In recent years, there has been plenty of buzz – and, indeed, misconception – around dropshipping, a popular business model that outsources inventory management and order fulfilment to a third party supplier – often in a different country.
The reduced costs and low overhead make it an attractive sounding approach for entrepreneurs with limited capital but, as with many inventive distribution models, it isn't necessarily the right fit for every organisation.
Therefore, if you are considering adopting this blueprint, it's a good idea to take a comprehensive look some of the pros and cons of the dropshipping business model first. We've compiled several of the most essential, so this is what you need to know.
What Is Dropshipping?
First, though, it's necessary to understand what exactly dropshipping entails.
At its core, it involves selling products through your own website or landing page, which you market yourself. However, unlike with traditional eCommerce models, the products in question are produced, stored and – importantly – distributed by another company, usually using their own warehouse space. Once you make a sale, you simply pass on the customer's information to this distributor, who is then responsible for packaging and shipping the product.
Of course, there are numerous advantages and disadvantages to this. Perhaps the biggest plus for fledgeling entrepreneurs is that dropshipping is enabled by online resale giants such as Amazon, Shopify and eBay, so if these platforms are essential to your business, you won’t have to change, while it can also negate the need to run your own website.
It's important to note, too, that dropshipping is not the same thing as an order fulfilment service. This is a subscription-based service where you pay a provider (such as Fulfilment by Amazon (FBA)) to house and ship your own inventory. These services are very different, so bear this in mind when considering which approach would work best for your company.
How Do Companies Use Dropshipping?
There are two basic approaches to how companies utilise dropshipping.
The first is to adopt the lean startup approach, and set up your company as quickly as possible – within a day, even. By forgoing the costs associated with production, inventory and fulfilment, you can set up shop with minimal overheads and instead focus on marketing your products and building customer relationships. Seen as a revolutionary way to lower the costs associated with operating an online retail store, this is the dropshipping model that is perhaps most widely utilised.
The second – and more conservative – approach is to employ dropshipping as a means of supplementing an established eCommerce business. Indeed, as it requires minimal investment, many online business owners use the model as a testing tool for new products before committing to purchasing inventory.
The Pros and Cons of Dropshipping
As mentioned, there are numerous benefits and drawbacks to this approach, and it is not suitable for everyone. To give you a clearer picture of whether or not dropshipping would meet your business objectives, consider the following:
Pro: Low Start-up Costs
We've already discussed how dropshipping is a low-cost startup model, which is why it is so popular among business beginners. You can get your business off the ground much more quickly, and focus on the innovative aspects of your enterprise rather than the operational groundwork of organising inventory and getting it shipped out.
It's not just newcomers that can benefit from this, though; so too can established businesses, as well. Instead of developing, producing, storing and shipping a new product, you can instead start sending it out immediately to your existing customer base. As touched upon, this is a great way to test the waters before committing to a new line of products, or to perform A/B testing with little impact on your bottom line.
Con: Low Margins
However, one of the stark realities of dropshipping is that the profit margins start low – and stay there. Since your company is not investing much in making the product available, the returns are minimal.
This can be an issue for new companies that are looking to establish themselves online. Razor-thin margins can keep a business afloat if everything is going well, but additional – and, often, unexpected – costs incurred through damages, customer service issues or other external factors could easily make your venture unprofitable.
It can also make it harder for you to sell these products competitively. Because the margins are so small, it is difficult to compete with larger retailers that can take the long-term hit on lower distribution prices. Even if you are using dropshipping for market research purposes, inflated prices as a result of low margins may skew the results in a way that yields less than useful data.
Pro: Better Management of High Maintenance Products
One of the ways that dropshipping can work in your favour is if your business is in, or is looking to expand into, a niche market with products that require special maintenance, storage or shipping. These include:
- Delicate Products – If a product is fragile, the manufacturer may already have a superior method of ensuring that it arrives safely.
- Heavy or Large Products – Some speciality items may be too large or heavy to be accommodated comfortably at an intermediary location. In addition, manufacturers of items of excessive weight or size most likely have an existing shipping solution in place.
- High-Security Products – Some items are of such high value that they require extra security precautions, which you may not be able to provide.
- Specific Condition Products – Products that require the presence of certain environmental conditions (such as specific lighting conditions or temperatures) may be better handled from their point of origin directly to the customer.
If you lack the facilities to accommodate these types of products, then dropshipping is an excellent solution for both you and your customers.
Con: Lack of Control Over Supply
While this increased capacity for distribution is no doubt an excellent benefit, there are obvious issues that can arise from not being in control of the shipping process.
You have little to no influence on how reliable the fulfilment process will be, as it is entirely in the hands of the supplier to deliver the product. There's no shifting the blame if something goes wrong, either; as far as your customers are concerned, you – and you alone – are responsible for ensuring the timely delivery of their purchase. If the distributor takes an eternity to do so, your customer will likely request a refund or make a complaint. Either way, you will be out of pocket in the short term, while the negative feedback and lack of trust will cause you problems in the long run.
In addition, you have no control over the product's packaging and branding, or the overall customer experience of receiving the product. For example, if the customer doesn't realise that you are dropshipping, they may get confused when their package arrives and bears no hallmarks of your brand; some may even feel duped. This also makes it challenging to build and establish your brand identity, as the quality and style of packaging used are important to modern consumers.
Although some view dropshipping as a fad, or even a convoluted and outdated model that is now oversaturated, there is no doubt that it is still a viable means of doing business – in the right circumstances.
If you are an adept marketer, able to attract traffic and convert leads, then there is still the potential for success, whereas existing business owners can also find it a useful tool. The key, though, is to understand its limitations and place them alongside your business goals, especially if you are planning on adopting it as a short-term solution within your longer-term goals.
What do you think? Has the dropshipping craze run its course, or is it ripe for reinvention and diversification? Let us know your thoughts and opinions in the comment section below!