Dropshipping has become a popular logistics approach with today’s online retailers.
The main reason? It eliminates the need for warehousing — an expensive and tedious endeavor that calls for careful inventory stocking, not to mention a whole host of other manual tasks, like picking, packing, shipping and more.
But drop shipping isn’t for everyone — nor is it necessarily easy.
Trying to determine if a drop shipping business model is right for your brand? Let’s look at the pros and cons now.
What is Drop Shipping?
First, let’s cover the very basics: what exactly is drop shipping?
At its simplest, drop shipping is a fulfillment method that allows a retailer to forgo buying, stocking and storing inventory. Instead, when a customer purchases a product, the retailer purchases that item from their supplier, who then ships it directly to the customer on their behalf.
Benefits of Drop Shipping
Buying, stocking, and storing inventory is one of the most expensive parts of being a retailer, and dropshipping? It lets you skip right over all that.
You don’t have to invest thousands into products, nor do you have to pay to rent warehouse space to store it.
“Especially around the holiday season, dropshipping can allow you to focus on selling, promoting, and marketing your business,” according to Mrigakshi and Smriti of Tech Buzz, Content Manager at Shipstation.
Other advantages of drop shipping include:
● Less risk – You don’t have tons of money tied up in inventory that potentially might not sell. You only buy a product if a customer has already purchased it, in which case, you’re already guaranteed some sort of profit margin.
● Very little overhead cost – Without warehouse costs or the need to stock inventory, drop ship businesses have very little overhead. Many owners are even able to run their business from out of a home office, using only a laptop.
● A faster start-up – There’s a lot of work in stocking inventory, finding a warehouse, taking out a lease and hiring people to manage, pick and pick your products. Without all those steps, retailers can get their businesses off the ground much more quickly.
● Scalable – It’s super easy to scale a drop ship operation, as the majority of the extra work falls on your suppliers — not you or your own team. When you do more business, you simply have to order more products. The supplier is the one who has to pick it, pack it and get it from point A to point B for the customer.
Finally, drop shipping also opens the door to a wide and ever-changing array of products. This can be good if you want to capitalize on trends or seasonal surges in consumer activity.
Cons of Drop Shipping
Obviously, there are disadvantages to drop shipping. The largest one is that you’re at the whim of whichever drop shipping companies you choose to work with.
That means if they mess up, you mess up. If they change their pricing, you change yours, too.
You essentially have less control over your business, and therefore less control over your customer satisfaction as well.
Other downsides of drop shipping include:
● Low-profit margins – Because of the low barriers to entry and the competitive space of online shopping, drop shipping businesses are often forced to price for very low profit margins. It’s not until they’ve really scaled their business and built up customer loyalty that they can increase prices enough to see big financial gains.
● Lots of inventory issues – It’s very hard to keep track of inventory levels when you’re not in charge of them yourself. And if your store isn’t in sync with the latest inventory data from your suppliers? That means a customer could order out-of-stock items, resulting in frustration, and disappointment that will probably hurt your reputation in the long haul.
● Shipping is complicated – Shipping is pretty complex with drop shipping, as it depends on which supplier the product comes from, where the customer is located, the weight of the product, etc. If a customer buys three products all from different suppliers, that means you’re hit with three different shipping rates. You’re forced to either eat some of those costs or charge sky-high costs and risk losing the customer. Neither’s an ideal option.
“Dropshipping, especially around the holiday season, can allow you to focus on selling, promoting, and marketing your business,” says Blanco.
“But dropshipping—and delegating in general—is dependent on your specific situation.”
As a general rule of thumb, handcrafted made-to-order products are best shipped under your watchful eyes, and not with a drop shipper–even if that means adding temporary hires to deal with additional shipping and returns.
The key, according to Blanco, is to test your drop shipper during a low season.
“A little experimenting before implementation can be the difference between a quality shipping experience and disaster,” says Blanco.
For more information on dropshipping, email email@example.com
The pros of dropshipping
1. Low barrier to entry
Both traditional and online stores often require a hefty financial investment to develop, manufacture, and source products. Additional costs associated with stocking inventory, maintaining a physical presence, staffing locations, and marketing to new customers can really add up!
Dropshipping has a much lower barrier to entry because you don’t have to worry about developing new products or purchasing and storing inventory.
2. No inventory management
Traditionally, retailers pay upfront production costs, wait for delivery, and then stock products in a shop or warehouse. If a product isn’t available for customers when they want to make a purchase, sales are lost.
Inventory management also requires storage and handling costs — someone has to fold shirts and put them on the shelves! And you might purchase or manufacture large volumes of inventory that don’t sell, so there’s significant financial risk involved.
Businesses that dropship, on the other hand, remove those risks. A third party handles inventory, and products are available to the customer on demand.
3. No need for a physical storefront or warehouse
Dropshipping nixes the need for a physical storefront — which means no lease, no mortgage, no construction costs, no upkeep.
4. Improved cash flow
Typically, retailers purchase products, wait for them to arrive, and then sell them to customers. For a period of time, they’ve spent a significant amount of money without the ability to make it back.
With dropshipping, you receive payment for the products at the same time you pay your providers — or before. This frees up cash for marketing and growth.
5. Test new products with minimal risk
Innovation is critical for keeping customers engaged, but fear of investing money into new products with unproven track records prevents many business owners from moving forward.
Dropshipping lets you test new product lines without spending lots of money. If customers don’t respond to a new item, simply remove it from your store!
6. Create passive income
Passive income is earned with little to no daily effort (though it does require upfront work and consistent monitoring). With dropshipping, it’s very possible for you to be working on other aspects of your business (or even be asleep!) while orders are placed and fulfilled automatically. With a traditional retail model, products couldn’t go out without your involvement.
The cons of dropshipping
1. High competition
The same low barrier to entry that makes dropshipping attractive creates heavy competition. Other stores aren’t selling similar products — they’re selling the same products from the same third-party manufacturers. You’ll have to find other ways to stand out in order to compete.
2. Lack of control
When dropshipping, inventory rarely passes through your hands, so you don’t have the chance to ensure that products are in top condition. Without quality control, you’re putting your store’s reputation in the hands of a third party. One bad batch of products could lead to unhappy customers and lost sales. And unless you have a special deal with your suppliers, you can’t use packaging to make your store unique, include coupons to drive additional purchases, add thank you notes that encourage customer loyalty, or customize boxes and envelopes.
Fee structures can also be complicated and can change with little notice. As your store grows and develops a strong reputation, you can start negotiating exclusive deals with suppliers. But until then, you’ll have less favorable profit margins and be a lower priority for vendors. High fees can quickly eat away at profits or force you to price goods out of reach for your customers.
3. Bulk discounts
One of the reasons big box retailers can sell products at such low prices is economies of scale. They get major discounts on products because they purchase such a large volume, and they pass those discounts on to shoppers.
With dropshipping, you can say goodbye to bulk discounts, since you’re essentially purchasing products one at a time. Until you generate enough sales to give you some negotiation leverage, you’re paying what the suppliers ask.
4. Disjointed orders
If you have a variety of products listed on your store, they may come from different suppliers. Customers may receive multiple packages for the same order, which can lead to high shipping costs, wasteful packaging, confusing branding, and annoyed customers.
5. Race to the bottom
Differentiating your store can be difficult. Many stores try to compete on price but, with so much competition, find themselves setting lower and lower prices. If you’re not careful, you’ll sell lots of inventory, but at prices so low that you end up losing money.
How to make dropshipping work for you
Successful dropshipping starts with picking the right products and vendors. Sloppy packaging or delayed shipping reflects poorly on you. Take the extra time to thoroughly vet all of your potential vendors.
Marketing, branding, and customer service are absolutely critical to success with dropshipping. Since anyone can sell similar products and you don’t want to only compete on price, make your store stand out by establishing a unique brand and offering superior service. Supporting a cause related to what you sell is one way to do this. And because margins can be very thin with dropshipping, it’s important to turn one-time buyers into repeat customers.
You’ll also need an attractive, effective website. With WooCommerce extensions for everything from marketing to bookkeeping, you don’t have to work on your store 24/7. You can start dropshipping inexpensively and scale your store as much as you’d like.
The WooCommerce Dropshipping extension was designed to make the entire process hassle-free, allowing you to:
- Automatically send order notifications to suppliers
- Import inventory on a per-supplier basis
- Assign products to specific suppliers
- Create special, locked-down accounts for suppliers with order and shipping information and packing slips
- Customize packing slips for consistency
Is dropshipping worth it? Yes, if you have the right tools. WooCommerce provides the perfect launching pad for dropshipping businesses. Create an online store in no time, enjoy world-class support, and take advantage of thousands of marketing, payments, and management tools.