Dropshipping is an order fulfillment method that doesn’t require the store owner to keep inventory. Instead, when a retailer sells a product, it passes the order to a third party who then ship directly to the customer. Consequently, the retailer never sees and handles the product.
That is why in dropshipping the retailer purchase inventory as needed. from the wholesaler or manufacturer and the later fulfills the order. Thus there is a seamless integration between the retailer’s system and a third party.
It looks like the easiest method in the retail industry because you sell another person’s goods and you get a commission. However, if you factor in all the disadvantages, challenges and day to day management. It is not as easy as it looks.
But if you with the right strategy, the methodology and patient it can help build a very successful business.
Benefits of dropshipping:
- Less capital
This is unarguably the most decisive advantage of dropshipping. That is because you don’t have put upfront thousand of dollars for stock building. You only purchase a product to resale when a customer has already purchased and paid. In addition, order fulfillment is not done by you.
- Low overhead
No inventory management and no physical stores. In fact, all you need is a home computer for less than $30 a month to make money from home.
- Location doesn’t matter
You can run your dropshipping business from anywhere around the world. All you need is an internet connection. As long as, you keep the communication flowing between your supplier and your customers you are all set.
- Easy to scale
Businesses that leverage dropshipping scale very well and rapidly compared to traditional eCommerce businesses. Since most of the work is handled by a third party. Further, because it is an online business the reach is worldwide.
This model has a lot of strong arguments that make it very appealing for everyone. However, it does have quite a few drawbacks that come with this convenience and flexibility.
Disadvantages of the model
- Low-profit margin
This is the biggest disadvantages of this eCommerce model. Because it is so easy to get started with relatively no barriers for entry and an overhead minimal cost. Irrespective of the site quality the competitive environment drives prices down.
- Highly competitive
This is because of the low cost of entry. In addition chances are you don’t have an exclusive contract with your supplier. That means many merchants selling the same products as you. Price point becomes, in this case, an element of differentiation and competition.
- Supply chain issues
In this model, you don’t control the supply chain process, from sourcing the product to shipping it to your customer after purchase. You are essentially trapped and hoping the supplier or the fulfillment center addresses any issues with the product while providing an excellent customer service that’s out your control.
Above there are also problems related to the quality of the goods. Since as a dropshipper you don’t have control over the shipment. So shipment error can really damage the brand.
- Legal liability
This happens when suppliers illegally use a trademark logo or another company’s intellectual property. Thus affecting your brand.
Usually dropshipping is perfect for an established brand with an already existing customer base. But if you are starting from scratch you need to be fully aware of the pitfalls and the time needed to build your business. Virtually it looks appealing but in the long run, it requires a lot of work. If you pass that stage of implementation the business can prove to be extremely lucrative.