What is Dropshipping?

Well, there are actually many different benefits to having your own dropshipping site as opposed to operating a standard eCommerce site.

The first positive thing about this kind of retail method is that the setup for a dropshipping website is easy. Getting your dropshipping site up and running just takes 3 steps. First you will need to find a supplier, set up your store’s site, and then start selling your products! Since it is so simple to get started, dropshipping is a very good choice for those of you who are just getting started in the online retail space.

Another benefit is that you will not have to worry about large overhead costs. Since the business owner of a dropshipping website does not need to have any inventory he will therefore not need to worry about  having to rent a warehouse or some space to house the products. And of course he will not need to pay for the things that go along with renting actual space, like paying for electricity, a phone bill, etc. These things could add up to a huge expense so not having to deal with that will save you a lot of money.

The risk of using dropshipping as your business model is low. Since you didn’t buy any stock, if your business doesn’t sell anything it doesn’t really matter because you won’t be losing any money if you make no sales.

A dropshipping site can be run from anywhere. Since it is all digital, you can run your dropshipping website from wherever you like as long as you have internet access. You can go on vacation for a few weeks or relocate to Europe, etc. You don’t have a warehouse or stock to manage or employees and bills to pay so there is no hassle or things that require you to be physically nearby.

The options for products you can sell are vast. As you do further research into dropshipping you will see that there is a dropship supplier for almost anything that you might want to sell. You can focus on one product or sell many different ones, whatever works for you.

You will have more time and resources to focus on your business. With a normal retail business, you would have to put in more work and resources in order to expand and grow your business. But with dropshipping all you have to do is get more orders to send out to your third party suppliers and let them do all of the heavy lifting while you bring in more profit. Since dropshipping is so hands off, you will have plenty of time to focus on growing your business.

And the last benefit to using dropshipping as your business model is that you will have less of a loss on damaged goods. Since the products are shipped direct to the customer from the suppliers there are fewer shipping steps in between which dramatically reduces the risk of products that are damaged while being moved from one place to another.

While we have listed some great positives to dropshipping, it does have a few negatives to it.

The first is that the profit margins are lower in comparison to sourcing from a manufacturer or wholesaler. Depending on what kind of product you are selling and location, the suppliers and vendors can charge your more money for dropshipping products which can hurt your profit

There is also complete liability if something goes wrong, even if it as the fault of the supplier. The customers are purchasing their items from the retailer’s website so even if the supplier does something wrong, it is still the retailer’s fault since they represent the brand.

Another con is that the brand has much less control. With the dropshipping model, retailers hardly ever have the opportunity to control how their brand is presented since the delivery and fulfillment are controlled and operated by the supplier. This can be a hug downside because customer satisfaction can rely heavily on personalized packaging and branding of the products. There may be some suppliers out there who are willing to do these extra things but you will probably have to pay for it.

Problems can occur because of complexity with shipping. Selling many different kinds of products may sound like a good idea to increase your sales but this could actually be a huge negative if the retailer has several suppliers for these products. Suppliers may charge different shipping costs depending on different factors such as: location, type of product, etc. If one of your customers orders different products that ship from different suppliers then the retailer will have to pay the shipping costs separately and this will then be transferred to the customer which could negatively affect conversion rates which will in turn hurt your profits.

A lot of competition. Since dropshipping it such an attractive choice for a business model it makes it very popular so there are more retailers in every niche. Unless a retailer is catering to an incredibly specific niche or industry, he will be up against a lot of competition.

Keeping track of inventory. It is incredibly difficult to keep track of the amount of inventory the supplier has. Miscommunications are likely to happen which will cause cancellations or could lead to items being put on back order. This issue can be more easily managed with software but that is an added expense you will need to take into account.

Since dropshipping is relatively easy to set up, it is a great business model for those just starting out in the online retail market. Since it has such a low risk and low investment, it is more attainable and feels like less of a risk. Dropshipping is also a great option for someone that is already a store owner and has an inventory but are looking to test certain products in the market to see how they do in sales before buying a lot. These are the kind of people who would be a great fit for starting a dropshipping website. Now let’s see who would not be such a good fit.

A brand focused entrepreneur should not use a dropshipping website. Trying to build a brand and use a dropshipping business model is incredibly difficult because there are so many elements of the customer experience that you will have no control over. Since you will have so many things out of your control, it will be nearly impossible to build a strong brand through a dropshipping business.

A margin focused entrepreneur will also not work well with dropshipping. There are very thin margins with the dropshipping business model, gross margins tend to be somewhere around 10-20%. Once you have paid for things like email services, app fees, credit card transaction fees, etc. you will only be left with a few percent.

Marketers who are not so creative. Most manufacturers have a certain goal of how much of their sales needs to be from direct to consumer sales through their eCommerce site, usually it is around 30%. So what does this mean? This means that if you are selling their product then you are competing directly with your own supplier who is able to have much higher margins than you on the same exact products. So competing directly against them is pretty much pointless because they will almost always win. This is where the creativity would need to come in because if you are going to beat your own supplier you need to think outside of the box and find a way to exploit the channels that the supplier isn’t using in order to acquire different customers.

In order to have any kind of successful retail business you have to fin the right products to sell and this is incredibly important for dropshipping. The best strategic way to go about figuring it out is to come up with a list of a few different products that will sell well (based on research, numbers, etc.) via the dropshipping model. The following is a list of certain elements that will help you to decide if a product is right for dropshipping.

Retail price. The retail price and the wholesale price play very important roles in dropshipping. You need to find the right price to charge customers so you can optimize sales. For example, lower prices may encourage sales but your profit margin per product may be smaller but higher prices may lead to fewer sales.

Size/weight. Of course, depending on how heavy or light and how big or small your product is will determine how much the shipping will be in addition to how much effort is needed in order to package it and get it to the customer. So therefore, it the smaller and lighter products will give you a better profit margin.

How durable are your products. If what you sell is disposable or renewable you have a greater chance that your customers will make repeat orders which will obviously increase your sales.

Many common mistakes for dropshipping businesses are:

• Deciding which products to sell based on your personal likes and dislikes.
• Selling knockoffs instead of the real deal.
• Deciding to sell a product because other people are selling it.

These may seem fairly simple but they are mistakes that people do make. So if you are serious about making your dropshipping site a success you should take all of these things into account.