In a traditional supply chain, companies field orders and fulfill them from inventory they have in stock. This includes picking, packaging and shipping the order out to the customer. Obviously, this fulfillment method requires significant overhead. The costs to keep product on hand (inventory), store it safely (warehousing), and fulfill orders (labor, packaging and shipping) can be prohibitive for smaller businesses, and those just starting out.
Dropshipping offers an alternative, allowing retailers to simply field orders, then leave the inventory management, storage and fulfillment (high-overhead aspects of selling) to a designated dropshipping supplier, usually a wholesaler or manufacturer. Some dropshippers will even handle returns!
So why doesn’t every business utilize dropshipping? Well, the truth is, it’s not right for every business. How do you know if it’s right for yours? Just take a look at some of the advantages and disadvantages we’ve laid out.
1) Low Overhead – As mentioned, selling products requires substantial investment in terms of inventory, storage and fulfillment when using traditional supply chain management methods. The failure of even just one product to sell as expected can leave you stuck with loads of unsold inventory and the loss of your investment.
With dropshipping, these pitfalls can be avoided. Sure, you might lose money in terms of marketing, but you won’t be left holding the bag if your product doesn’t fly off the shelves.
2) Ability to Pivot & Test New Products – Whether you’re launching a new business, or simply testing a new product, dropshipping gives you more room to experiment. Instead of purchasing a ton of new inventory and waiting to see if your investment pans out, try testing its ability to sell through dropshipping. If a new product doesn’t sell, move on to the next. If your store fails to find a profitable niche, pivot to something new. If your product does take off, then consider selling, storing and shipping the item yourself so you can keep a bigger piece of the profits.
3) Makes Scaling Your Business Easier – Scaling your business up to handle success is major growing pain for many new businesses. When orders start pouring in, it can be difficult, sometimes impossible to meet the demand, causing a host of new problems. From staff working longer, more frantic hours (which can lead to low morale and mistakes), to stressing over having enough product on hand and answering a growing number of customer inquiries – the challenges are enough to cause any owner headaches.
Dropshipping allows you to field orders at the rate they come in, whether it’s a trickle or a tidal wave. When the dropshipping supplier is responsible for all the dirty work, you have more time to focus on other things that matter to growth like marketing and customer service, which leads us to our next advantage …
4) More Time to Focus On, You Guessed it, Marketing & Customer Service – Dropshipping extends your runway to success, giving you more time to find a winning combination of product offerings, audience, marketing strategy and customer service. You can test new products and marketing strategies, which helps you create a clearer picture of your customers by finding out what they like and which messages they respond to most. After you’ve got that down, you can also spend time perfecting the customer service component of your business by making sure inquiries are answered quickly and product support is swift.
1) Profits will be Lower – For every advantage dropshipping offers, unfortunately, there’s a drawback – and this one’s significant. As the saying goes, “you can’t get something for nothing,” and dropshipping services are no exception. While you can often get products at wholesale prices (or close to them), you may have to pay for the considerable services a dropshipper performs on your behalf.
Here’s how it works – when a customer pays for your product, you turn around and pay your dropshipping supplier for the same product, often along with a cut to cover fulfillment. This can be in the form of a monthly payment, a one-time signup fee, or even a small percentage of the product price. The difference between what your customer pays, and what you pay, is your profit. This means you’re profit margin is almost always lower than it would be if you were fulfilling the order yourself. That said, you are saving on overhead, which means it’s still a viable option for a lot of businesses – especially smaller ones, or those just starting out.
2) Product Quality is Out of Your Hands – Because you’re not manufacturing products yourself, you don’t have control over the quality. To avoid selling bad products to your customers, which will reflect poorly on your business, always test the products you plan to sell before you actually do. If the products meet your standards, and you can offer them at an appealing price, go for it!
3) Competition is High – Because of the flexibility and low-overhead benefits dropshipping provides, a lot of would-be entrepreneurs want in on the action. This makes the competition in some markets fierce. After all, not everyone can sell fidget spinners and stand out from the crowd. Before you jump into selling a product, make sure to explore your options and get to know your potential audience. If possible, look for markets that aren’t overly-saturated, but still offer healthy demand. This improves your odds of getting noticed quickly, and gives you more time to become a leader in your niche.
4) The Logistics of it All can Still be Complex – While letting someone else handle fulfillment is considerably easier (in most cases) than doing it yourself, working with dropshipping suppliers can still be a hassle – especially if you’re working with multiple vendors. Keeping the various policies and fulfillment methods straight can be confusing. And like everyone else, even the best dropshippers make mistakes. Products may arrive late, damaged or even end up at the wrong destination – inevitable mistakes that pop up in every supply chain. Just as you’d be prepared to handle these issues if you were in change of fulfillment, be prepared to handle them when you’re not. Have a variety of customer service responses ready, and develop an acute understanding of how you or your dropshipper handles things like returns, damaged freight and re-deliveries.
Is Dropshipping Right for Your Business?
Ultimately, you’re the only one who can decide if dropshipping will work for you. If the advantages outweigh the disadvantages, and the model fits with your business goals, then dropshipping could certainly make your life as a business owner or manager a whole lot easier.