. Low barrier to entry
A dropshipping business requires very little initial capital to get started. The merchant does not have to worry about buying inventory or manufacturing products or shipping costs. Some authors believe that potential owners can start a new dropshipping business for next to nothing – as little as $ 150.
Finding suppliers is often the hardest part of getting started – and tools like dropshipping supplier directories can make this problem easier. While the merchant will still have to spend on marketing, a website, and an ecommerce platform, the barrier to entry for dropshipping is much lower than for most ecommerce businesses.
2. No inventory management
Since the merchant’s shipping partners manage inventory from manufacture to delivery, the owner won’t have to worry about stocking or shipping inventory.
This means that they can start their business without investing in storage space or having in-depth knowledge of e-commerce logistics. It also means that the owner can ship products that require specialized storage without having to invest in refrigerators or similar storage technology.
3. Low cost of shipping and storage
The dropshipping merchant spends very little on the storage and shipping of goods as a dropshipping business. A typical e-commerce business needs to invest in equipment that allows it to package, label, ship, and track each individual item.
Shipping partners will do this for the dropshipping merchant. All the dropshipper has to do is take action when a customer complains or has a question they cannot answer with the information provided by the shipping partner.
Storage costs won’t be a problem either. Merchants will very rarely, if ever, process goods in-house. The trader will also not have to worry about sourcing in anticipation of customer demand. This means that the dropshipper will not be able to hold obsolete or overstock inventory due to items that will not sell.
Under-storage is also less likely. If a shipping partner is missing a particular item, the dropshipping merchant may be able to partner with another business that still has inventory, providing the same item or a similar product to their customer base.
4. High scalability
One of the most important benefits of dropshipping is the easy scalability of the business model. Dropshipping businesses can easily scale up or down to meet customer demand exactly where they are located. Since the dropshipper’s only management is order management, the hardest parts of an eCommerce business to scale – inventory and logistics – will be outsourced.
If the merchant needs to supply more items to customers, they can just get in touch with a new dropshipping partner or send more orders to a current partner.
This means that it is possible for the business to rapidly scale up and down in response to customer demand.
5. No direct management needed
At first, the owner of a new dropshipping business will not need to manage employees directly. It is usually possible for an individual to run a dropshipping business entirely on their own, communicating with customers and shipping partners as needed.
As their own boss and sole employee, the owner will have full control over office equipment, management styles and hours of work.
Drop shipping challenges
1. Dependence on shipping partners
If a shipping partner makes a mistake, there may not be much the dropshipper can do. Shipping partners may have their own refund and return procedures, may not provide tracking information, and may not offer a wide range of shipping options.
Dropshipping is generally low risk, but the dropshipper still depends on shipping partners to handle sourcing, manufacturing, storage, and shipping. A lot can go wrong between how a product is made and when it gets to the customer – and the dropshipping merchant has very little control over how these steps are handled.
If a customer has a problem or wants a replacement for their item, the merchant can be tricked: responsible for customer service but with little control over resolving the problem.
2. Low returns
The overhead of dropshipping is extremely low, but the profits usually are too. While an owner can make money from dropshipping, profit margins are usually not as high as they would be if the owner took more risks.
Profits for new dropshipping businesses are also generally low due to the small customer base. New businesses typically build their traffic flow from scratch. Since the traffic and profits are directly related to dropshipping, this means that the profits tend to start small.
A new trader may have to cut profits to keep prices competitive. Marketing, advertising, website design, and storefront development are also not free, which can further reduce profit margins.
3. Major competition
The low barrier to entry for dropshipping means that the current market is somewhat saturated. There are a large number of new and existing dropshipping companies in most market niches. Popular markets are even more crowded than others.
Smaller, newer businesses may find it difficult to compete with existing businesses which can generally lower prices more than their competitors, get better deals with suppliers, and offer cheaper prices on most products.
Often, new businesses find themselves in a race to the bottom. Without an existing audience or a unique value proposition they can use to differentiate themselves, they focus on becoming a price leader. As a small business, selling goods at the lowest possible price requires minimizing profits. Without prudence, it is easy to make accounting mistakes and put the business in the red.
4. Fewer customer service options
Customer service options available to ecommerce businesses running their own execution may not be available to a dropshipper.
For example, the company may not be able to ship products with custom packaging with a personalized branding. The business may not be able to include personalized thank you notes, coupons, or advertisements.
This is not true in all cases. Many dropshipping partner companies offer white label or private label agreements. With one of these agreements, the company’s product will be personalized with the company’s branding. It may also be possible with one of these offers – or a similar one – to include personalized touches with each order.
However, this may require a special arrangement with a shipping partner – and not all companies may offer this option.
The appeal of dropshipping for e-commerce businesses
Dropshipping provides an accessible business model for homeowners without a lot of upfront capital. It allows a new business owner to get started with no storage space, no logistics experience or no existing audience. However, the profits from dropshipping can be low, the competition is fierce, and building an audience from scratch can be a serious challenge.
The benefits of dropshipping – the potential profit without overhead or storage – are attractive, but the costs of running a dropshipping business can be too high for many.