What are the Pros and Cons of Dropshipping?
The world of eCommerce has evolved.
More and more retailers have jumped onto the eCommerce bandwagon which in turn, has created more competition for consumer transactions. As a result, we’ve seen new models of online retail emerge, such as dropshipping.
Maybe you’ve even heard of it before, but does dropshipping work? And is it a good business decision?
What is Dropshipping?
Dropshipping has emerged as an alternative to conventional eCommerce that allows retailers to collect orders from customers before passing those orders to distributors and suppliers for fulfillment.
Basically, the use of dropshipping gives retailers a workaround, saving them from many of the difficulties associated with maintaining inventory and having to implement your own fulfillment process.
The Pros of Dropshipping
As you can imagine, there are a lot of benefits to running a dropshipping business in lieu of a more conventional, inventory-driven eCommerce store.
The main benefits of dropshipping are that it’s cost-effective, allows retailers to take risks with less costly repercussions, and makes the storage and infrastructure of inventory unnecessary.”
Startup Cost is Lower
The traditional model for eCommerce often requires you to start your business with some initial capital. This capital is then used for obvious necessities like establishing your inventory and investing in storage space and infrastructure for that inventory.
You’ll also use the money for creating your brand identity, building a website, and developing your systems for day-to-day operations.
With a dropshipping business, you can eliminate some of those upfront startup costs. In turn, you can spend more time and capital on things like branding and website design.
Eliminates the Expense of Inventory
When you employ the dropshipping model of eCommerce, you can save yourself many of the expenses related to inventory.
Maintaining your own inventory requires an upfront investment to get your inventory established. You need a way to store and organize that inventory, too. This requires additional expenses, as will replenishing your inventory as you sell products.
Dropshipping offers a rather appealing solution. You can unload the burden of inventory by deferring all those responsibilities to your suppliers and distributors. In other words, you’ve basically got the inventories of several businesses at your disposal, but none of them are your responsibility to maintain.
Minimizes the Expense of Fulfillment
Fulfillment isn’t free.
Picking and packing — which is the process of compiling products for an order and getting them ready for shipment — takes time. Resources like boxes and packaging materials cost money. Shipping products can be expensive, too, especially when the products you’re selling are large or heavy.
As with the cost of inventory in general, dropshipping means that your suppliers and distributors do all the fulfilling of your orders, which means you’re not burdened by the process (and costs) of fulfillment.
You Can Take More Risks
Though taking calculated risks sometimes pays off, it’s harder to be a risk-taker when you’re maintaining your own inventory. If you decide to branch out by offering products in new product categories, what happens if your customers aren’t interested? You could take a huge loss on the amount invested in those products and any of the costs associated with adding them to your inventory.
If you’re not burdened with the expense of inventory, you’ll find that taking risks won’t necessarily have such a devastating effect on your revenue. If you’re dropshipping, your suppliers and distributors are the ones who are heavily investing in the products you’re selling.
You can experiment with adding new types of products to your online store without needing to put substantial financial backing behind those products.”
If you add a new product category and your customers aren’t interested, you’re not at risk for losing a bunch of money. It’s as simple as taking those products off your store.
No harm, no foul.
The Cons of Dropshipping
It may sound appealing, but dropshipping may not be the best option for every eCommerce business and online storefront. In fact, there are even certain drawbacks to dropshipping that you should consider before starting a dropshipping business.
Margins Are Lower
Not having to invest upfront in inventory and continue paying for storage and replenishment is a huge plus, but the trade-off is that your margins are much lower. The potential to profit from customer purchases is much more limited.
When you maintain your own inventory, you’re often buying your products wholesale, meaning you’re getting a discounted rate in exchange for buying in larger quantities. Since this makes your cost per item less, the margin on the item ends up being higher, which leads to more profit.
However, when yours is a dropshipping business, you’re deferring your orders to a supplier or distributor for fulfillment, and it’s that supplier or distributor who sees the impressive margins.
Your own margins will be negotiated with your suppliers and distributors, and it’s usually just a small percentage of what your customers pay for the product.
Dropshipping is Highly Competitive
The need for very little capital to start a dropshipping business makes it very appealing to a lot of entrepreneurs. For this reason, you’re likely to encounter much more competition in this space than with a more conventional, inventory-dependent eCommerce model.
You’re Dependent on Other Companies
When yours is a dropshipping business, you’re relying on other businesses and companies to essentially facilitate your business. Though many of the suppliers and distributors you’d be working with will have established credibility through years of reliable service, you’re still putting the future of your business into others’ hands.
And when you’re dependent on dropshipping to fulfill orders, you have a limited ability to provide customer service for the products you’re selling. For some issues, you may have to refer customers to your supplier or distributor for support.
This roundabout way of getting the service they need can be frustrating and discourage future purchases.
Brand Loyalty is Hard to Build
Outsourcing fulfillment by using suppliers and distributors to pick and pack your orders is convenient, but it offers very limited opportunities to establish a brand for your business.
Your suppliers and distributors could get the credit for all the products and services your customers buy.”
If a customer falls in love with one of the products you’re selling, for instance, that customer is more likely to focus on whatever company actually manufactured and produced the product than the dropshipping business that served mostly as a liaison between the buyer and manufacturer.
Additionally, dropshipping provides fewer branding opportunities. Customers who receive orders placed through your dropshipping business may see another company’s logo on the box and the receipt inside. For traditional retailers, shipment is an opportunity to reinforce a brand, but since a dropshipper doesn’t actually fulfill orders, you’re not able to seize these kinds of branding opportunities.
The lack of branding opportunities is arguably one of the biggest drawbacks to dropshipping.”
After all, customers find their favorite stores, and then continue buying from them. If your store is little more than a cash register, there’s very little incentive to continue buying from you versus finding the product from a more conventional retailer.
Is Dropshipping Right for You?
Ultimately, a dropshipping business is an effective business model for those who want to start eCommerce stores while investing as little as possible in the business upfront. On the other hand, those who put more value in branding opportunities or would like more control over margins would probably find the traditional model of eCommerce better meets their needs.
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Once you’ve decided to become a dropshipper, the next step is to find a great hosting plan. Fortunately, Liquid Web has you covered.
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