If you\’ve ever been interested in starting your own e-Commerce business, you\’ve probably heard of the term \”dropshipping\”. It is a modern e-commerce business model that requires little financial investment to start with.
The practice of dropshipping was first introduced around 1928, but it lost strength due to the Great Depression. Toyota then implemented the Just-In-Time (JIT) supply chain in the 1950s. The benefits of JIT inventory management quickly became apparent. Such a modern business model eliminated the costs of transporting inventory and storing them by retailers.
Nowadays, dropshipping began to gain popularity as an effective eCommerce business model in 2006, when AliExpress became more and more popular in the United States.
At that time, few entrepreneurs were able to answer the question: what is dropshipping? As a result, only a few savvy sellers were able to take advantage of the low prices offered by AliExpress to run their online store as dropshipping.
Currently, it is estimated that over 30% of all online stores are based on the dropshipping model. The market is valued at USD 162.44 billion in 2019. Analysts estimate that by 2027 it will reach over USD 590 billion.
In this guide, we\’ll look at the definition of dropshipping, its pros and cons. We will also learn the most common myths and opinions about dropshipping.
What is dropshipping
Dropshipping is an online retail order fulfillment model where, instead of stocking products in your store, you buy them directly from suppliers (when purchased by your customers) and ship them directly to your customers.
Dropshipping is when products are shipped directly from the manufacturer / wholesaler to the customer. The retailer performs dropshipping through its website and digital marketing activities. In such a situation, it is able to profit from the margin generated by circumventing the traditional retail supply chain. With this online business model, you don\’t have to deal with many issues related to your sales organization:
- finding a warehouse,
- storing goods and maintaining stock levels,
- the implementation of the shipment of products.
What makes this model attractive to entrepreneurs is the fact that it is easier to set up and run than other types of e-Commerce business models. In addition, it requires less start-up capital as overheads are passed on to the supplier / wholesaler.
Basically, you act as an intermediary – you bridge the gap between customers and wholesalers. Like any business model, dropshipping has its pros and cons. Let\’s find out what are the possibilities and limitations of this model of online trading.
Advantages of dropshipping
As you might guess, running a dropshipping business has many advantages over a conventional online store based on product inventory. The main advantages of dropshipping are:
- Easy commissioning
You can set up your online store in three easy steps. All you need to do is identify your products, partner with a good third-party supplier, set up your online store, and put your products on sale. Even if you are new to e-commerce, you can easily understand and implement this model.
- Low start-up and running cost
You don\’t have to pay for the production of your own products or buy goods in bulk. You can start selling almost immediately, without large investments – the perfect scenario for beginners and new entrepreneurs.
Even as your business grows, your costs will be quite low. By choosing dropshipping, you can reconfigure your supply chain to remove the cost (and risk) of shipping physical goods from different countries and continents. You will save on the costs of transportation services, port operations, warehouse maintenance, warehouse workers, packaging and labeling.
- Low business risk
You don\’t keep inventory in stock, you are not under sales pressure and you don\’t have to worry about out-of-date inventory. Whether you\’re selling products or not, you really have nothing to lose – you just won\’t earn any money.
- Access to an unlimited range
You decide how many products you want to sell. Regardless of your niche, you\’ll find a dropshipping supplier for every product. You have access to a virtually unlimited number of suppliers around the world. It can easily sell abroad.
- More time and resources to scale your store
Your supplier packs and ships products to customers, and you earn. This means lower overheads and more time to develop your online store.
- Better cash flow
Typically, retailers buy products, wait for them to arrive, and then sell them to customers. For a time, they spent a considerable amount of money without the possibility of recovering it. With dropshipping, you get paid for your products at the same time as you pay your suppliers – or earlier. This frees up money for marketing and development.
- Real-time market tests
If any of your products are still not selling despite your great marketing efforts, it means you can remove them from your offer immediately. Analyze and adapt your products to market demand in real time.
Disadvantages of dropshipping
Business in the form of dropshipping may seem like a very beneficial solution for an e-Commerce company, but not for everyone. Before you decide to start dropshipping, learn about the disadvantages of this online business model:
- Low profit margin
One of the disadvantages of dropshipping is that you will have low margins initially. When you start out, you won\’t have the volume required to offer significant discounts. This does not mean that dropshipping is not profitable, but you should be aware that the product margin in some niches may be small.
- Less control = different risks
You don\’t have much control over some aspects of the dropshipping process, such as the supply chain, product storage, order fulfillment, and shipping. For example, if suppliers pack the goods incorrectly or do not deliver on time, you will have to smooth out all difficult situations with customers.
In the case of dropshipping shipping, there is usually no place for personalized packaging, freebies attached to the order – attributes that increase customer satisfaction. In addition, you have no control over your inventory, which can lead to order cancellations or delays in delivery when you sell products that are out of stock with your supplier.
These issues can arise – especially in the early stages of new partnerships, so make sure you choose a reliable partner early on.
- Highly competitive market
It takes very little capital to start a dropshipping business, this low entry barrier means a lot of competition, and the most popular markets suffer more than others. Basically, the larger the company, the more it can reduce its margins to offer the lowest prices.
Worse, chances are you don\’t have an exclusive contract with your suppliers. This means that any number of competitors can sell exactly the same products. And if you\’re just starting out, your rivals with decades of experience have the resources to lower their selling prices when necessary. This means that customers can buy exactly the same from someone else but at a lower price.
- It\’s hard to create a unique value / USP (brand building)
You will need to be careful about how you \’create value‘ for your dropshipping business. As long as you combine buyers with a wholesaler, you are providing relatively little value. If you add branding, quality assurance, customer service, convenience, etc., then you are in a better position.
- Ease of copying
You\’ll have to build your own added value over time, but especially in the early stages, you\’ll be really easy to copy. If or when you start selling, it\’s best to keep quiet.
Dropshipping: opinions and myths
There are many myths about dropshipping that can make people starting their dropshipping adventure feel overwhelmed, frustrated and disappointed when they take the initial steps.
Below, I debunk myths about dropshipping and present all the facts so that you know what you are actually doing.
- Source of quick earnings (passive income)
It is widely believed that dropshipping is a viable get-rich-quick scheme. Successful dropshipping requires studying and testing proven strategies, and this takes a lot of time. While there may be some amazing success stories overnight, but these stories are rare.
- Everyone is successful in dropshipping
It is true that anyone can start a dropshipping business. But for this to work, it takes a person with exceptional abilities. Successful ones focused on the process, not the result of their actions – success (more often the lack of it).
By focusing on the process, you will patiently take the time to experiment, try different dropshipping tactics, and test a range of products. If you focus only on the results, you will be very disappointed when the first few ads fail, leading you to give up in front of the people focused on the process to achieve the results you want.
- Dropshipping is easy
A popular myth about dropshipping is that if you build an online store and run one ad, customers will start buying in bulk from it. This is a fiction that will not happen. The more effort you put into product selection, store design, and digital marketing, the more money you\’ll earn in the long term.
People mistakenly think it\’s easy because they see the end result. However, there are months of experimentation and failure ahead of the big payoff.
- Niche matters
Many people will find that the niche in which you operate is the most important, but the products you sell are definitely more important. There are two ways, you can either sell a narrow assortment or go to a wide assortment store.
If your goal is to build a blog (your focus is on SEO strategy at the same time) and generate the right traffic, having a general store is likely to be a bad idea. However, if your marketing strategy uses advertising or social media marketing, you can add products that go beyond a single niche and be successful.
- Elimination of intermediaries
While it\’s common for a product manufacturer to be a mail order company, some wholesale distributors also offer shipping for products they have purchased from the manufacturer. This means that the wholesaler will add a profit margin to the unit cost of the producer and thus limit the potential profit. A broker can be an attractive partner if it deals with returns, offers additional services, or otherwise adds value to the products you sell.
Dropshipping is a great way to earn money online, but it takes patience and hard work. The more you experiment and optimize, the closer you will be to achieving sales success. It will not be easy, and you will have to learn a lot.