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The global dropshipping industry was around $122 billion in size in 2019. It grew to $149 billion in 2020. and it continues to grow even in 222. Drop shipping is an order fulfillment system that doesn’t require your business to keep products in stock. Your online business sells products but passes on the sales orders to a third-party supplier. It is this supplier that will then ship products to your customer.
So, what is drop shipping meaning, and does it actually work? What are its pros and cons? Find out how the dropshipping business may seem to be a viable business option to you or not at all.
What is Dropshipping?
Dropshipping has evolved into an alternative to a traditional eCommerce platform. It allows online retailers to collect orders from their customers and pass them onto dropshipping suppliers and distributors for order fulfillment. A drop-ship business provides you with a workaround. You will not have to go through the hassles of inventory management and creating your own fulfillment process.
So, basically what is dropshipping business? It is a business model that allows selling online and shipping items without owning the stock. You also don’t have to maintain that stock. It is your designated third-party or supplier that will do the following:
- Producing the goods
- Warehousing the goods
- Shipping them to your customers
The key steps in drop shipping businesses are as follows:
- You receive an order from a customer
- You forward the order to the third-party supplier
- The supplier fulfills your order
Now that you understand dropship meaning, it is important to learn about its pros and cons before deciding whether it makes sense to you or not. There are many benefits of dropshipping, but also many drawbacks at same time. So, it may be entirely perfect for one business person, but not for another one.
At Blackbelt Commerce, we will like to shed light on this topic so that you can take a sound decision for your online business goals.
Pros of Dropshipping Business
Obviously, there are many benefits of running drop shipping businesses. Which is the reason it has such a large market. The dropshipping business model offers many advantages over the conventional and inventory-based eCommerce store model.
Primarily, cost-effectiveness is its big strength. As a retailer, dropshipping allows you to take risks with much lesser potential losses at stake. There is no longer any need for you to spend money on managing storage and the relevant inventory management infrastructure.
Explore the different pros or positives of drop shipping businessesto create a
1. Cost of Startup is Lower
It requires a lot of investment to develop the infrastructure for a warehouse and stock it with your products. Drop shipping allows you to get started with your online business without taking financial risks. You don’t have to invest in a vast inventory with the hope that it will sell. A drop-ship business can be started with zero inventory and you can immediately start generating revenue. There will be no hassle of shipping management.
You will save potential investment in the areas of:
- Inventory storage
- Systems for product preservation
Dropshipping companies have low overhead and they can start an eCommerce business with a smaller capital. With drop shipping, you can focus more of your upfront investment on ecommerce site design and development (online store), branding, and marketing.
2. Eliminate Cost of Maintaining Inventory
Having an inventory not only requires an upfront investment but continual expenses for replenishing and protecting that inventory. You will need systems to store and organize the inventory. With a dropshipping business, you will have access to the inventories of multiple businesses at your disposal. However, you will not have any responsibility in maintaining those inventories.
3. Save on Order Fulfillment Costs
When you dropship, your order fulfillment costs will come down significantly. Order fulfillment typically requires you to do the following:
- Picking & packing
- Shipping the stock
When you choose a dropshipping business model, it means that it is a third-party that takes care of all these steps. All you have to do is ensure the dropshipping suppliers get your customers’ orders.
4. Reduce or Eliminate Your Risks
A drop-ship business model means that you don’t have to bear the costs of owning and maintaining the inventory. Besides, you can update your inventory quickly, affordably, and easily. It all comes down to selling online more products and testing the effectiveness of your business while taking much lesser risks.
When you identify hot-selling products for other online retailers or resellers, you can also offer them without the need to raise the capital for procurement or waiting for the product. You can also test new products without any risk of rendering your inventory obsolete. You can make quick decisions on a new product idea or business ideas.
In simple terms, you will be paying only for the products you are selling online. Thus, drop shipping will help significantly improve the chances of your business’ success.
Cons of Dropshipping Business
As mentioned above, the drop ship business model may not be the best option for every online storefront or ecommerce business. There are a number of cons to this business model compared to a traditional eCommerce business and you must know them before embracing it.
1. Less Profit
The dropshipping business model doesn’t give you the advantage of bulk pricing that comes with maintaining a large inventory of your own. You will be paying more for every product you sell when compared to maintaining your own large inventory. This translates into lesser profits. The only want to generate massive profit margins from dropshipping is to sell more products than following the conventional method of owning and warehousing your own items and selling via an ecommerce store.
Drop shipping means it is the supplier/distributor that captures the big margins. You will have to negotiate your profit margins with the suppliers. It is typically a small percentage of the products final selling price.
2. Relying on a Third Party
Dropship means you have a lot of control over when to stop selling a product or add a new product to your catalog. This is a great advantage. However, the dropshipping business model also means that you don’t have control over the third party’s inventory. If they are to run out of stock, it will halt your order shipments. This lengthens shipping times and can increase the number of lost customers.
Your business will thus be relying on other businesses to run your own business processes. While there are many reputable and trustworthy drop shipping suppliers/distributors who are known for their credibility, you will still be putting the present and future of your business in their hands.
3. Customer Service Issues
When you have a drop-ship business and rely on others to fulfill your orders, it affects the quality of your customer service. For many issues, it may be required to refer your customers to your supplier/distributor. This approach to customer service can often prove to be frustrating and discourages people from buying again.
Any issues on the end of the supplier will mean that your customer holds you responsible for it. Some of the examples of such issues include:
- Late deliveries
- Product damages
- Delivering the wrong item
Besides, you will not be able to maintain the same level of personal touch that you will be able to have when you have your own inventory and ship products yourself directly to the customer. Every time there is an issue, you will have to contact your dropshipping supplier to resolve it. Third-party dropshipping suppliers can take a lot of time to resolve issues, thus affecting your customers’ trust in your business. If there are issues with delivery times, the only thing you can do is ask your dropshipping suppliers to improve.
You will have lesser control over order fulfillment. Besides, you may also not be able to control product quality. That is not how an ideal business model is meant to be. If the supplier screws up, your customers will complain to you and are highly likely to go to your competition. If you want to start a dropshipping business, it is important to choose a high-quality partner. You should also have a good dropshipping business plan.
Challenges to Building Brand Loyalty
A dropship business model involving the use of a third party to pick and pack your orders can be quite convenient. However, it limits your chances of creating or strengthening your own brand and building your business. It will be your suppliers/distributors who will be getting credit for all the products your customers orders. Consider, for example, a customer likes a product you are selling online. They are more likely to be impressed by the manufacturer of the product than your business. They will associate the product quality with the manufacturer or producer. Marketing your dropshipping business is much different than promoting your eCommerce business when you manage the products on your own.
There are even more reasons why drop shipping may not be for you. It has become an increasingly competitive business model. Starting dropshipping means very little investment is required and this has encouraged many entrepreneurs to take the leap. So, you should expect a highly competitive landscape, which makes it difficult to succeed.
Thus, there are both advantages and disadvantages to starting a dropshipping business. At Blackbelt Commerce, we will suggest weighing all your options before making the right choice. Whether you are going to become a drop shipper or not, you will need an eCommerce site to help sell and promote your business. Whichever path you may want to go, we can help you create a customized eCommerce store to help you build your eCommerce business. For more information about our services and to explore your options with drop-ship business, feel free to contact us at +1-516-704-9890 or write to us at [email protected].
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