What is dropshipping?

Saturday, January 03, 2015

Dropshipping is a popular method of supplying and selling products online, specifically for newcomers to the ecommerce marketplace. It allows you to focus chiefly on sales, business recognition, and building a consumer base.

It involves working with a supplier who offers dropshipping, meaning that they’ll supply your product and package, as well as send the product to your customers. This means you only make money, and acquire costs, when you make sales. In many ways, your storefront can be seen as the intermediary between customers and a provided service.

While this is an easy and low-risk approach to entering the online marketplace, it does have its disadvantages – particularly in the long run. Because some aspiring business owners may be curious about how dropshipping works and if it’s a good fit for their online business, this article will focus on the pros and cons of dropshipping and what those who integrate it into their company should expect.

How does dropshipping work?

Dropshipping is a supply chain model with four main members: the distributor, the wholesaler, the retailer, and the customer. Let’s break down each member and then explain how they work together in the dropshipping process.

The distributor is the party who actually makes the product. Whether by hand, in a factory, or by any other means. Oftentimes, specifically with arts and crafts storefronts, the distributor is the retailer themselves. In the dropshipping model, however, the distributor and retailer are always separate entities.

The wholesaler purchases products (typically in bulk) from distributors, and then sells them in a variety of ways. A popular approach is to mark up the products and sell them in bulk to retailers, who then mark up the product again and sell through their storefront to customers. Wholesalers typically carry a large variety of products and work with a variety of retailers.

This business model between distributors, wholesalers, and retailers is known as business-to-business (B2B) commerce.

The retailer sells its products to customers, known as business-to-consumer (B2C) commerce. Retailers may sell items they make themselves or have purchased from other distributors or wholesalers. The bulk of the work of retailers is in managing the housing of products, shipping out customer’s orders, attracting clients, and landing sales. Some of these tasks can become tedious, and if your business gains significant traction, quickly overwhelming.

This is where dropshipping comes in: allowing retailers the opportunity to solely focus on selling. After teaming up with a distributor or wholesaler who offers dropshipping, this “dropshipping partner” will take on the various tasks that some online retailers might find tedious and unenjoyable: shipping, packaging, and actually supplying or manufacturing the product.

The dropshipping process looks like this:

  1. A customer places an order through a retailer’s online storefront
  2. The retailer relays the order information to their dropshipping partner, who then prepares and ships the product directly to the customer
  3. The dropshipping partner charges the retailer for their service (supplying and shipping out the product) and the retailer charges the customer

As an online merchant, the opportunity to have another party complete the more arduous tasks of your business may seem too enticing to pass up, but dropshipping does have some important caveats to consider before making the final call. Let’s next break down the various advantages and disadvantages to dropshipping.

Benefits of dropshipping

Easy to set up: Even wanting to offer a simple product online will require a host of complicated decisions and start up costs if you’re attempting to supply the product yourself.

  • Where will you house the products?
  • How will you find time to make the products?
  • Will you need to hire additional workers to assist you?
  • What locations will you be willing to ship to?
  • How will you manage refunds or damaged products?

Dropshipping effectively answers all of these questions and leaves you to focus on managing your online store, customer service, and building traction – all of which are things possible with low startup costs.

Scalable: In a classic supply model in which the retailer is also the supplier, a heavy order carries with it a heavy workload for the retailer. Continue to increase this pattern long enough and the retailer will be forced to make changes to meet the demands of increased orders.

However, in a dropshipping model, increased orders transfer their workload to the dropshipping partner, allowing the retailer to continue at a more manageable pace.

While retailers in a successful dropshipping model will still have their workload increased on the customer service side, this is far more manageable and easier to overcome, specifically when it’s their sole focus.

Reduced overhead: Being able to sell products without actually having to physically manage the products heavily reduces businesses costs. Essentially, all that’s needed to complete the job of a retailer is an internet connection and reliable computer. This means expenses can be kept manageable and inexpensive, avoiding the high costs of running an office, warehouse, or manufacturing process.

Flexible: Touching on the previous point, a dropshipping model allows retailers the freedom to operate from essentially anywhere with an internet connection. The online marketplace is a real convenience for those looking to escape the morning commute, strict working schedules, and anchored locations. eCommerce allows for merchants to construct their own schedules and work from anywhere, and the dropshipping model is perhaps the pinnacle system to take advantage of these benefits.

Easier to manage: Divide and conquer! The dropshipping method is a great example of this phrase in action, with all the different members involved within it claiming a certain part of the business puzzle and then fulfilling it. Even more so, this fragmenting of the selling chain allows each member to work in an area they’re most capable in, creating a process in which expertise and efficiency can truly shine.

What this means for merchants is that they can focus on and become experts in selling and customer service. Rather than having to juggle the making, selling, transferring, and the secure storing of products, merchants can claim their piece of the puzzle and focus all of their efforts on solving just the retail section. This will lead to increased efficiency, expertise in their field, and a less stressful workload.

Disadvantages of dropshipping

Slim margins: As we mentioned earlier, dropshipping is easy to set up and the barriers of entry are low. This means high competition that can spread demand so far out amongst themselves that no one is truly making any significant amount of profits.

This is where business recognition comes into play, and reveals itself as the true workload for retailers in a dropshipping model. It’s not rare for your competitors to be working with the same manufacturers and wholesalers, which means your products can be virtually the same. How do you differentiate your business in this situation?

Some choose to do so by providing excellent customer support and streamlined websites with easy payment checkouts. Others choose to sell more niche and uncommon products that attract a smaller but passionate customer base who are willing to spend more and become faithful shoppers into the future.

Whichever route you take, the chase for the attention of customers will be an integral part of being the retailer in a dropshipping model, and profits could be low until traction begins building up.

Complicated order processing: Unless you’ve found the perfect niche item to sell, it’s likely you’ll be selling from various different wholesalers in order to offer a robust and versatile collection of products.

This could mean increased costs. If customers place complex orders that require making use of multiple dropshipper partners, then you’ll be covering the additional shipping costs. While it may seem an easy solution to just carry these charges back to the customer, it’ll hurt your relationship with potential faithful clients or could lead to canceled orders.

While on the topic of working with multiple dropshipping partners, it’s also important to note that these partners are their own entity and from time to time will make mistakes just as you do. But in the dropshipping model, the retailer (you) is responsible for taking the hardest hits from these mistakes, where you have to work with customers to resolve issues that weren’t necessarily your fault.

Minimal control: In most cases, your dropshipping partner will have full control over the products being shipped out with your job being just the selling portion. For some, this isn’t any issue, but for others with dreams of building a brand, taking risks on new products, or offering customizable options to clients, this could be a dealbreaker.

Closing thoughts

To some, dropshipping is the perfect pathway for them to succeed in the online marketplace. For others, it’s a great way to enter the eCommerce platform but is not sustainable in the long-term, as it may not fulfill their specific ambitions that necessitate more control and higher profit margins.

Another option not mentioned is taking advantage of dropshipping as a secondary income or ”side hustle”. While fulfilling the duties of the retailer in a dropshipping business is not exactly passive income, it certainly is a manageable workload that many individuals perform on top of their other professions.

Whatever the case, dropshipping plays an integral function in the online marketplace, and it’s beneficial to be informed about how it works whether your business chooses to take advantage of it or not.

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