Dropshipping - What You Need to Know
If you’re the owner of an ecommerce business, by now you’ve likely heard of dropshipping.
Dropshipping refers to a method of retail fulfillment in which, upon receiving an order, a retailer purchases an item from a third party and has it shipped to the customer, rather than keeping its own inventory. The seller never actually handles any of the product themselves.
This may seem like a great option, with a lot less hassle to the small business owner. But be warned: dropshipping comes with its own inherent problems, and it’s important to proceed with caution. The bottom line: it’s very difficult to make a profit with dropshipping, especially if you don’t have experience in the field. In this article, we’ll go over some of the things to keep in mind if you’re curious about whether dropshipping might be a viable option for your online retailer.
Advantages of Dropshipping
First, let’s go over the things that might make dropshipping attractive to the small business owner:
Less money required upfront. The products are purchased as-needed, and the lack of inventory means that there’s far less of an investment upfront to the business. Typically, one of the largest expenses for a new business is actually purchasing the product they’re selling and finding a space to house it. With dropshipping, since you’re not actually handling the product yourself, it’s possible to start your own business with very little money.
Lower overhead. This ties in with the last one - since you won’t be managing inventory or storage space, in theory it’s possible to run a business with little more than a laptop and a website. Very few additional employees will be required, if any.
Less accounting for growth required. Most of the work that comes with dealing with an increased number of orders is handled by the manufacturer. You’ll have to deal with an increased number of customer service issues, but from an actual production and shipping standpoint, very little effort is required on your end.
Location doesn’t matter. You can run a dropshipping business from pretty much anywhere with an internet connection, since all that’s required is your online storefront and management of customer emails.
This all sounds pretty great, right? Sure, but in reality, these benefits come with a whole host of downsides that, in many cases, can result in low profits, angry customers, and other assorted headaches for your business.
The Dark Side of Dropshipping
While the benefits listed above may make dropshipping seem attractive to the small business owner, many businesses using a dropshipping model fail to make a profit. There are a few reasons for this, including:
The bottom line is, it’s extremely difficult to make money through dropshipping due to its super low margins. While the lower cost of shipping and lack of inventory means you can sell products at ridiculously low prices, this also means that you have to sell a LOT just to make a profit. Since the cost of starting a dropshipping business is so low, it’s also likely that others will already have found their way to your niche already, and their competition will drive profit margins down even further.
When it comes down to it, dropshipping is a brute force numbers game. The most successful dropshipping companies will spend thousands of dollars testing hundreds of products, and most smaller businesses just don’t have that kind of money to throw around.
The success of a dropshipping-style model of fulfillment is not only based on how you well you build your niche audience, it’s also partially based on sheer dumb luck. You may have lots of great products that you love and think will sell well, only to receive a lukewarm response from actual customers. Or you may have a niche or product that really blows up - but this happens in only a very small number of cases and certainly can’t be relied on, regardless of how you might personally feel about the appeal of your product.
Shipping Will Be a Major Issue
Most dropshippers make sales because their products are cheaper than others on the market, due to the fact that they’re selling products straight from the manufacturer. Unfortunately, since they’re not handling the products themselves, quality control becomes that much harder. Customers are more likely to receive damaged goods, or not receive them at all. Dropshipping suppliers will inevitably make mistakes, and since your business is the one people are actually interacting with to order the products, you’ll likely be blamed for unfulfilled orders and subpar packaging.
While customers may find the cheaper costs of your products appealing, they will likely not feel the same way about average shipping times of several weeks or even months. One way to mitigate this is to enable sophisticated tracking with all your products, but even then, mistakes happen.
If you’re not equipped to handle the inevitable headache of irate customers with damaged products or demanding refunds, then dropshipping is not for you.
No Control Over Inventory
When you stock your own items, it’s much easier to keep track of how many are available. With dropshipping, since you’re sourcing your products from a third party supplier, this becomes much more difficult to gauge. Depending on the supplier you use, it may not be possible to sync your online store’s display with the actual availability of products at the supplier’s warehouse, leading to misinformation and customer dissatisfaction.
Some Platforms Don’t Like Dropshipping
While dropshipping’s low prices may make it appealing, some ecommerce platforms aren’t so hot on the practice. Platforms like Woocommerce and Shopify often include specific limitations for businesses who utilize dropshipping. With Shopify dropshipping, you may find a portion of your sales withheld for up to 90 days to allow for refunds. PayPal might freeze your account for months while they verify your business operations.
The best way to deal with these limitations is to keep your refunds as low as possible - but again, since you’re not handling the products yourself and have very little control over the shipping process, this may prove to be quite difficult. Refunds are simply a fact of life when it comes to dropshipping, due to long shipping times and sometimes-unreliable quality.
So, is it worth all the hassle?
Well, dropshipping may be useful for businesses with very little money looking to make a few bucks to start out with, or those who wish to test the waters with a truly niche product. But in the long run, if you’re really looking to build a successful, lasting business without relying on cheap fads or cutting corners, most of the time it will be much better to stock your own inventory. This will allow you to keep profit margins higher, as well as give you greater control over your products and their shipping times.
Of course, there are always exceptions. A small number of businesses have done very well for themselves using a dropshipping model - though this is rare, and for every example you’ll find hundreds of other stores that have failed. Either way, it’s best to be as informed as possible. If you keep the above tips in mind, you’ll have a better idea of what to expect, and you’ll be that much more prepared for whatever method of retail fulfillment you choose.