Do you want to start an ecommerce business with low overhead and no warehouse and still make a profit?
Then dropshipping is the business model you’re looking for.
But starting a dropshipping business isn’t the right choice for every entrepreneur. There are significant tradeoffs between dropshipping and traditional wholesaling.
We’ll look at the pros and cons of dropshipping and help you make the right choice for your business today.
Dropshipping is a business model that allows you to sell and ship products you don’t own and don’t stock.
Your suppliers – wholesalers or manufacturers – produce the goods, warehouse them, and ship them to your customers for you.
The process is simple:
– You receive an order
– You forward the order to your supplier
– Your supplier fulfills the order
While dropshipping has many benefits, it also has many drawbacks. We’ll explore both in the sections below.
Many people start a dropshipping business because they think it’ll be easy to run.
“No inventory, no problem!” they say.
The truth is, it’s not “easy.” It comes with its own set of problems.
With that said, dropshipping also solves many problems for retailers and wholesalers.
Let’s take a look at the pros and cons of dropshipping to see if it will solve your business problems or if it will add to them.
It requires a lot of capital to stock a warehouse. You can eliminate the risk of going into debt to start your business by using dropshipping.
Instead of purchasing an extensive inventory and hoping that it sells, you can start a dropshipping business with zero inventory and immediately start making money.
The cost of inventory is one of the highest costs you’ll have if you own and warehouse stock.
You may end up with obsolete inventory – forcing you to find ways to reduce your stock – or you’ll end up with too little inventory – leading to stockouts and lost revenue.
Dropshipping allows you to avoid these issues and focus on growing your customer base and building your brand.
Order fulfillment usually requires you to warehouse, organize, track, label, pick and pack, and ship your stock.
Dropshipping lets a 3rd party take care of all of that.
Your only job in this arrangement is to make sure they get your customer orders. Everything else will be handled by them.
Without the constraints of a physical inventory and the costs associated with it, dropshipping allows you to update your inventory quickly, easily, and cheaply.
If you know a product is doing well for another retailer or reseller, you can immediately offer it to your customers without waiting for it to arrive in your warehouse.
Dropshipping allows you to test new items without the risk of carrying obsolete inventory. You only pay for what you sell.
Even though you don’t carry the cost of warehousing stock, you will pay for dissatisfied customers.
The manufacturers and wholesalers you do business with are responsible for managing and shipping your stock. If they screw up, the customer complains to you or buys from your competitor.
If you start a dropshipping business, make sure you work with high-quality partners.
Being able to offer new products immediately or stop selling slow-moving products is a major benefit of dropshipping.
The drawback to this perk is that you don’t control your supplier’s inventory. If they run out of stock, YOU run out of stock.
This will result in longer lead times and lost customers.
The hidden “cost” of dropshipping is the lack of bulk pricing.
You will likely pay more for each item you sell as compared to paying less for a large inventory of items – leading to less profit.
If you want to earn a lot of money using dropshipping, then you’ll have to sell more products than you otherwise would have if you owned and warehoused them yourself.
If your supplier delivers products late, damages them, delivers the wrong items, or otherwise screws up your customer’s order, the customer will take it out on you.
We already mentioned this problem when it comes to order fulfillment and lead times. But it extends farther than that.
You won’t be able to maintain the personal touch that retailers who manage their own inventory can provide customers. You won’t be able to quickly solve customer issues without overseeing the inventory yourself – you’ll have to deal with your suppliers to solve problems for your customers.
This “man-in-the-middle” way of helping your customers can lead to issues with your suppliers who may take a long time to do what you ask them to do, and with your customers – who will quickly get tired of waiting a long time for their problems to be solved.
Now that you know the pros and cons of dropshipping, it’s important for you to know about a tool that you can use to make dropshipping work better for you.
We mentioned that one of the cons of dropshipping is not being in control of the inventory you’re selling – leading to potential stockouts.
But, you can use a cloud-based inventory management software that integrates with your supplier’s software so that both of you know how much inventory is in stock at any time.
This helps you as a dropshipper synchronize your marketing and sales campaigns with your supplier’s stock.
So, when any of your supplier’s customers make a sale (including you), it will update the amount of inventory in your supplier’s warehouse automatically.
If you want to minimize some of the issues with dropshipping and make it more worthwhile, then you need an inventory management system that tracks your stock levels in real-time.
Where will you find such a system?
Right here at DEAR.
Try DEAR for 14 days, completely free!