Millions of people seeking for side income keep asking – what is dropshipping? In short, the way by which a retailer makes sales without actually having to store and ship any of the products is called dropshipping. The retailer makes a sale, orders go directly to the wholesaler or supplier, and they handle the rest. The retailer has to take care of neither for payments nor the product, as well as the shipping.
If you choose to handle shipping and payments yourself, you may make this arrangement with the wholesaler, yet that seems to be in conflict with the whole point of dropshipping which is to make running an eCommerce business faster and easier.
Some of the distinctions between traditional online commerce business and business employing dropshipping can be seen in planning & logistics, costs, gross income margin, profit velocity, and startup costs.
Planning & Logistics
The best about running a dropshipping business is that you could be absolutely anywhere to operate your own eCommerce store. Thus, you are not tied down to just one place where the stock is. Moreover, you don’t need to coordinate the work of a warehouse or shipping, this work is already done for you. You also will never be worried that the shipment is late or the warehouse needs to be replenished because this is also being handled for you.
The costs of running a dropshipping store will always be lower than those of a brick-and-mortar store. You do not need to pay for warehousing and for the operation of the said warehouse. You do not need to pay for products and in some cases, shipping as well. All you need to worry about is handling customer service, process orders, and forward them to the wholesaler. Selling online will greatly decrease your operational costs, and in some countries, minimize taxes.
Gross Income Margin
Gross income is the money the retailer gets after all the costs of running a business are accounted for. Traditional e-commerce business has more expenses, as noted above. Therefore, if you do not have to pay for the cost of production, warehousing, shipping, and staff your gross income is likely to be more than that of an e-commerce business run using a traditional business model.
Actually stocking the products can also benefit from a profit standpoint, even though operationally it is more inconvenient than employing a dropshipping business model. Wholesale and dropshipping suppliers tend to sell the products at much lower rates to those who buy in bulk. This allows resellers to determine their own prices, beginning from the original wholesale price and upwards. Depending on the product and materials of which it’s made, profit margins may easily reach over $1,000 per single order.
At first, it might seem that having low starting costs for opening a dropshipping business is a huge advantage. In fact, it may put you at a disadvantage as you are likely to have more competition and copycats than those who choose to store and ship the products themselves. In other words, many choose dropshipping over physical stores, and the competition is high. However, fact is that dropshipping is a cheaper, easier, and less risky way to start an online business.
How does dropshipping work nowadays? Let’s say you choose to sell coats. Using the regular retail business model, you would need to buy 30 coats and keep them somewhere safe, then search for customers wanting to purchase your product. You may sell all 30 in a day, or you may sell only 2 and run out of willing customers. In this case, you are left with no money and 28 coats.
With dropshipping, on the other hand, you do not have that risk. All you need to do is advertise the coats on social media and set up a website for processing orders. You sell a coat for $120. You process an online order and forward it to your supplier. They take $80 for the coat and $10 to ship that coat directly to your customer, leaving you with $30 of net profit. If sales drop, you lose nothing. If your business takes off, you can repeat those easy steps indefinitely.
Even though using the traditional business model has its advantages, it’s also riskier and could cost more, while a dropshipping option relieves you of most costs and helps you make a profit from the very first sale. You can also run your business from anywhere in the world and have significantly less stress than you ordinarily would while running a traditional business. If your business becomes stable you may consider an option where you’d store the products or open a retail store. However, if it fails you don’t need to worry about all those leftover products that didn’t sell well.
Disadvantages of dropshipping
We’ve named all these pros, but are there any cons to this type of business? Let’s name a few, to better understand the dark side of dropshipping.
Yes, there can be low margins, depending on what you’re selling. It’s easy to start dropshipping, but keeping your products low-priced at all times, even when you need to boost your store at the beginning, will be your downfall. Your competitors might be doing this all the time, but most of them fail and close shop after working at minimum profits.
Thus, setting prices is really important. In a nutshell, customers will always compare prices, even more so by having to buy from an online store with bad customer support, than one with great online assistance.
Sometimes, you can’t control mistakes simply because your supplier can make one. Humans make mistakes, as is the case with dropshipping, when organizing and sending orders. The problem is, you’re the one whom they ordered from, so you’ll have to apologize instead.
Don’t worry, even the best of the best can make a mistake, although compared to low-quality suppliers, they are less prone to do so. So, there’s not much you can do about it except try to compensate your customer with a different product of the same value, in order to keep your reputation intact. Most dropshippers solve this frustrating issue by sending gifts as a bonus for the customer’s patience. This usually makes things a bit easier, while you wait for the order to be completed.
Dropshipping isn’t easy to start, because you’ll need to learn the basics first, and then upgrade as you go. However, it’s a very lucrative business that many entrepreneurs of all ages tend to focus on. After a while, you can fully concentrate on developing your online store, and become your own boss.
Many have succeeded in the business, and some have failed. That leaves the question – are you willing to succeed? If you’re looking to start dropshipping today, use DropshipVillage to your advantage.