Want to start your own ecommerce company? You may want to consider dropshipping. Business trends and methods have diversified over the years as the world has advanced technologically. Throughout these advancements, dropshipping has become a very popular business model. Let’s take a deeper dive on what dropshipping is and help you develop a strong understanding of how it may be a right fit for your company.
What is Dropshipping?
A dropshipping business is all about selling products without keeping them in stock. To fulfill orders, the seller instead ships goods through a third party, typically a wholesaler or manufacturer whenever a sale is made.
The most prominent distinction between dropshipping and the conventional retail model is that goods are not stocked; instead, they are fully stocked in the original warehouse by the original company where they will be shipped. You act as the middle man. For instance, you have a storefront where customers can purchase products, the customers place orders via your website, your dropshipping partner bills you on the wholesale price and ships out the customer’s order directly to them. You never see the actual product during this process. Your profit is made up of the difference between the wholesale price and the price you sold it for.
How Does Dropshipping Work?
Dropshipping is a supply chain management approach. A supply chain is a process of delivering products from the manufacturer to the consumer.
This is a simple structure of the stages of dropshipping:
- Manufacturers create the goods. They often don’t sell directly to customers, selling in bulk to wholesalers and retailers, or dropshipping
- Retailers find a manufacturer/wholesaler that has the products that fits their brand and they work out a fair dropshipping agreement
- Retailers list the manufacturers products on their website
- Whenever a sale happens, the retailer places the same order with the manufacturer/wholesaler who bills you the wholesale amount and ships directly to the customer. This is often times automated, resulting in an almost totally passive supply chain system on the retailers end.
The Benefits of Dropshipping
Dropshipping is a great retail inventory management strategy that may help you reduce risks while increasing profits. Businesses that wish to minimize inventory risk while enhancing company flexibility and efficiency will likely choose this form of order fulfillment. Here are some more benefits of going with dropshipping as a part or your whole business model:
Low-Cost Startup:
Dropshipping significantly reduces the initial costs of starting an online business, which can end up being costly with the purchase of all your inventory, the space to house it all and eventually employees to manage it all. Since you are not responsible for managing storage for the product, it saves you there as well. Meaning you won’t be left with inventory that isn’t selling, and you won’t be forced to mark down those items and incur a loss as a result of doing so.
Your Choice of Location is Flexible.
Businesses with a dropshipping business model might also be more agile and flexible than companies with more standard organizational structures. You can run your business effectively from any place with an internet connection because there is no physical inventory and with that, no need for a physical space. This allows you to focus more time on other areas of your business, such as customer support and marketing.
You Can Provide a Wider Variety of Products:
Since there is no money to establish your inventory, you can keep up with the latest trends and easily add new products to your website without incurring additional costs. Furthermore, you can quickly change up your offers without having to buy new items or clear out your backstock inventory first.
You are Relieved of the Responsibility of Inventory Management:
Because you will not have any inventory, you won’t have to worry about managing it. Inventory management may be a time-consuming and challenging endeavor, and cutting that whole headache from your business model may be a good idea if possible. Because you and your staff will no longer be required to keep track of inventory, reorder it, and process it, you will have more time to focus on other elements of your company that will help it expand. Often times even returns will be handled directly with the original supplier.
Dropshipping Challenges
So far everything sounds great! Right? Nothing is ever perfect. Although dropshipping may be advantageous for many e-commerce business owners, several disadvantages may not be compatible with your entire business plan. Here are a few reasons why some companies choose not to use drop shipping as their business model:
Inventory-Related Issues
It is simple to track how much you have on hand when you have inventory. Getting products from many different suppliers, each of which works with many various retailers, makes it more challenging to ensure that the products you need are available when you need them.
Complications in Shipping
When you’re dealing with a large number of suppliers, keeping track of shipping costs can become complicated. Suppose that a consumer purchases two things, both of which are from separate vendors and have different delivery charges. To avoid the customer feeling overcharged, you’ll need to figure out how to charge the customer for shipping in an appropriate manner. This may become even more complex as the customer orders more products from all different suppliers.
Quality Control
By placing your trust in a dropshipping partner to deliver items to your customers, you act in good faith that the orders will be delivered safely, punctually and in good condition. If they don’t meet their end of the deal or provide things late, damaged, or not at all, it could hurt your company’s reputation, which could hurt your company’s overall sales.
Supplier-Related Problems
Building relationships on mutual trust and respect is significant to be successful. Suppliers are essential to your company’s success, so choose who you partner with carefully and never take those connections for granted by paying them late or challenging them. If you want to build strong relationships with your suppliers, you need to manage them properly. You take care of them, and they’ll take care of you.
How to Choose a Dropshipping Supplier
For your dropship business to be successful, you need to do a lot of research into the third party you choose.
Generally speaking, you want to establish dropshipping agreements directly with the producers of the items you want to sell to maximize your profit margins. It is very likely that the fewer intermediaries you have to deal with, the greater your profit margins will be. Each extra cost levied by your supply chain partners has an impact on your bottom line, so it’s ideal for working directly with a manufacturer if at all feasible, to save money.
Here are some good questions to ask prospective suppliers:
How Much Will You Charge Me?
One of the most important questions to ask! Before picking a dropshipping partner, it is essential to run the numbers and make sure the profit is worth it. If the wholesale price on their products arn’t low enough for you to make a reasonable profit on the items, you should look for a different place to buy from or just choose another product.
Is There a Handling Fee?
Some suppliers have other fees on top of the cost of their products. Consider how it could affect your profit margin if this is the case. As previously said, every cost and every intermediary has an impact on your bottom line. Therefore, you want to make sure you have all the numbers aligned for you to make a profit that makes sense to you.
What Method Is Used to Ship Products?
Your ideal partner will ship things via a service that allows you to follow the progress of your order (which they should send to you). Customers who have questions about the status of their orders should be provided with correct and up-to-date information via either a tracking number, email updates, etc. Find out what the policies are on returns and warranties. If a vendor doesn’t allow returns or items that aren’t guaranteed, it’s best to stay away from them.
How Does the Billing Procedure Work?
Will your dropshipping partners charge your credit card as soon as you place your order? Or do they give you a bill every month? Be careful to choose a partner whose billing method is compatible with your cash flow requirements.
Key Points You Should Consider Before Starting to Dropship
Focus on What You CAN Control
Yes, the shipping speed, product quality and overall supply chain management is mostly out of your control, but there is still a lot you do have control over. Try to focus on providing amazing customer service from the order until delivery and beyond. It all begins with a user-friendly e-commerce experience, which is essential. You want to make your website easy to use and understand on any device, while at the same time assisting your customer with anything they may need along the way.
Pay Attention to The Products You Choose
Dropshipping enables you to offer a broad range of items, but this does not imply that you should sell everything you can. Do market research and examine trends in the industry to identify what you should offer in your store. Make a list of products that are marketable, easy to export, and hard for people in your area to get.
Concentrate on Quality
Even if you properly examine a supplier before working with them, you should be alert about the service after you begin collaborating. For example, suppose there are several occurrences that involve broken items, missing packages, or late deliveries. It might be better to break off with the supplier rather than risk losing your customers’ faith.
As stated before, you don’t see the product when dropshipping. This is why we recommend always purchasing at least one of every product you plan to list on your website so you can thoroughly inspect the quality of what you’re selling. This allows you the chance to find flaws in the products before your customers do.
To establish trust in your company, you shouldn’t only follow through on your promises with dependable dropshipping partners and a well-designed website, but you must also work to increase your online credibility as a means of gaining customer confidence. For the success of your dropshipping business, it is essential to establish strong relationships with your customers. A solid social media presence and good email marketing campaigns are a great start.
Is dropshipping legal in the United States?
Dropshipping is legal in the United States. Although dropshipping is permitted, business owners who choose to use this business model should be careful when choosing providers, especially when it comes to trademarks and intellectual property. You don’t want a nasty lawsuit on your hands!
The Market Scope of Dropshipping
In 2020, the global dropshipping industry was valued at 128 billion dollars 2020. From 2021 to 2026, it is expected to grow at a compound annual growth rate (CAGR) of 32%
According to the International Trade Administration, the increasing prevalence of smartphones and a rise in disposable income among customers contribute to the expansion of the ecommerce business, fueling the demand for dropshipping services. A significant increase in investment by the major players in the ecommerce industry has occurred due to the number of buyers who choose to purchase on online shopping platforms. During the Covid-19 pandemic, awareness increased, providing and buying more goods and services online, raising e-commerce’s share of global retail trade from 14% in 2019 to about 17% in 2020.
Is Dropshipping a Viable Business Model?
Yes, when done correctly and strategically. Dropshipping’s profitability is dependent on several factors, and it is not for everyone. That being said, If the numbers are run correctly, you choose reliable dropshipping partners and all other areas of your business are well managed, dropshipping can be a profitable and easier than average business model.
Growrilla Digital is here to help walk you through every step of your dropshipping journey. Whether you need help setting up your website, making SEO optimized product listings, advertise, or simply need help setting up dropshipping automation apps, were here to help! Contact us and let’s get your business rolling!