What is Dropshipping?
Dropshipping is a special variant of fulfillment in which the retailer does not keep the products he sells in stock himself. Instead, he buys the products from a third party (supplier), who then sends the product directly to the consumer. The detour of the product delivery from the manufacturer to the seller is completely eliminated. The goods are virtually “dropped” directly from the supplier into the consumer’s living room.
The biggest difference between dropshippers and traditional retailers is that the one who sells the item to the consumer does not have his own stock. In return, he buys the goods when he needs them to process the consumer’s orders – usually from a wholesaler or directly from the manufacturer of the product.
Advantages of Dropshipping
Low capital requirement
Probably the biggest advantage of Dropshipping is that it allows the seller to build an e-commerce business without having to spend thousands of dollars of capital on their own warehouse and stock to serve consumer orders. Normally resellers have an enormous capital requirement just to build up sufficient stock. The high capital commitment as well as additional costs for securing and insuring the stock are financially a big challenge and basically inefficient.
In drop shipping, the retailer uses a model in which it is not necessary to buy the products in advance. Only when a product has been ordered by the consumer and the money has been credited to his own account (or at least has been sent on its way) is the product purchased from the supplier. Without major investment costs for stock and inventory, it is possible to use the Dropshipping structure to set up a successful business with relatively little capital.
Less start-up difficulties
Starting an e-commerce business is much easier if you as a seller do not have to deal with the handling of physical products. The resources and time that would otherwise have to be used to procure, transport, store, insure, package and sell the products can thus be invested elsewhere. In this way you can concentrate on the essential strengths of your own company. This helps the business to grow faster and more effectively, as you can focus more on core competencies and value-adding processes. With Dropshipping you no longer have to worry about:
- Warehouse management and rent
- Picking, packing and shipping of goods
- Inventory and stock accounting
- Returns management and incoming goods logistics
- Inventory monitoring and procurement
Low overhead costs
Because dropshipping does not require you to manage your own inventory and warehouse, overhead costs are low. In reality, many successful dropshipping businesses have only a home office with a laptop and the most important office equipment – this usually costs less than 100€ per month. If the company continues to grow over time, these costs will also rise. Nevertheless, they will always be well below the level of a traditional online retailer, as the entire goods logistics are eliminated.
A dropshipping business can be managed and controlled from almost anywhere, provided that an Internet connection is available. As long as the retailer is able to communicate with suppliers and customers and has access to his sales platform, he can run the business without any problems. Perhaps he even acts as a so-called digital nomad and has been travelling in the wilderness with a converted van for months, perhaps in Norway, Thailand or the Mongolai – everything is possible with Dropshipping.
Wide range of products
Because Dropshippers don’t have to keep the products they sell in their own warehouse and maintain inventory, they can offer a huge range of different product lines to potential sellers. As long as the wholesaler or manufacturer has the products in stock, they can list and sell the products on their sales portal – without incurring the expense of storage.
Disadvantages of Dropshipping
A relatively small profit share is probably the biggest disadvantage of Dropshipping, especially since there is a lot of competition between the Dropshippers within this niche. Precisely because it is so easy to start such a business, thousands of small Dropshipping dealers operate in a well-saturated market. In addition, the outsourcing of warehouse logistics to the manufacturer or wholesaler means that a not inconsiderable work step is no longer necessary for earning money. This additional profit potential is thus eliminated. The lost profit falls back on the wholesaler or manufacturer, who of course allows himself to pay for the additional expense by fulfilling the consumer order and passes it on to the retailer in the form of price surcharges or additional shipping costs.
Problems with the stock
If you manage your inventory yourself, it is relatively easy and responsible to ensure that your inventory is secure so that there are always enough items available to meet consumer demand. However, since drop-shipping is dependent on the supplier’s inventory management, there is potential for problems with inventory planning. For example, the dropshipper can expect an increase in demand and now needs additional inventory to be ready for the coming weeks. The supplier, on the other hand, could pursue other goals and not be willing to increase inventory, and the warehouse would be empty in 2-3 weeks – not an unrealistic scenario.
Complexity of delivery
If you are using Dropshipping with multiple Suppliers (as most Dropshippers do), you usually have individual contracts, shipping costs and delivery times with each supplier. Customers, on the other hand, usually expect delivery times and shipping costs to be the same. So how do you price delivery times and delivery charges on the customer side? It is also a great challenge to keep delivery times low by working together with offshore suppliers. If, for example, you are dependent on the delivery of a Chinese supplier who has to send the order halfway around the world, it is only a matter of time before problems arise that you will probably have to deal with yourself.
Error by supplier
It happens to everyone. Someone else makes a mistake or delivers a bad performance and this mistake or bad performance falls back on yourself, because you are responsible for the quality of the results externally. Since dropshipping is directly dependent on the supplier’s performance, you must always bear in mind that any errors made by the supplier (e.g. late delivery, material defects) are attributable to your own business. Such problems can have fatal consequences, especially in online business. Retailers on Amazon, for example, are dependent on as many positive ratings as possible. If you have a bad rating on Amazon, it is particularly difficult to market your products successfully and to achieve corresponding sales figures. Of course, errors can always occur without Dropshipping. But perhaps it is more sensible and more pleasant if you can only be punished for those mistakes that you yourself have caused.
Dropshipping does not represent a new and revolutionary solution. It is not an unlimited substitution of traditional businesses with simplified structures. Of course, it has considerable advantages because warehouse logistics are completely outsourced and you can concentrate on other areas. Less capital required, more room for manoeuvre for the core competencies – no question: this is an advantage over the classic business. But of course you must not disregard the disadvantages. Lower margins, a highly competitive market, a lack of transparency and the ability to control inventory levels and dependence on suppliers are significant factors that must be taken into account.
Ultimately, you always have to take into account all the framework conditions and decide on the basis of the individual situation whether dropshipping is an advantageous model for your own business or not.