Dropshipping has become a popular business concept lately. The number of people searching the term “dropshipping” in Google has increased by eightfold in the last five years.
As you can imagine, any time a business concept grows in popularity that rapidly, it’s easy for people to have different ideas of what it means. After all, interest is far outpacing quality information about the subject.
With all this in mind, let’s take some time to talk about what dropshipping is and what it isn’t. Then we’ll untangle the mystery of how exactly you can deliver products to your customers without ever handling them yourself!
At its core, dropshipping is nothing more than a supply chain management method. Someone who uses dropshipping as part of their business model holds no inventory. The customer orders products and the seller passes that along to a manufacturer, another retailer, or a different third party.
If that’s tough to comprehend at first, consider the following example. I start a store selling different kinds of novelty T-shirts. Different T-shirts contain different slogans.
Whenever someone orders a T-shirt, I pass that order directly to my manufacturer in China. They then either pull it out of their stock or manufacture the shirt on demand. The manufacturer then puts the shirt in a package and ships it directly to my customer.
When running a business this way, my value-add is not in the creation of the shirt. Nor is my value-add in transporting the shirt from one place to another. I add value by creating a friendly and easy-to-use front-end for a much larger global marketplace.
The idea of dropshipping is at least conceptually attractive because of what it implies. You don’t have to handle inventory. You don’t have to deal with fulfillment or manufacturing. In a sense, your company is a middleman focused purely on providing a good customer experience.
But what are the specific reasons that compel people to start dropshipping businesses? We can think of ten.
By its very nature, anyone can start a business using this business model. You don’t need inventory or a place to store it. There’s no need to invent something totally new.
Theoretically, you could read through to the end of this article and then have a dropshipping business set up by the end of next week. The barriers to entry are very low.
When you have a business model that lends itself to starting quickly, first-time entrepreneurs will take notice. They should! This is the perfect business model for someone who is looking to test the waters in the business world without taking on an enormous amount of risk.
When you have a business model that can be set up in a week, it stands to reason that the same business model can be scrapped and reborn in a week as well. That is to say, with dropshipping, you’re never forced into a corner. You can explore new markets and try new products without a lot of overhead.
Perhaps you want to own your own inventory at some point so you can make more profit. Fair enough.
But wouldn’t it be so much better if you could test on a small scale first? Dropshipping lets you do exactly that.
With low inventory and little commitment comes low costs. You will have to pay for a website and probably advertisements, but other than that, expenses are almost entirely incurred as cost of goods sold. That means the costs come along with revenues, meaning the startup cost is minimal.
Like we said earlier, you don’t have to handle inventory. That means you don’t have to find physical space to store goods or even use a fulfillment company like our own. You pass this responsibility directly onto the supplier.
Because of the low overhead costs, dropshipping is intrinsically low-risk. You don’t have to spend much money and you don’t have to enter into long-term commitments. It’s one of the few business models that doesn’t come with a lot of financial baggage.
The flexibility of this business model allows entrepreneurs to experiment with different product lines. That means dropshippers are often the first people to be able to capitalize on emerging trends.
Very few businesses can be run with only a few hours of active work per week. Dropshipping is one of them. Once you have found suppliers for items, you can use technology to send order information to the suppliers to handle it on your behalf.
Combine this with the fact that dropshipping stores are often promoted through advertising, growing the business could be as simple as increasing ad spend. No demand planning or staffing needs!
Most of the responsibility will fall on your suppliers. All you would have to do is manage your website. You can focus more on drumming up traffic than actually fulfilling orders. Combine this with a lack of commitments, and you can see that management is actually really straightforward.
The dropshipping business model sounds like a dream. There are a lot of aspects that play out more like a nightmare, though. Many major drawbacks to dropshipping come to mind, and we can easily think of seven.
It doesn’t cost much money, take much skill, or even require much work to set up a dropshipping business. For this reason, tons of people are getting into dropshipping. The amount of competition is enormous and staying ahead is very difficult.
Imagine working in a business with tons of competition and price-sensitive customers. As you can imagine, this leads to a race to the bottom in terms of prices.
Add onto this the fact that shipping is handled by your supplier, often from a foreign country. For this reason, the cost of goods sold per item is very high.
What do both these truths mean for your dropshipping business? The margins will be extremely slim.
When processing an order through a dropshipping store, you have to send the order information to a third party. If you’re lucky, this can be done automatically through integrated systems. If you’re not lucky, it requires painfully strained conversations between two companies that don’t share a common language.
In exchange for an easy life, you give up control. Dropshippers don’t make the product, ship it, or store it. That means if it’s defective, late, or damaged, it can be very hard to figure out who’s to blame. This lack of control can get very old very fast.
Imagine a customer receives a defective or damaged item. Alternatively, imagine the customer receives an item late. Like we said, it’s hard to know who to blame. Your company, being the public face of the entire operation, has to provide answers, but you often don’t have them. That makes customer service for dropshipping notoriously difficult.
When you lack control over your supply chain, then you lack control over customer service. When you lack control over customer service, you lack the ability to create consistent customer experiences that are needed to establish a brand. For that reason, dropshipping is not good for building a brand, which is often crucial to long-term business success!
Your suppliers might not have to follow the same rules that you do. What happens if something you dropship from a developing country injures a customer?
This is an extreme example, but it’s worth considering anyway. The less control your business has over the day-to-day processes that make it run, the more likely that difficult legal issues can arise.
After reviewing the pros and the cons above, let’s say you definitely want to start a business using the dropshipping supply chain model.
Good for you! Now, what do you sell?
Because you will likely be shipping items directly from factories or warehouses in foreign countries, some items are better candidates for dropshipping than others. In general, ideal items for dropshipping fall into a handful of buckets:
The common thread here is that the best items to dropship are usually small and high-value. This minimizes shipping costs while maximizing profit margin. In short, the last things on earth you would want to dropship would be a three-seater couch or a single pack of chewing gum.
Starting a dropshipping business involves seven major steps, most of which are not appreciably different from setting up a business with a different shipping model.
We spent the previous section talking about this at length, but it bears repeating! Figuring out what to sell is vital.
Naturally, items need to be a good fit for the dropshipping model. However, from a broader business perspective, you need to come up with a target market and find your business’s niche. Then do some competitive analysis and figure out what you can do differently and better.
The most important relationships you can have in dropshipping are with your suppliers. You have to find good ones! The right suppliers will differ heavily based on what precisely you choose to sell.
Make sure you vet them thoroughly, though. They are how customers will see your business!
The beautiful thing about dropshipping is that you can test the market on a small scale. Start by creating simple storefronts with a few item listings. Make sure you only have a small amount of “inventory” in stock, such as 5 or 10 units. Take out a few ads on Facebook or Google AdWords and see what happens. See if you can sell out of 5 or 10 items. If you can do that and make a profit, scale up from there!
While this differs greatly from state to state and country to country, you will eventually need to go through the formal process of creating a business. Usually, this involves clearing a certain revenue threshold at which you are liable for paying taxes.
In short, if you’re making a few hundred dollars, you probably don’t need a formal business license. If you’re making a few thousand, you probably do. Again, it differs state by state and country by country, so do independent research on this.
Once your online store is set up, you need to drive traffic to it. Some of the best ways to do this include social media, email marketing, and pay-per-click campaigns through sites like Facebook and Google AdWords.
Your supplier will be handling most of the logistics because they will be shipping directly to your customer. However, if your customers are not happy with the product, you need reverse logistics processes in place. Figure out how you are going to handle returns, refunds, and replacements.
Customer service is notoriously tricky in dropshipping businesses, but it is necessary. Figure out how you will provide customer service. Will you answer phone calls and emails? How about messages on social media? The right answer will depend on you and your unique business.
Dropshipping is nothing more than a new way to manage the supply chain for your business. It can be great for first-time entrepreneurs looking to be a foothold in the business world, but it’s not without its frustrations. It’s by no means a perfect business model.
By understanding how dropshipping works, you can see simple applications that can be used for any business. You may embrace the model entirely, use dropshipping for small market validation projects, or simply as see it as inspiration to streamline your supply chain. No matter what, though, it’s not going anywhere.
What do you think of dropshipping? Let us know in the comments below!