Dropshipping is an order fulfillment method that does not require a business to keep products in stock. Instead, the store sells the product and passes on the sales order to a third-party supplier, who then ships the order to the customer.
However, contrary to popular belief, the dropshipping business model is not a get-rich-quick scheme.
Sure, it seems like easy money — you sell other people’s goods and take a cut for yourself — but when you factor in all the drawbacks, obstacles and day-to-day management, it’s far from easy and can be hard work.
If you approach it the right way, though, dropshipping can still help you build a successful business… just not as quickly as you’d hoped.
With dropshipping, however, there’s no physical inventory to manage. When a customer makes a purchase, the store processes the order and transfers it to a third-party supplier, who then prepares the order and ships it out to the customer.
The store owner only pays the supplier for an item when someone buys it; they’re not responsible for producing it, storing it, or shipping it themselves.
Benefits of dropshipping
Sell anything you want
There are thousands of dropshipping suppliers selling just about any product you could imagine. You can add as many dropship products to your online store as you want, and it’s easy to add more product listings to your e-commerce sales catalog.
Test the market
Dropshipping lets you see which items resonate with your customers without investing in physical inventory. If the products sell well and provide you with your desired profit margin, great!
If not, you can choose to keep them in your online store anyway (just in case) or drop them altogether—there’s no cost to you either way.
More options for customers
Dropshipping provides business owners with an easy way to expand their product offerings and give customers more options.
If folks are browsing your site for a product and don’t find exactly what they want, they may leave and shop elsewhere. With dropshipping, you can add more of the products customers are searching for and entice them to spend with you.
Reduced operating costs
Every time you have to touch a product in the supply chain, there’s a cost. Freight, warehousing, inventory management, labor costs, picking, packing, and shipping all add up.
Holding costs, dead stock, and damaged or misplaced items also add to the expense. You can only pass on so much of your operating costs to customers without alienating them. In many cases, it may be cheaper to sell a dropship product than stock it yourself.
International expansion
The internet opens the door to international selling since nearly anyone with an internet connection can access your online store and make a purchase.
By using dropshippers, you may be able to partner with companies that offer products locally or regionally in countries where it would otherwise be cost-prohibitive to ship across international borders.
More flexibility
As long as you can communicate with customers and suppliers, you can run your business from nearly anywhere—including your home. Since there’s no brick-and-mortar storefront and no inventory to manage, you don’t need a dedicated physical space for operating your business.
Easier scalability
In a traditional retail or e-commerce store, increased sales also mean increased costs. There are more products to buy, manage, and fulfill. You may need expanded warehouse space and more employees to handle all of the tasks necessary to run the business.
And if your volume grows quickly, you risk struggling with order fulfillment. In a dropship business model, much of the work is done by your supplier, allowing you to scale with less additional overhead.
Disadvantages of dropshipping
Low margins
Since you’re not purchasing inventory in bulk—and you’re paying someone else for storage and order fulfillment—your profit margins from dropshipping are typically lower than they would be if you managed the whole process in-house.
Online sellers often use dropship products to augment their other physical inventory. You tie up less capital with dropshipping, but you only get a small percentage of the sale; most of the earnings go to the dropship provider.
Dropshippers will typically offer you a discount on products because they don’t have to handle the product marketing and sales. Your profit comes from the markup. While you’re saving on warehouse space, you’re also unable to take full advantage of wholesale pricing.
Plus, you’ll still have to pay for order fulfillment, processing, returns, customer service, marketing, and other business overhead. That means you’ll need to sell many dropship products to build a profitable business.
Significant competition
Dropshipping doesn’t require a significant investment to get started, but the low barrier of entry can cause market saturation in the dropship business model.
The most popular products can be found at thousands of online sellers; some may even come from the same dropshipping suppliers.
Selling dropship items can quickly be reduced to commodity sales, where you will be competing with other e-commerce sites on price and reputation.
Larger, more established retailers may reduce their markup to offer lower prices, which can force you out of the market. Even if you can match their pricing, consumers may feel more comfortable buying from an established vendor.
Lack of inventory control
In a traditional retail model, you’re in control of every aspect of the process—from marketing and sales to shipping and customer service—so you always know exactly how much product you have in stock.
With dropshipping, you rely on your supplier to handle a significant part of your business, so your reputation hinges on their job performance.
If there’s an issue with an order, the customer will contact you, and you’ll have to reach out to the dropshipping supplier to find a solution. This back and forth makes it tougher to resolve problems quickly and efficiently.
Bad actors
While plenty of dropshipping partners are top-quality suppliers, you should be aware there are some bad actors, too. You might encounter some suppliers that have a professional presence but deliver in a less-than-professional manner.
For example, there are scammers who claim to sell brand-name products but ship knock-offs, and when customers receive low-quality products, it reflects poorly on you.
So if you find a dropshipper that claims to provide designer products at dollar store prices, be very cautious. Like anything else, if it sounds too good to be true, it probably is.
Less repeat business
Since you’re selling other people’s products, it may be challenging to set yourself apart.
Consumers shopping for discount items tend to buy from places where they can find low prices with minimal risk, so many folks will be comparison shopping rather than returning to your store regularly.
You may miss out on one of the most profitable things a business can do: earn repeat customers.
Managing multiple dropshippers
Many dropshippers opt to use several different suppliers at once to increase the diversity of their products. This strategy can be beneficial, but shipping multiple products from separate locations can cause your fulfillment costs to rise, too.
Dropshipping alternatives
Dropshipping is one way to enter the retail industry without investing in inventory and a place to store it, but it’s not the only way. There are several alternatives to dropshipping, including printing on demand, affiliate marketing, and private labeling.
Print on demand
The print on demand (POD) model allows users to upload designs that can be added to various products, including T-shirts, stickers, and coffee mugs.
You can focus on creating designs instead of manufacturing products and holding stock. Plus, your selection of designs and products will still be unique.
Affiliate marketing
With affiliate marketing, you’re not actually selling a product. Instead, you use an affiliate link to a product of your choice and get a small portion of that sale when somebody makes a purchase using the link.
While affiliate marketing is easy, it’s a lot less hands-on and engaging than some of the other dropshipping alternatives.
Private labeling
Private labeling, or white labeling, allows you to purchase generic products that you can add your own labels and marketing materials to.
For example, Costco is a big-name retailer that operates under this model. The Kirkland products Costco stocks their shelves with often come from other producers.
With private labeling, you have a little more control over the image of your brand. However, it’s also a bigger upfront investment.
The right approaches to dropshipping
Dropshipping makes a better sideshow than the main event. While its faults make it hard to support a business on its own, it still offers enough benefits to help ecommerce companies improve their business substantially.
Consider these four approaches to using dropshipping effectively:
1. Market research
Dropshipping works better as a means to an end, not the end itself. Use dropshipping to mitigate the risk in trying out new products and used for market research.
Rather than raising your inventory costs by packing your warehouse with an unpredictable product, test it out with a trial period using dropshipping.
More than just discovering if it sells or not, you’ll also have a better estimate of how much it sells for, giving you a more accurate number of what quantity to buy for your initial stock.
This is doubly important for trying out new product types, which always carry inherent risk.
2. Protection from overselling
Experienced ecommerce brands know that market fluctuations aren’t always predictable. Rather than raising inventory costs by overstocking to meet unlikely maximums, having a dropshipping supplier as a backup saves you money without losing those sales.
This is especially useful for seasonal overflow. It’s a great safeguard against the uncertainties all retailers face. Having dropshipping options in place also makes great insurance against extreme circumstances.
If something like a natural disaster happens to your warehouse space, you can still fulfill pre-made orders by dropshipping the products from elsewhere.
The same holds true for side-stepping surprise shipping delays.
3. Strategic shipping systems
One unfortunate consequence of expanding your business is shipping complications. The farther out you get from your warehouse or fulfillment centers, the more shipping costs and fees you’ll incur.
Dropshipping can be the perfect solution for some problematic locations that fall outside your profitable regions.
- Maybe shipping that far costs too much, or maybe storage prices are too high to justify setting up a new shipping center.
- Maybe it’s an issue of taxes or extra fees, like when shipping out of the state or country. Relying on dropshipping for these select areas could be the determining factor in keeping you out of the red.
Moreover, just as dropshipping can be useful in market research, you can also use it to test new locales.
4. High-maintenance products
Some products cost more to stock and ship than others. In certain circumstances, it may be more profitable for you to dropship them versus storing them yourself.
What do we mean by high-maintenance products? Any products that necessitate extra fees for storing or shipping, such as:
- Large products — Some products take up so much space, their sales don’t make up the costs of the excessive storage room.
- Heavy products — If a product’s weight makes it cost too much to ship, try dropshipping from a manufacturer or wholesaler.
- Fragile products — Fragile products require special care when shipping. In these cases, the supplier or manufacturer might be better equipped to meet these requirements than you.
- Valuables — High-value items like fine jewelry, antiques, etc., require additional security that not all warehouses can offer. Rather than risking theft, you could leave the storage to someone who can adequately protect them.
- Special conditions — Maybe you want to sell items that need to be kept frozen, or materials sensitive to light. If your inventory needs special conditions, you may be better off dropshipping than storing it yourself.
Unless your entire company specializes in these types of products, it doesn’t make sense to pay additional storage and shipping fees for a small subsection of your business.
But you can still keep your customers happy by offering these products through dropshipping.
Choosing the best dropshipping suppliers
Whenever you include dropshipping into your sales strategy — in any capacity — you are entering a business partnership with the supplier.
Like we said above, as the vendor you are often at the mercy of your dropshipper for product quality, timely shipping, and even legal compliance.
That means you must choose them with the utmost care. For one thing, you want to make sure that the products are as advertised, but you should also see if their shipping meets your criteria.
Outside of the condition of the products, there’s still plenty of concerns about how your supplier conducts business. Here’s a quick-reference checklist of questions to ask yourself before signing on to do business with someone:
- How do they handle returns or damaged products?
- How long does it take them to fulfill an order, from sale to delivery?
- How is their customer support? (Feel free to test this yourself.)
- Do they insure orders?
- Do they offer fraud protection?
- Can you find reviews or references online?
Also don’t forget the Dropshipping Agreement Contract, explained above.
To help quicken your research time, we’ve previously compiled a list of the best dropshipping companies, including Spocket and AliExpress Dropshipping.
