If you are a new business owner wanting to break into the lucrative world of e-commerce, you have probably heard of the term “dropshipping.” You may understand the basics of how it works to help you sell your merchandise, but the act of dropshipping itself can be intimidating to a business owner selling products online.
What is dropshipping?
Dropshipping allows a company to sell products without needing a warehouse for inventory. Instead, the business owner partners with a dropship supplier who works as a middle-man between the business and the customer. The dropship supplier manufactures, stores, and ships the products to the customer.
Launching a successful e-commerce business is difficult, and growing it sufficiently takes a lot of work. It is expensive to keep items in stock, so dropshipping allows you to purchase the item from a third-party manufacturer or wholesaler who has it stocked in a warehouse, and then they ship it directly to the customer. Read on to learn all about dropshipping and how it works.
How Does Dropshipping Work?
Dropshipping allows you to sell products from anywhere at any time. As long as you have an e-commerce website and an internet connection, you can sell products to your customers. When using this type of business model, you – the seller – never handle the product directly. Instead, there are these steps in which it gets to your customer:
- Your customer places an order for a product through your website.
- You forward the order to your dropship supplier.
- The dropship supplier, who has the product in his or her warehouse, packages and ships the product directly to the customer under your name.
Seems simple enough, right? It essentially eliminates the need for you to pay for a physical business location or warehouse to store all of the inventory you are selling on your e-commerce web page. It may seem like you can begin dropshipping right away since all you need is a laptop and internet connection, but there are pros and cons.
Basically, you are fulfilling orders for your customers while other people are keeping the inventory in stock for you. This is certainly not a get-rich-quick business structure, but with little risk and financial investment, it can be the perfect way for an aspiring entrepreneur to start and grow a successful e-commerce company.
There Is Little Financial Risk with Dropshipping
Dropshipping is a helpful business model for individuals who are aspiring to be an entrepreneur but simply do not have the capital to start a business. Investing in a storefront or warehouse costs, along with purchasing inventory, costs thousands upon thousands of dollars. With dropshipping, you do not purchase a product until it is sold.
Since dropshipping eliminates the need for purchasing inventory and setting up retail operations, it makes the risk of starting a dropshipping company quite low.
- You do not have any high up-front costs in a physical location or inventory, so you can start sourcing your products with the small investment of running your e-commerce website.
- You have little overhead because you do not have to purchase inventory or manage a warehouse.
- Many prosperous dropshipping companies are run out of one’s home, which also gives you a few tax write-offs for a home-based business. But, you also have the flexibility to run the business from anywhere at any time with the internet.
If your business does not sell anything on your website, you do not lose anything. You are not pressured to sell your inventory since you have not invested any of your own money into it. You also alleviate the risk of items being damaged during shipping since the products go directly from the supplier to the customer with fewer steps involved.
Easier to Start, Test, Scale, and Improve
Running an e-commerce company through dropshipping is much easier to start when you do not have to deal with any physical inventory. It simply requires you to find a supplier, set up your e-commerce website, and then start selling the inventory on your site. You do not have to worry about any of the hassles of starting a new company:
- No paying or managing a warehouse
- No packing, shipping, and tracking orders
- No handling returns or damaged items
- No managing of the stock level or having to continuously order products
You also have the flexibility to test different products since you have such a wide selection of items to sell. Since you are not purchasing any products beforehand, you can offer an assortment of products and test them to see what sells and what does not. You are essentially listing potential products before committing to investing in them.
If you see a product selling off the shelves, you can rely on that one lucrative product. If you want to sell several different products at once, you can do that as well. You can even find a niche that you believe in, such as bath products or pet toys, design your website around that niche, and then have fun watching the products sell to customers.
Since you are not running a traditional brick-and-mortar business, you do not need to work three times as hard when you are selling three times as much product. Most of the work of processing additional orders will be on the dropshipper. You will simply be sending the additional orders to the dropshipper either manually or automatically.
There Are Some Disadvantages
Dropshipping does have some disadvantages, and probably the biggest one is the lower profit margins involved with this business model. Everything comes at a price, and your profit margins may be lower due to the prices vendors may charge for dropshipping your products. This gets worse if you are dealing with multiple shippers for inventory.
Margins are also affected because the level of competition is much higher since starting a dropshipping store is so easy. You also may be competing with dropshipping businesses that are selling inventory so low that it is difficult for you to compete with them. This is why building a niche market is so ideal when it comes to dropshipping.
Even though you are not shipping the products on your website directly to the customer, there may still be shipping issues and complexities. Selling from different suppliers may seem lucrative, but if you are dealing with multiple suppliers, which is common in dropshipping, this will make your shipping costs more complicated.
If a customer orders different items from your site that are from different shippers, this convolutes things even more. Just picture this scenario:
- A customer purchases four items from your e-commerce site
- All four items must be shipped from four different suppliers
- You will now incur four different shipping charges for sending each item to the same customer
Since it is not good business sense to charge the customer for these shipping charges, you will need to automate these calculations and cover the cost. This means it is up to you to work out and pay the shipping costs, which, in turn, come out of your own profit margin. This confusion gets even worse when you are keeping track of your inventory.
Is dropshipping right for you?
Dropshipping can be an easy way to start an e-commerce company because there is very little investment beyond setting up your website. It is a great business model for a first-time seller who wants to try out online selling without the risk of setting up a brick-and-mortar location and purchasing inventory that may never sell. The gamble is low.
However, you must go into dropshipping with the knowledge that you may not make millions. There is a lot that can affect your profit margins, from the low-balling competition and supplier charges to shipping issues and costs. Finding your niche and then focusing on that could be the perfect way to successfully dropship for your business.