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If you are an online entrepreneur, then you should be very familiar with the word “Dropshipping” by now. Many people come across this term often, but they don’t really have a clear understanding of what it’s all about and how it works. So in this post today, we will be taking a look at what Dropshipping means, together with it’s advantages and disadvantages as well.
What Is Dropshipping
There are so many definitions of what dropshipping means, but i will try to make it very simple for easy understanding. Dropshipping is simply a retail fulfillment method where a store or shop does not keep the products it sells in stock. Rather, whenever the store makes a sale, it purchases the item from a third party (usually a wholesaler or manufacturer), before having it shipped out directly to the customer who ordered for the item.
This way, the store has no physical contact with the product, all that needs to be done is to source for the product whenever an order is placed and send to the customer who needs the item. This method can also be described as the store being the middle-man that connects the actual seller with the customer. It is also the major difference difference between the standard retail model and dropshipping, as it eliminates the need for the selling merchant to own inventory or stock.
Just like every other business model, dropshipping has a lot of benefits attached to it. It also comes with limitations as well. Let’s check them out below;
- Low Startup Capital
Low startup capital is probably the biggest advantage to dropshipping. You don’t need to have thousands of dollars to invest in inventory when setting up your ecommerce store with the dropshipping model. It eliminates the need to have products in stock, since you don’t need to purchase inventory until you have already made sale and received payment by the customer.
With a low startup capital, anyone can set up an online store by using the drop shipping model.
- Easy to Setup
Managing an ecommerce store is quite easy especially when you don’t have to handle physical products. With the drop ship model, you don’t have to worry about the administrative aspects, it takes care of the following
- Managing or renting a warehouse
- Packaging and shipping your orders
- Tracking inventory for accounting reasons
- Handling returns and inbound product shipments
- Continually ordering products and managing stock level
Operating a dropshiping business offers so much flexibility. You can easily manage everything from anywhere provided you have an internet enabled device and stable internet connection. Provided you can communicate with suppliers and customers with ease, then you can operate your business from location.
- Variety of Products
Since you don’t need to purchase inventory, you can offer a wide variety of items to your prospective customers. Whenever your suppliers have new stocks available, you can list them on your website at no extra cost.
- Reduced Overhead Cost
Opting for the drop ship model reduces your overhead cost , because you don’t have to handle purchasing inventory or managing a warehouse. It’s no secret that most successful dropshipping businesses were started right from the comfort of a home office, with just a laptop and stable internet connection for less than $50-$100 monthly. However, these expenses are bound to increase as your business grows , but it can’t be compared to traditional retail outlets spend.
- Easy to Scale
Drop ship retail model is easy to scale, compared to the traditional retail model where you have to put in more work if you have more orders. However, you can leverage on dropshipping suppliers as most of the work required to process extra orders will be taken care of by the suppliers, thus providing you with the opportunity to expand your business without much stress.
These benefits are what makes dropshipping a unique business model to both beginners and well established e-commerce merchants. However, drop shipping has it’s pitfalls and setbacks as well. Let’s read up on them below;
- Low Profit Margins
One of the major drawbacks of this system is its relatively low profit margin. Since it’s easy to startup, with minimal overhead cost; many merchants can afford to set up shop and sell items at dirt-cheap prices in a bid to generate more sales and increase revenue.
It’s also worthy to note that most of these merchants have low-quality websites, and terrible customer service if they have any. However, these red flags won’t prevent customers from comparing their prices prices to yours. It also brings about an increase in cutthroat competition among merchants, thus affecting the profit margin in a particular niche.
- Inventory Problems
Stocking up all your own items makes it easy to keep tracks of which products are in available and out of stock. However, when you’re sourcing from different warehouses, some of which are also servicing orders for other merchants, their inventory is likely to change everyday and they might not have the particular item which a customer has ordered and paid you for..
- Shipping Complexities
Most drop shippers source their products using multiple suppliers, and this complicates your shipping costs. For instance, if a customer orders for four items, all of which are sourced from separate suppliers. Sending each of these items to the customer, requires paying separate shipping charges, and it’s not advisable to pass this charge to the customer, because it will make them think they’re being overcharged for shipping. Even if you decide to pass on these charges to the customer, getting your calculations right can be difficult.
- Supplier Errors
Have you ever found yourself in a situation where you were blamed for something that wasn’t your fault and made to accept responsibility for someone else’s mistake? Mistakes are likely to occur, and even the best dropshipping suppliers are liable to make mistakes when fulfilling orders, some of which you have to own up to and apologize. Furthermore, unprofessional an poor quality suppliers can also damage your business integrity with issues like botched shipments, missing items and low-quality packaging
Like i mentioned earlier, dropshipping is not a fail-proof method of building a successful online business, it has several disadvantages as well. I will be addressing these problems in my next blog post, and also offer tips on how to overcome them if you want to be successful and have a profitable dropshipping business.
Do you have any contributions to the points discussed in the article or would you like to know how you can start a profitable drop ship business of your own? Feel free to leave a comment below. Thanks for reading, and don’t forget to SHARE, because SHARING Is CARING & CARING Is SHARING.