Dropshipping is an order fulfilment method that does not require a business to keep products in stock. Rather, then store sells the product and passes on the sales order to a third-party supplier, who then ships the order to the customer.
-Dropshipping can still support you build a successful business, just not as quickly as you’d hoped.
-It’s challenging to maintain a business doing dropshipping alone, let alone start one from scratch.
How does dropshipping work?
With Dropshipping, products are sent directly from your wholesaler to your customer.
step - 1 Your customer place an order from your online store.
step - 2 Your store automatically sends the order to your dropshipping supplier.
step - 3 Your dropshipping supplier prepares your customer's order.
step - 4 Your dropshipping supplier ships the order directly to your customer.
5 Harsh Facts About Dropshipping No One Talks About
1. Low-profit margins.
Sure, since you don’t have to manage or store your inventory, the overhead is low — but so are the returns.
You place less money in, but you get less money out. That implies you have to do a lot of business just to stay afloat, let alone turn a profit.
According to Fit Small Business, you can predict your earnings using these variables :
- 20% margin.
- 2% conversion rate.
- Possibilities are, your discount on buying from manufacturers and wholesalers will be less than 20%.
- This doesn’t account for any of the extra expenses mentioned above that you have to pay from your end. It’s not the final profit.
- For most maximum products, you’ll have to cut into your profits to keep your sales prices competitive. If you persistently hold on to your 20% margin, other companies will easily undercut you.
It’s much more flexible to approach dropshipping when you already have a regular source of traffic.
2. Highly competitive.
There will always be overly optimistic entrepreneurs who focus solely on the “low overhead” part, ignoring the clear evidence above.
The extremely small capital is needed to start a dropshipping business, that deep barrier to approach means a lot of competition, with the most popular markets suffering more than others.
Basically, the larger a company is, the more they can reduce their markups to offer the lowest prices.
That means customers can get the same thing from someone else for cheaper — why would they buy from you?
3. No control over supply-chain.
In standard eCommerce, if customers complain about product quality, fulfilment speed, or return policies, you can address the problems yourself.
In dropshipping, you’re more or small at the mercy of your supplier — but you’re the one who still has to talk to your customers directly.
And if they’re vocal about it, those bad reports early on could end your business before it even starts.
4. Legal liability issues.
Although this isn’t a universal problem for dropshippers, it’s worth mentioning. Any suppliers aren’t as legitimate as they claim, and you don’t always know where the merchandise comes from.
It’s something you’ll want to keep in mind when choosing suppliers.
5. Difficult to build a brand.
Dropshippers must know that the credit for their work goes to someone else.
If whatever product you’re trading is so unusual, your customers are going to focus mostly on the product’s brand and forget about the shopping experience entirely.
After all, it’s not your logo on the box.
The Right Approaches to Dropshipping
1. Market research.
Dropshipping controls better as a means to an end, not the end itself.
Rather than asking your inventory costs by packing your warehouse with an unpredictable product, test it out with a trial period using dropshipping.
More than just discovering if it sells or not, you’ll also have a better estimate of how much it sells for, giving you a more accurate number of what quantity to buy for your initial stock.
That could be hit-or-miss, but you can always test the water by dropshipping a few products and see how it goes.
2. Protection from overselling.
Experienced eCommerce brands know those market variations aren’t always predictable.
Rather than increasing inventory costs by overstocking to meet unlikely maximums, having a dropshipping supplier as a backup saves you money without losing those sales.
If something like a natural disaster happens to your warehouse, you can still fulfil pre-made orders by dropshipping the products from elsewhere.
The same holds for side-stepping surprise shipping delays.
3. Strategic shipping systems.
One unfortunate consequence of growing your business is shipping complications.
The farther out you get from your warehouse or fulfilment centres, the more shipping fees you’ll incur.
Dropshipping can be an excellent solution for some problematic locations that fall outside your profitable regions.
- Maybe shipping that far costs too much, or maybe storage prices are too high to justify setting up a new shipping centre.
- Maybe it’s an issue of taxes or extra fees, like when shipping out of the state or country. Relying on dropshipping for these select areas could be a certain factor in keeping you out of the red.
4. High-maintenance products.
Any products cost more to stock and ship than others.
What do we mean by high-maintenance products?
Any products that necessitate extra fees for storing or shipping, such as:
- Large products — Any products take up so much space, their sales don’t make up the costs of the excessive storage room.
- Heavy products — If a product’s counterweight makes it cost too much to ship, try dropshipping from a manufacturer or wholesaler.
- Fragile products — Fragile products need special care when shipping. In these cases, the supplier or manufacturer might be completely equipped to meet these requirements than you.
- Valuables — High-value things like fine jewellery, antiques, etc., require additional security that not all warehouses can offer. Rather than risking theft, you could leave the storehouse to someone who can adequately protect them.
- Special conditions — Maybe you need to sell items that need to be kept frozen, or materials sensitive to light. If your inventory requires special conditions, you may be better off dropshipping than storing it yourself.
But you can still keep your customers satisfied by offering these products through dropshipping.
How do I incorporate dropshipping into my business?
Assuming you already have an online presence in one or more stores (or at least know how to set that up), incorporating dropshipping is similar to launching any other new product, with a few distinctions.
Here’s a quick step-by-step guide:
Analysis of what products would fit well with your strategy, market, and customer base.
Analysis of how your competitors are selling the product, namely pricing.
Find the best supplier (see our checklist above).
Finalize a fulfilment process that works for both of you and incorporate it into your system. Depending on your sales administration software, this could be straightforward or require ironing out some wrinkles.
List and promote your new product. Be sure to define any special conditions, such as changes in shipping times or locations.
We don’t want to give the impression that we’re against dropshipping — quite the opposite, we think it’s a highly useful tactic when applied correctly.
But the reasons it doesn’t work for new companies to become less relevant the bigger a company gets.
For example, an organised company already has a healthy flow of traffic and doesn’t need to worry as much about establishing their brand.
That’s why dropshipping allows a great complement for most experienced eCommerce companies — just don’t rely on it for the heavy lifting!