To put it simply, dropshipping is a type of business model which allows businesses and companies to operate entirely without managing or directly owning inventory. This means that when a consumer buys something, the manufacturer then ships to product directly to the customers, without the retailer ever seeing the product. This type of business model can be very successful for certain industries and allows people to start businesses without having to put lots of capital at risk. It does however mean that the retailer has much less control over what happens and is liable for faults that are likely to be nothing to do with them. Dropshipping businesses often rely on third party logistics companies, like Complete Packaging, to ship the goods from the manufacturer to the customer. This article depicts the details of dropshipping including the advantages and disadvantages of the model.
Before we go any further, it is important to understand what a drop shipping is not. Drop shipping is not a manufacturer. A manufacturer is somebody who actually produces the products. A manufacturer may or may not be involved in a drop shipping programme which means that the person who runs the drop shipping business may or may not be able to sell their products.
Then there’s two distinctions to make within a dropshipping business. A drop ship wholesaler is someone who buys one type or product from the manufacturer in bulk and ships it to buyers through an ecommerce business. A drop ship aggregator is somebody who buys different products from various manufacturers to give the retailer a variety of products to sell. Aggregators take a higher cut which could affect the profit margins of a drop shipping business and are not a necessity.
The dropshipping process
So, what happens when a customer places an order from a business with a dropshipping business model?
- The first step begins with the customer placing an order for the desired product on the retailer’s ecommerce site. It is unlikely to be obvious that the business has a drop shipping business model.
- The next step involves the product being shipped to the customer. The order is automatically (or manually if a smaller business) sent to the dropship supplier for the order to be prepared and packaged for the customer.
- The final step involves the package being sent directly to the customer from the dropship supplier (not passing through the hands of the retailer at all). The parcel arrives as if it was sent directly from the retailer, not the supplier, and the customer knows no different.
Sounds good right?
The benefits of dropshipping
Well, dropshipping is an easy, low risk way of setting up a business and there are many benefits to choosing this business model.
- Less capital required to get started on it
With less capital required to get going, this is a great business model for those people who want to set up an ecommerce business but perhaps don’t have the money to do so.
- It’s easy because you have less things to think about
It is pretty straight forward on the retailers behalf. It’s a little like hiring a 3PL for your business in the sense that you do not need to think about the products being sent out, these are all done for you. The difference is that you can only sell products that you can get from a wholesaler with a dropshipping business. Any business can use a 3PL, and many businesses who manufacture their own products choose to do so.
- Flexible and easy to scale
It’s easy to scale up because the scale up is already there. There’s no need to expand your premises and overheads to sell more (except maybe for extra customer service members of staff etc.). It’s also possible to scale down because you haven’t actually bought the stock or rented the warehouse space.
- Risks are lower
Because you don’t have to invest in any stock straight away and you don’t have to put up lots of capital, your risks are much lower with a dropshipping business.
- Reduced overheads
Much like hiring a 3PL, your overheads are reduced. First of all you don’t actually need to make anything. Then you don’t need to hire anybody to oversea the packaging and fulfilment.
Whilst there are clearly some benefits to setting up a dropshipping business, it isn’t the perfect business model for many reasons.
- Low margins
First of all the margins are low. Yes, you don’t have the overheads, but you do have to pay for those things to be done and it is unlikely that you will make THAT much money per item you sell. You might have to sell quite a lot to make some money.
- Inventory and supply issues/no control
The inventory is completely out of your control. So, there may be some issues that you cannot sort out but will have to deal with the consequences of. Unfortunately this is sometimes unavoidable and something to bear in mind.
- You can’t sell your own products
This is absolutely not the business model for anybody looking to sell their own products. This is a business model for people wanting to sell products that already exist, and you can probably get somewhere else.
- Competition is high
This means that competition is high so you need to find another way to differentiate yourself in the market. Maybe lower prices, high quality content and advice, or a high-functional website.
To conclude, dropshipping is a business model which can be a great option from people wanting to start and ecommerce business. It is not a business model where you can share unique products you have manufactured but rather a business where you sell products from wholesalers and manufacturers to your customers without owning the stock first.