Are you looking to build a lucrative online business? Drop shipping is a business strategy that is snowballing and becoming more popular amongst online retailers across the globe. Drop shipping allows retailers to sell quality products without having to worry about the hassles of manufacturing products, tracking inventory or setting up warehouse space.
In this article, we are going to look at what is dropshipping, how it works and its pros and cons.
What is dropshipping?
Drop shipping is a business model that does not require you to stock up products. Instead, you get into a partnership with a supplier that stocks up their own inventory. Hence, as a retailer, all you need to do is to ship goods directly to your clients from a third party supplier or manufacturer without an intermediary step like having to store the products in their physical address.
How does it work?
Simply put, online retailers coordinate the sales and delivery of products between the manufacturer and the consumer. The retailer starts by partnering with one or multiple dropship suppliers. Once they have come to an agreement, the retailer starts selling the products in their own store. Once the retailer gets a client, the products are supplied directly to the consumer from the wholesaler or manufacturer.
The retailer is not obliged to purchase and store a whole lot of inventory. Instead, they only need to get in touch with the wholesaler or manufacturer and sign up them with the entire merchandise in their eCommerce store. Dropshipping helps to reduce the initial investment since it eliminates the inventory maintenance cost. However, with it comes reduced profit margins and tighter competition.
Pros of dropshipping
It gives you the ability to grow your business fast
Being able to fulfill all your orders and ship them out to clients may take a lot of time. While this might not seem hard when starting out, managing all the orders might become more difficult as your business grows.
When your business is thriving, and you are finding it hard keeping up with the demand, drop shipping might be the answer to your problems. You can continue growing your business without stressing about completing orders correctly and on time. Instead, you will get more time to plan, manage and grow your business.
Allows you to offer a wide range of products
With drop shipping, retailers can provide a vast product range to consumers as well as co-work with multiple manufacturers and wholesalers.
Low Startup Cost
An entrepreneur looking into dropshipping will not need to store any inventory to fulfil pending orders. Also, there are no upfront costs involved in such an agreement with the wholesaler/manufacturer such as overhead expenses of running inventory, billing, shipping, and warehouse.
Saves on time
Drop shipping eliminates the time spent waiting for products to be shipped from the manufacturer to the retailer, which in some cases may take a few weeks. With this method, the retailer can go to the market with their product as long as they are fully manufactured and have passed all quality checks.
Cons of dropshipping
Since it requires low startup costs, it allows room for more entrepreneurs to opt for drop shipping as an order fulfilment model, thereby increasing competition.
More complicated logistics operations
When working with multiple suppliers, logistics operations might get complicated since you will have to deal with different manufacturers and shipping methods. Hence, there is a higher chance of errors occurring.
Retailers need to be ready to communicate frequently with consumers and the wholesalers to avoid discrepancies.
Lower profit margins
A low-profit margin is the biggest disadvantage of dropshipping. Since this business is so easy to start, and the overhead costs are minimal, most merchants resort to selling their items at rock bottom price with the hopes of growing their revenue. This is because they have invested so little that they can afford to sell at minuscule margins.
Dependability on suppliers
Just like any other business venture, it is crucial that you choose your partners carefully. Some suppliers tend to be more reliable than others. If you pick the wrong supplier, you will be stuck explaining to your customers why their shipment is late.
While dropshipping is relatively easier and more affordable than most businesses to start, it is not a get rich by doing nothing model. At the end of the day, how well you understand the business model will significantly affect how perfectly you do. So take the time to learn more about the industry, and you will survive just fine.