The Benefits of Dropshipping
How to Make Dropshipping Work for You
With its low overheads and the promise of easy money, dropshipping seems, on the face of it, to be an ideal way to launch an online order fulfillment business.
But, as many eager entrepreneurs are finding to their cost, dropshipping is not a get-rich-quick scheme. There are as many cons as pros to this popular business model.
Smart operators have learned how to use dropshipping to build a thriving business—but it takes much longer, and requires more effort, than most people hope.
What is Dropshipping?
Under the online dropshipping model, a retail business does not hold products in stock. Instead, it sells a product listed on its website and passes the sales order to a third-party supplier, which delivers the item to the customer.
This business model is attractive because it lowers the entry barrier and makes it simple for entrepreneurs to start and grow their businesses.
How it all Began
In the 1960s and 1970s, mail-order evolved into a lucrative business, especially in the United States.
It worked like this:
Potential shoppers would receive mail-order catalogs by post, listing hundreds of items for sale.
Customers would order products from the catalog by phone.
The company would deliver the items to the customers’ doorsteps.
As the popularity of the mail-order business model grew, the participating retailers would establish warehouses stocking their catalog inventory to increase delivery efficiency.
Smart entrepreneurs saw an opportunity to piggyback on the success of the mail-order companies by listing the items in these warehouses in their own catalogs, with small mark-ups.
Once an order came in, they would purchase the item from the fulfillment center and have the warehouse deliver it.
For very little outlay and minimal financial risk, these piggyback companies began coining it—and the term dropshipping was conceived.
What is Dropshipping Business Like in the Ecommerce Era?
Even though the basic principle remains the same, the growth of ecommerce has changed the format of the dropshipping business model.
Instead of catalogs, dropshippers today build websites advertising thousands of items of merchandise from an array of manufacturers, wholesalers, and retailers—all with small price markups.
From then on, the procedure is much the same as it was in the 1960s and 1970s. On receiving an order, the dropshipper purchases the item from the retailer/supplier and has them deliver it directly to the customer. The dropshipper’s profits, of course, come from the small mark-ups on each item.
The Benefits of Dropshipping
Dropshipping has become a popular model for retailers engaged in online sales, especially those for whom order fulfillment involves international shipping. These are some of the reasons for its popularity.
1. Little upfront capital needed
Dropshippers can, without too much trouble, launch an ecommerce store without having to invest thousands of dollars upfront in inventory, the way traditional retailers do. As a dropshipper, you don’t purchase a product until you have sold it.
2. No physical premises are required
Due to the nature of dropshipping, you don’t need to bother with any of the following physical demands of traditional retailing:
Packing and shipping orders
Dealing with returns
Ordering products and maintaining stock levels
3. Minimal overheads
Many dropshippers work from home using little more than a laptop and a telephone. Running expenses are at a minimum.
4. Wide array of products to sell
Because you don’t pre-purchase the products you sell, you can offer customers as wide an array of products as you like. If suppliers expand their inventories, you can easily add these to the items you sell in your online store at no extra cost.
5. Expansion is easy
Unlike traditional retailing, your work doesn’t escalate significantly if your orders increase. Your suppliers will pick up most of the additional work involved. On the other hand, however, as your business expands, your customer service demands will inevitably increase.
If It Sounds too Good to Be True—It’s Because it Is!
With the explosion of dropshipping enterprises over the past few years, the landscape has become cluttered. To compete against the big players that dominate this sector, newcomers have to lower their mark-ups to a point where they make very little money on each transaction.
The maxim holds: The less money you put in, the less money you get out. To stay afloat, let alone make a profit, you need to do a lot of business to cover the costs of advertising, maintaining your website, and managing your sales orders.
These are some of the other drawbacks of the dropshipping business:
It is highly competitive: Because starting a dropshipping business requires little capital investment, more and more entrepreneurs looking to make an easy buck have jumped on the bandwagon. This makes for fierce competition in which bigger businesses—able to offer very low mark-ups—will typically win out.
You can’t control the supply chain: If your supplier messes up or delays delivery of the order, you suffer the fallout. You are the one who must deal directly with irate customers even though delivery is beyond your control.
You are at the mercy of third-party suppliers. One bad review on social media can wreck your business before it has built up any momentum. It is critical for the survival of your dropshipping business that you find reliable suppliers.
Complicated bookkeeping: Unlike a retail store with its own stock, automating the charges for dropshipping can be difficult. For example, if a customer orders three different items from separate suppliers, you will need to keep track of the mark-ups on each item, the various shipping costs, and VAT charges.
How to Use Dropshipping Effectively
The good news is that an estimated 10-20 percent of new dropshipping ventures succeed. The following tips by dropshipping experts may help you to become part of that happy cohort:
Concentrate on marketing: You may have built a stunning website, but if no one knows about it, you will receive no traffic. In the months after launching your enterprise, you will need to devote time to marketing, SEO, and traffic generation.
Add value: Thousands, if not tens of thousands, of merchants will be offering the same goods for sale as you. To stand out, you need to offer extra insights and information about products that customers will find useful.
Find a niche: It is worth studying articles about dropshipping niches to steer you towards your own specialization. The beauty of dropshipping is that you can test the appetite for products without investing in them.
Be patient—dropshipping is a long-term venture: Like most enterprises, it takes time—at least a year—to build a successful dropshipping business. You will struggle for the first few months and begin to have doubts when you generate few sales and little traffic to your website. But if you mentally prepare yourself for the long haul, you are more likely to succeed.
Focus on customer service: Word-of-mouth is still the best form of advertising. Keep your customers happy, and they will spread the word—without extra cost to you.
Dropshipping Extends Beyond Physical Goods
As could be expected, dropshipping is not confined to physical goods. In this digital age, the following services are also offered by dropshippers:
Digital products are intangible assets, such as streamable files, educational courses, stock photos and videos, and plug-ins. They are sold repeatedly online without the need to replenish stocks.
Dropshippers purchase the rights for these products and sell them at a mark-up price. However, there are often free alternatives on the Internet, so choose your niche carefully.
2. Online services
This category comprises services such as content writing, web designing, video editing, graphic designing, and website management.
The dropshipper bids for a job posted on a freelance site and then contracts a freelancer to do the job at a lower rate than the successful bidding price.
Most Important of All—Find Reliable Suppliers
Your hard work in building up your dropshipping business could be undone if your suppliers are unreliable. It takes just one or two delayed or failed deliveries for the word to spread that you can’t be relied on to deliver on time.
Don’t necessarily go for the cheapest wholesalers or manufacturers. Mediocre suppliers will be a source of customer service problems, with poor packaging, missing items, and botched delivery.
Do your homework and find suppliers with a good delivery reputation. One option is to order some products for yourself from a variety of suppliers and compare their delivery performances. It may take more time and effort than you had expected, but dropshipping, nonetheless, is a proven way to make a good living.