In traditional ecommerce businesses, the order fulfillment process involves companies receiving customer orders and shipping the products from inventory they have in stock. This includes picking, packaging, and sending out the order to the customer. Obviously, this method of supply chain management requires significant overhead costs. The expenses involved in maintaining inventory, storing it safely in a warehouse, and fulfilling orders (labor, packaging, and shipping) can be a barrier for smaller online businesses, and those just starting a dropshipping business.
Dropshipping offers an alternative, enabling online stores to simply process customer orders, then delegate the inventory management, storage, and order fulfillment — the high-overhead aspects of running an ecommerce business — to designated dropshipping suppliers, usually wholesalers or manufacturers. Some dropshipping suppliers will even handle returns, enhancing the customer experience!
So why doesn’t every online business adopt dropshipping? Well, the truth is, it’s not the right fit for all businesses. It’s a highly competitive field with unique challenges. So, how do you know if dropshipping will work for your business? Let’s delve into some of the advantages and disadvantages.
Advantages of Dropshipping for Ecommerce Businesses
1) Low Overhead – As mentioned, selling products in an online store requires substantial investment in inventory management and order fulfillment when using traditional supply chain methods. Starting a dropshipping business avoids these pitfalls. While you may still have to spend on social media marketing and other promotional activities, you won’t be left holding surplus inventory if your products don’t sell.
2) Ability to Pivot & Test New Products – Dropshipping gives you more room to experiment. Instead of purchasing a large inventory and waiting to see if it sells, you can test a product’s viability through dropshipping. This is particularly beneficial for print on demand items. If your product does take off, consider selling, storing, and shipping the item yourself to retain higher profit margins.
3) Makes Scaling Your Business Easier – Scaling up to meet demand is a significant challenge for many new businesses. Dropshipping allows you to manage orders at the rate they come in, ensuring you’re not overwhelmed by success. When your dropshipping supplier handles the bulk of the work, you can focus on marketing and customer service.
4) More Time to Focus On, You Guessed it, Marketing & Customer Service – Dropshipping gives you more time to perfect your online store’s marketing strategy and customer service. You can test new products to sell and marketing strategies, refine your customer experience, and ensure inquiries are answered promptly.
Disadvantages of Dropshipping for Ecommerce Businesses
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.
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 aligns with your business goals. If the advantages outweigh the disadvantages, and the model suits your online store’s objectives, then dropshipping could streamline your operations and make your life as a business owner or manager a whole lot easier. By focusing on product quality, maintaining a keen understanding of the supply chain, and striving for excellent customer service, you can make dropshipping work for your ecommerce business.
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Michael Eichenberg is the co-founder and CEO of FreightSnap, allowing the supply chain, logistics, manufacturing, distribution and transportation industries to measure, weigh, photograph and ID pallets and parcels in just seconds. Learn more and share your ideas on Facebook and LinkedIn.