Last updated on September 22, 2020
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Dropshipping is an order fulfillment method that enables you to sell products without holding inventory or purchasing products up-front. Instead, when a product sells, you buy it from a third party that will ship the item directly to the customer. The third-party can be a manufacturer, wholesaler, or another retailer. Dropshipping removes the fears and costs associated with buying and carrying inventory that may not sell. Separation from supply chain management, inventory, and order fulfillment differentiate dropshipping from traditional retail models.
Dropshipping, by itself, isn’t a business. It’s one aspect of running an online store. It’s critical to realize that because you’ll need a robust understanding of online retail to achieve your goals and sales targets. For instance, you must have an excellent marketing plan to attract enough buyers. If you don’t understand marketing or must improve your skills, you should take an ecommerce-centric marketing course.
Dropshipping appears to be a hands-off business with many benefits. However, retail and ecommerce are more complicated and getting more challenging by the day. For instance, Amazon is one reason traditional and online retailers are constantly being upended and disrupted. Quick delivery times, autonomous delivery vehicles, and other innovations are pushing its competitors out of business, including Barneys, Charlotte Russe, Gymboree, Sears, and others.
Dropshipping is a legit model that works for many retailers, but it has drawbacks. Let’s explore the truth about drop shipping by understanding its advantages and disadvantages. Tips and resources will follow each obstacle to help you flourish.
Pros & Cons of Dropshipping
Advantages of Dropshipping
Dropshipping requires a low investment/cost to start and operate. A website and hosting are all you need to launch a dropshipping business. More of the same is required to maintain it. Therefore, you can keep overhead and expenses to a minimum. By contrast, a bricks and mortar retail store involves the lease of a physical location, insurance, inventory, a point-of-sale system, employees, security, cleaning services, and more. Where a dropshipping business can cost less than $10 monthly, traditional retailers will spend hundreds to thousands regularly.
Dropshipping is a low-risk venture. One of the most significant risks in retail concerns inventory. Many retailers often write-down and write-off goods that don’t sell because of supply chain issues, inaccurate forecasts, changes in consumer demand, damages, bad publicity, recalls, and so forth. Since dropshipping is an inventory-free business model, inventory risks remain with suppliers. That makes dropshipping an excellent option for risk-averse individuals. Secondly, avoiding inventory risks enables sellers to take calculated bets in other areas, for instance, hiring a marketing agency to produce an edgy campaign.
Dropshipping is relatively effortless. It requires mainly research, marketing, and site management, which is much easier and less time-consuming than other online business endeavors, for example, blogging or scaling a software company.
Multiple sites and channels are available to sell products. You can create a store and sell products with ecommerce software like Shopify. You can also sell on marketplaces like eBay. Retailing on Amazon is possible too, but it has guidelines for dropshippers. Although many sellers use websites and online markets, social media channels are another option, for instance, Instagram and Facebook.
Product selection is in the hundreds of millions. Popular dropshipping portals, such as AliExpress, Oberlo, and Wholesale2b, typically have 25+ product categories and hundreds of subcategories. Products of varying colors, sizes, models, prices, and ratings are available in each subcategory. Regardless of the niche you pursue, there are bound to be items to sell. Read Picking Products to Dropship.
Dropshippers enjoy excellent product flexibility. A drop shipper can freely change the products she decides to sell, without concern for inventory levels. By contrast, traditional retailers often keep low-turnover products on their sites to sell through the existing stock. Keeping slow-moving products listed hinders the sales of other goods.
Purchase orders can be small. Most suppliers allow dropshippers to buy one unit to fulfill a customer order. The benefit of not having purchase order minimums will free up cash to allocate elsewhere, for example, to search engine marketing (SEM) campaigns.
Suppliers range in the millions. A robust landscape of manufacturers, wholesalers, and B2B sellers support dropshipping retailers. On many websites, suppliers have business profiles, product pages, and feedback scores. Those details make it straightforward to find and buy goods from reputable merchants. Although many sellers default to sourcing products from China, suppliers are available globally and even in your backyard. Suppose you live in Canada. You could partner with a local supplier that will send goods to customers.
Thousands of marketers are available to help promote your store. Affiliate marketing is a performance-based advertising model. An affiliate (publisher) promotes a product or service online and receives compensation for achieving a specific objective or action. A merchant (advertiser) specifies the goal, which is usually a valid sale. For example, the merchant will pay an affiliate a 30 percent sales commission. The merchant may use one or multiple cost per action (CPA) and compensation arrangements, such as cost per sale (CPS) and cost per lead (CPL). These are also known as pay per sale and pay per lead. Affordable and reliable affiliate software tracking apps include iDevAffiliate, Tapfiliate, and ShareASale, which is a popular affiliate network.
There are plenty of free, freemium, and paid tools to support sellers. “Tools” are products and apps that improve and sustain an online business. There are thousands of apps and integrations for popular online store software. For example, Omnisend is an email marketing app for online retailers, whereas Printify is a print-on-demand platform that streamlines working with multiple print providers worldwide. Tools fall into many categories, from conversion to reporting to productivity, to name a few.
Sellers can learn while they earn through excellent instructional content. In this post, I highlight the best dropshipping courses, tutorials, and resources. For instance, Shopify’s Dropshipping 101 course. You’ll learn the basics alongside how to succeed with your store. Dropshipping courses typically cover things like product selection, dealing with suppliers, handling returns, and more.
Help is a click away. Freelancers, experts, and agencies are available on freelance marketplaces, such as Fiverr and Upwork. Shopify also has a directory of experts. From content writing to product photography to store setup, specialists are available to help with operations, marketing, and sales.
Ecommerce is still untapped. Online retail sales only make up a small percentage of retail sales worldwide. Given that ecommerce is convenient, frictionless, and growing exponentially, it’s arguably easier to get people to visit a website than a physical location.
Dropshipping produces passive income. Passive income is income that requires little to no effort to earn and maintain. What makes ecommerce passive is that sales can occur while you’re awake or asleep. Also, most of the hard work—supply chain management, inventory, order fulfillment, shipping, etc.—belongs to suppliers. Therefore, you can mostly focus on product selection, marketing, and sales, which don’t have to be tedious. You can also automate many marketing and sales activities with various ecommerce apps.
Disadvantages of Dropshipping
Retail is highly competitive and cutthroat. Although ecommerce offers plenty of opportunities, there are millions of online stores with a handful dominating the space. For example, Amazon has a significant ecommerce market share in the United States. Moreover, most of its competitors hover around the low single digits, including eBay, Walmart, and Best Buy. There are, of course, millions of offline retailers to compete with too. Dropshipper or not, the challenge for new entrants is to gain enough customers to remain in business.
Tip: Competition is almost everywhere (unless you have a monopoly or are a part of an oligopoly). You can compete by doing things differently, thinking outside of the box, and creating unique customer experiences. Secondly, consider “red ocean” and “blue ocean” concepts. In red oceans, companies try to outperform their rivals to grab a more significant share of existing demand. As the market space gets crowded, profits and growth are reduced. Products become commodities, leading to a cutthroat or ‘bloody’ competition. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. A blue ocean is an analogy to describe the broader and deeper potential that’s available in unchartered and new markets.
Paid advertising is almost always a must. Unless you’re selling a unique product or targeting a small niche, you’ll likely have to spend hundreds to thousands monthly on advertising to get enough traffic. That applies to online retailers across the board. Organic search results are shrinking and compete against numerous panels/distractions; for example, Google’s “People also ask” and featured snippets. On Facebook, organic reach is a shell of its former self. Therefore, you must be willing to spend on advertising, or your business will likely fail.
Helpful resources: Google Ads for Ecommerce and Facebook Ads for Beginners: Retention and Loyalty courses.
Adding value as a drop shipper can be challenging. Many individuals worldwide buy from AliExpress directly, including Russian and Brazilian shoppers. They may also purchase goods at low prices from wholesalers like Costco or local equivalents. Those considerations erode the value propositions of dropshippers who use AliExpress to serve the same markets. As intermediaries, dropshippers can also slow down the process by a few clicks in the purchase cycle.
Tip: Dropshippers who provide user-friendly websites, beautiful layouts, robust customer service, convenient return policies, and various payment options add value to customers. Ultimately, dropshippers must stay ahead of the value curve to attract and retain customers.
Helpful resource: Picking Products to Dropship: Ways to Add Value
Brand recognition is hard to build. It isn’t easy to create and grow a brand when a company’s products come from dropship suppliers that also concentrate on differentiating themselves. By contrast, when a retailer owns its supply chain and order fulfillment processes, it can better control its brand from manufacturing to delivery.
Tip: Many suppliers accept special shipping instructions and even inserts. Secondly, consider how you can make order fulfillment activities consistent among your suppliers.
Helpful resource: How to Design Your Online Store
There are enormous price and profit pressures. Dropshippers pay much more per unit compared to sellers who purchase in bulk. That pitfall results in dropshippers remaining competitive on price while accepting lower profit margins. Dropshippers also increase their exposure to fluctuations and spikes in costs by purchasing items one at a time.
Tip: Dropshipping doesn’t have to be an all or nothing decision. As you sell products, perhaps you can bulk buy and carry a few of your bestselling items to reduce the average cost of units.
Supplier delivery times may turn off shoppers. Most dropshippers will deliver goods in weeks or months, depending on where they must ship products, for example, locally or internationally. Those delivery schedules won’t cut it in the current ecommerce landscape of instant gratification and same-day-delivery. Unfortunately, the slightest lag in delivery times will motivate many shoppers to look elsewhere, even if they must pay a premium to get their goods faster.
Tip: Consider carrying enough inventory, a few units of your bestselling items, to quicken local delivery times.
Product returns are a complicated matter for dropshippers. Returns are relatively easy for Amazon customers who repackage items and mail them back. Many online sellers follow Amazon’s process to reduce headaches. By contrast, drop shipped products can be a hassle to return to a third-party, and especially one that operates in a foreign country/different language.
Tip: Review the return policies of comparable online stores in your niche. Also, remember that creating positive customer experiences should be your top priority (not making money). Thus, consider how you can make returning goods as hassle-free as possible.
Helpful resource: How to Manage Returns with Drop Shippers
Product images from suppliers can hit or miss. Most suppliers aren’t product photography specialists, and many only provide photos for the sake of offering something. Therefore, retailers will almost always have to take product photos themselves. That requires ordering the product, taking pictures of it, and perhaps some photo editing. Alternatively, retailers can hire product photography experts and agencies to do the work.
Helpful resource: Product Photography for Ecommerce
Dropshippers must depend heavily on others. The dropshipping business model requires a lot of trust and faith in people who you likely don’t know and have never met. While suppliers are as motivated as you to make money, that doesn’t mean they’re as reliable or hard working. All it takes to fail are one or two subpar suppliers that can’t get their activities to align with your demands and expectations. With so much competition in retail, mistakes will quickly lead to failure.
Tip: Carefully vet suppliers and customer feedback to ensure your partnering with trustworthy and reliable entities. Additionally, do internal reviews to make sure your suppliers are meeting your performance objectives.
Helpful resource: Finding and Working with Suppliers
Dropshippers can’t control product costs. Dropshipping requires you to outsource supply chain management, inventory, and order fulfillment to suppliers. Therefore, you can affect or improve those processes to lower production costs. Regardless of how efficient or inefficient suppliers are, you must take products or leave them at their price points. Conversely, a retailer that’s involved in manufacturing can continually seek ways to drive efficiencies, improve processes, and lower expenses. In reducing costs, the retailer gains pricing advantages and competitiveness.
Tip: There’s not much you can do about supplier pricing, except if you’re willing to buy in small batches or bulk. However, always keep an eye out for lower prices and discounts from other suppliers.
Trade wars can disrupt operations, sales, and profits. Dropshipping favors global economic and political stability. If trade wars become a new normal, the dropshipping model will become subject to more risks. More risks and uncertainties are the last things sellers of any stripe want. Case in point, Trump’s trade war with China, and the world has negatively impacted millions of business owners worldwide. New tariffs and rate increases have hurt commerce between Americans and Chinese businesses and individuals to the tune of billions of dollars. Trump had even threatened to leave a decades-old postal treaty, which would have wreaked havoc on international mailing rates. The matter has since been resolved.
Tip: Keep tabs on relevant news and trends that could impact your business to avoid disruptions and surprises.