Imagine that you are running an e-commerce business..
You are getting a lot of orders, from across the world..
These products are shipped to customers without your intervention and you are getting paid instantly after every fulfilment.
Best part – You don’t even have a warehouse or have any inventory!
A process of running an e-commerce business without owning any inventory is called dropshipping. In this article, we’ll explain what is dropshipping, how it works, its benefits and who is it really for.
What is dropshipping?
There are several different business models practised in modern times and one such model is dropshipping. In this business model, a business can operate without maintaining its own inventory and need not own a warehouse to store products.
The business need not have the hassle to even ship products to its customers.
Then who does that all?
All this is managed by its retail partners or a dropship supplier. This supplier would manufacture or distribute the products, keep inventory and even ship it to your customers on your behalf.
In case of dropshipping, the store owner sells a product but does not keep it in his store.
He purchases it from a third party vendor and asks the vendor to ship it directly to the customer. Thus the store owner never sees the product he sells.
He just passes the orders to the vendors as he receives.
The working process of drop shipping is quite simple. It includes 3 simple steps as follows:
- The store owner publishes products he wishes to sell on his online store. The customer sees the product and places an order on the website.
- The retailer receives details about the order and forwards the details of the customer and order manually or automatically to the dropship supplier.
- The supplier then packages and ships the required products directly to the customer with the store owner’s branding.
This is an attractive business model as it eliminates the warehousing cost of the store owner. Also, he need not have a physical business location.
Benefits of dropshipping
There are several beneficial aspects of dropshipping, such as:
- Ease of setup: Setting up a dropshipping business needs 3 simple processes i.e. finding a supplier, setting up a website and sell goods. It is quite simple and easy to manage without much investment.
- Minimal cost of setup: While traditional businesses need a lot of investment for setup i.e. purchase a shop and warehouse as well as products. Dropshipping eliminates all this process and costs associated with it. You just have to pay the cost of running and maintaining your website.
- No exorbitant overhead costs: you need not worry about costs such as renting or buying an office, electricity, phone or stationery costs. The business should just focus on a fixed cost of managing the website and hosting.
- Lower risk: as there is no physical inventory and investment there is nothing to lose for a business. Also, the store owner has no pressure to sell his inventory.
- Location independent business: To run a dropshipping business you need not have any office, employees, warehouse or any other hassles. There is no sort of commitment to a physical space and you can work from anywhere, you just need a good internet connection and a laptop or smartphone.
- More product varieties: A drop shipper supplier can sell anything he likes. You can choose any niche and there is no bond with the supplier too.
- More time and resource availability: In the traditional business model you must work more to earn more but in case of dropshipping business you just have to send more orders to your dropship supplier and they will handle it for you. You can utilize the time to earn more profit and grow your business.
- Reduced losses: Since the supplier ships the products to the customer, there are fewer shipment steps that are involved in this process and this reduces the risk of losses due to damage of products while transporting from one place to another.
Is the drop shipping model right for you?
Drop shipping does not suit all business types, but it is a great option for these entrepreneur types that would work well with the dropshipping model.
Let us understand them in detail by considering the type of entrepreneurs:
Validating entrepreneur: With dropshipping, an entrepreneur gets the freedom to test new products before they invest in inventory and stocking.
Buying new products have a risk that it may not sell and if an entrepreneur wants to lower risks and perform product validation before buying then dropshipping is the perfect business model to choose.
Budget entrepreneur: With drop shipping, you can sell online in the least expensive manner. Due to this, it works for entrepreneurs that have a limited or low budget or for startups who want to keep their costs as low as possible.
First time entrepreneur: If you are just starting to sell online then this is the best business model to choose. E-commerce is not that easy and if you do not have proper knowledge of digital marketing then you must start with dropshipping till your website gets optimized.
As dropshipping can get started with low investment, entrepreneurs can start with it till they create their brand value. It also allows newbies to learn about setting up an online store, conversion optimization, driving traffic and other e-commerce fundamentals.
Walmart Entrepreneur: If you want to sell a huge variety of products then this business model would suit you. If you want to sell thousands of products then you would need massive funding for it to maintain all inventory.
With drop shipping, you need not purchase all the inventory and just redirect orders to the correct supplier.
Disadvantages of dropshipping – Where it fails..
Just like any other thing in this world, drop shipping too has some drawbacks. Here are some of the major cons associated with this business model:
- Lower profit margins: As you are not buying in bulk, you may have to pay a higher price for dropshipping. Also, most manufacturers or wholesalers do not dropship and buying from retail vendors would be costly. This will eat up your profit margins.
- Complete liability for losses: As the customer purchases the product from the website if there is any mistake from the supplier’s end, it reduces the brand value of the site.
- Lower control: In the dropshipping model the seller has no control over the way his brand is projected in front of the customer. This is because the supplier manages packaging and shipping.
- Issues related to shipping: If you have multiple suppliers for a single order from your customer then it can cause problems related to transportation. This is because different suppliers charge different rates for shipment based on the type of products, location, etc. the seller needs to pay separate shipping costs to each supplier whereas he would take a single shipping cost from the customer.
- High competition: With the growing popularity of dropshipping and e-commerce the competition is continually increasing.
- Inventory management can be tricky: It is nearly impossible to keep track of the stock count of your supplier. This can lead to miscommunications, order cancellations and back ordering for your customers. This can hurt your brand image.
How to get started with drop shipping?
To get started with drop shipping you must follow these steps:
Select a target market and niche: Do market research and select products you would like to sell. Choose a domain name according to keyword research and start building your website. You should do proper market research, know your competitors and learn how they market their products efficiently and what is the profit margin or pricing structure used by them.
Choose places to source products: Once you know which products you want to sell, then you should look out for suppliers from whom you want to source your products.
Once you find suppliers and have a website ready, then you need to market your site and fulfill orders to earn the profit.
Where to find drop shipping suppliers?
Dropshipping model depends mainly on the supplier, and hence you should choose the right supplier to be successful. Google can be your best buddy when it comes to finding local suppliers that would support dropshipping.
You can get complete directories of the suppliers with contact information on websites dedicated to e-commerce and startup incubators. Once you find the list of potential suppliers for your products, then you should email them with details of your business plan.
Those who reply promptly, it means that they have better sales and customer support executives.
Things to consider while choosing a supplier:
- Choose a drop shipper with experience and helpful sales representatives.
- Choose one who has top-notch and high-quality products.
- Find a drop shipper that is having technological abilities.
- Choose a supplier who is punctual and knows the shipping process efficiently.
- Make sure to ask all your queries before you choose the supplier.
What would be refund, return and replacement procedure?
You must deal with returns, refunds as well as replacements in online business. Once the customer asks for a refund, you will ask the supplier to provide you with a return merchandise number for authorization. Once the supplier receives the product, you will get your amount in your account. Some suppliers may charge a restocking fee too which should be borne by the store owner.
What happens if the items shipped are defective?
In case of defective products, either you or the supplier would bear the loss depending upon your agreement with him. Some suppliers would offer to replace the product for free. It is best to communicate via email for having written proof.
What should be done if the drop shipping products become out of stock?
You can create a backorder for the customer in the supplier’s inventory, and then you must communicate to the customer about the delay. If the customer does not want to wait, he is eligible for a full refund.
Drop shipping a great option if you are just getting started with online selling and want to test the waters first. Even though the margins are low, its a great way to kick start your business.
Its also important to use a good inventory management software from the day one.See How ProfitBooks Can Help