One of the recent trends in retail ecommerce is dropshipping. Dropshipping is a model where an online store sells product without keeping it in inventory. Instead, the store works with a supplier or manufacturer to ship the product directly to the customer.
There are several advantages and disadvantages to this model, and all are compelling. Here’s a quick rundown.
Advantage: Smaller initial investment and lower overhead costs
To get started with ecommerce dropshipping, you’ll need to make fewer investments up front. There are lots of reasons why this is. First, you aren’t purchasing an initial stock of inventory. Since you aren’t dealing with physical products, it’s a lot easier to get started. The other investment you don’t need to worry about is warehouse space. Dropshippers avoid the inventory-related responsibilities in a warehouse such as tracking, purchasing, stocking levels, and other management tasks.
Disadvantage: Low profit margins and high competition
Because there isn’t a large initial investment, there isn’t a need to recover initial cost. For this reason, many dropshippers can afford to sell their product at the lowest possible price to increase the volume of sales. You might have a high volume of sales, but you aren’t making as much profit per sale. And when several online stores bottom-out their prices at once, it creates high competition.
Advantage: Flexible location and variety in product offerings
There aren’t many limitations to where you run your business or locations where you can ship. Dropshipping businesses can operate from anywhere with an internet connection. And, suppliers often offer a wide variety of product, and can ship anywhere.
Disadvantage: Complications with inventory and shipping costs
Since dropshippers aren’t responsible for maintaining inventory, there will always be a degree of uncertainty. If you’re working with several suppliers, you’ll need to be mindful of which product is coming from where. Different suppliers can have different costs and policies for shipping. Open and frequent communication with each of their suppliers is crucial to gauge inventory levels.
Advantage: Easier to scale
Have a flexible product offering and location makes ecommerce dropshipping easy to scale. Since dropshippers aren’t responsible for order processing or fulfillment, you’re not worried about being overwhelmed with new orders, returns, and maintaining stock levels.
Disadvantage: Unreliable customer experience
This is a considerable downside to letting your supplier handle inventory. For example, say your supplier makes a mistake and ships an incomplete order. Or maybe the packing was low-quality, and the product arrived damaged. In both of these cases, the consumer will expect you - the seller - to take responsibility. There’s a lot less flexibility and a lot more uncertainty, which means your customer’s first impressions of product - the packaging, how it looks, how fast it gets there, if it’s even the right order - are completely out of your control.
Is ecommerce dropshipping a good idea? Here’s the bottom line
If you’re thinking about the ecommerce dropshipping model, I’d encourage you to weigh the advantages with the disadvantages. It depends on your situation. For some, ecommerce dropshipping can be fairly profitable. But for others, it’s way more trouble than it’s worth. Sometimes it’s a good option when starting out - and other times, you need that control over shipping and inventory right from the beginning. Remember, there are disadvantages with any ecommerce model - just make sure you’re prepared to handle them.