Dropshipping is a business where you forward a customer’s order to a manufacturer or vendor instead of sending the product from your own inventory store. They send it to them on your behalf and then bill you. Usually, it bears your branding, so the customer thinks it came directly from you.
You can get involved in dropshipping in one of two ways. You can be the shipper, holding inventory, taking orders, and shipping the items on behalf of another retailer. Alternatively, you can act as the retailer, transmitting the order to a supplier for shipping.
Dropshipping is becoming an increasingly common fulfillment method regardless of whether it’s being used as a way to test a new product line, a lifeline for when stock runs low, or your business’ core method.
Most of the advantages of dropshipping involve the ability to reduce costs in key retail business areas and the ease of setup.
No need to store or buy items upfront
You never actually touch the inventory sold. You don’t need to purchase it upfront, store it, package it, or ship it. You can use dropshipping to test new products or as something to fall back on if you sell more than you have in stock.
Most organizations begin with a pure dropshipping model because it’s easier to set up. What’s more, they don’t need to concern themselves with storage. They need to find a supplier for the service once they’ve defined a niche.
Businesses can start their search on Google or Alibaba.com if they don’t already know an entity that can provide this service. This is followed by a pricing agreement, where the business tries to make sure it’s not undercutting its retail side and is still in the black despite the wholesaler’s charges.
The next step is to market the business. Having a well-developed dropshipping website is crucial in this context.
Dropshipping is easier to set up than selling only via retail channels.
Wide product range and flexibility
You can manage a dropshipping business from anywhere in the world. This gives you the flexibility to outsource work processes overseas if you want. You can also sell any product you wish because you’re only listing other businesses’ products and testing what sells well and what doesn’t.
Your overhead is low because you’re neither managing a storage facility nor buying inventory. As your business grows, overhead costs will rise as well, but they will still be lower than those of a more traditional online store or a physical venue.
The business is easier to grow
In traditional sectors, twice the sales mean twice the work. If you have a dropshipping business, on the other hand, the supplier deals with higher orders and volumes. You can grow a business unobstructed because you don’t have to hire more people.
The downsides of dropshipping involve more limited control over branding and quality, lower margins, and customer satisfaction and service issues.
Mediating between your business and your supplier or suppliers takes a lot of effort. It can lead to customer satisfaction issues. You don’t have full control over the transactions, and handling customer service issues can get stressful.
It’s challenging to give shipping updates, especially if the supplier has more than one warehouse and they are all shipping different order components, arriving via different delivery persons and at different times.
The biggest financial downside of dropshipping is the lower margin because the supplier frequently charges extra for branding. If this happens, you need to consider whether to increase prices, which might scare customers away. The alternative is to establish a loyal customer base first, but then, you’ll reckon with lower margins at the beginning. With time, you can gradually increase prices.
It’s hard to keep track of shipping costs, especially when you’re working with several suppliers. It then also becomes hard to decide how much to charge customers. You either include some costs in the item price or increase your shipping prices.
Issues with tracking inventory
It’s easy to track inventory when stocking your own products, particularly if you integrate a retail management platform. It’s hard to keep an eye on stock when you introduce multiple warehouses, which are managed by other entities.