For many years, dropshipping has been a popular method for online sellers to offer products for sale without the expense of maintaining any inventory. Even traditional retailers are discovering the advantages of dropshipping. However, there are many pitfalls involved that can derail a business, and a smaller, independent retailer is likely to be hit harder. Maintaining a profitable dropshipping business is possible, but your success depends on knowing your manufacturer, picking a good market, and keeping your customers happy.
The Advantages of DropShipping
Low startup investment. One of the biggest draws to this model of business is that the cost of getting started is very low. Even establishing an online presence can be as affordable as setting up an eBay account. You don’t place an order to your suppliers until one of your customers makes a purchase, so you never have to buy any inventory with your own money.
Location independence. Because you don’t need to store your own inventory or package and mail products yourself, you can conduct business anywhere where there is internet access. This freedom from a fixed location might mean that you can travel freely while working, or it may mean that you can maintain an income from home while still being available for your kids or other dependents.
No warehouse costs. Sometimes people can run their own store from their homes, converting a garage or basement into their own warehouse and fulfillment center. Once the business grows larger, however, they will often need to rent a storage facility and pay rent on the space through all of the peaks and lulls of their fiscal year. Then these sellers also have to be sure they have enough staff on hand to send out orders promptly, but not so many workers that they spend days with nothing to do. With dropshipping, the suppliers take on the responsibility of warehousing and hiring. They also take on the risks of a sudden drop in demand for their products, leaving you free to explore other markets without having to take a loss on products you have already purchased.
No steep learning curve for fulfillment. Shipping out your customers’ orders can become costly and inefficient if you do not already have experience with negotiating postal rates, calculating Import Duty or VAT tax, or choosing streamlined packaging. Manufacturers that drop ship will already have these challenges mastered, freeing up more time for you to market your business.
The Disadvantages of DropShipping
Slow order processing. In an age of Amazon Prime and same-day delivery, customers no longer want to wait a week or more to receive their order, especially if they can get the same item faster elsewhere. The dropshipping relationship is vulnerable to these delays due to the extra step it takes for you – the curator of your store’s products – to relay your customers’ orders to your manufacturer. The delay increases if your products are shipped to your customers from a different country. If your manufacturer isn’t responsive when they receive your order, your customers will eventually stop visiting your online store.
Reliance on the manufacturer. If most of your products come from one manufacturer, and they go out of business, you might go out of business with them. You might not even have any backup inventory to meet demand while you find a new supplier. Even if your manufacturer stays in business, they may discontinue a product line that has been popular with your customers.
Risk of poor quality control. Because you will never see the physical items being shipped to your customer, you won’t know if the quality of the goods has suddenly gone down. That is, not until your customers tell you. Even worse, some suppliers may be producing counterfeit items, which may result in you receiving legal penalties and bans from ecommerce platforms.
Lack of professionalism. If your customers want to exchange their purchase, report a lost item or get a refund, how responsive will your supplier be? If your customers encounter rude behavior or slow response times, they may demand that you handle it, or they may leave you a negative seller rating.
You may not be large enough to have a say. Manufacturers will be more likely to listen to a request to reinstate a discontinued line or provide a new variation to one of their products if the request comes from a major client. If you do not give them enough business, they may not find it profitable to adjust to your requests.
Ways to Overcome the Disadvantages of Dropshipping
Find the right niche. The popularity and low cost of establishing a dropshipping business means there is a lot of competition for you to deal with. Therefore, you need to study your market well enough to know which areas are saturated and which still have room for growth. One good strategy is to find a product that already sells well in certain markets and bring it to an audience that is just beginning to embrace it (but is still familiar enough with it for it to have a good demand).
Choose more profitable products. It’s harder to make a profit drop shipping small, very inexpensive items; their small margins don’t give you much room for business expenses. Ecommerce retailers usually find more success using drop shipping to sell items that brick-and-mortar stores don’t carry, such as very large or heavy items (like lawn furniture) or items with a large variety of models. Other strategies include negotiating with a supplier to become the exclusive distributor of a particular model of their product. You might also focus on luxury items with a larger profit margin and a clientele less likely to seek out discount pricing.
Create your own storefront. Just being one of many sellers on Amazon or eBay might place you in front of many potential buyers, but you will have a hard time attracting repeat customers without an online storefront that has its own distinct identity. You can use your own website to encourage customers to receive updates from you about new items and sales. Because it takes time to attract buyers to a new ecommerce site, many sellers will use Amazon in the beginning to attract customers, and then gradually direct them to their own site.
Create your own brand. An extension of having your own storefront is creating your own unique products in partnership with your manufacturer. If you choose this route, you will need to market your product to generate demand, but you will also have no direct competition. In our own case, we produce private label skin care products for clients, many of whom already have a loyal customer base. In whatever market you focus on, you may find that developing your own brand gives you many potential opportunities to reach your customers as a lifestyle resource and offer them a wider range of products centered around their core interest.
Choose a high-quality manufacturer. Select a manufacturer who can guarantee quality products and who will scrupulously avoid any counterfeiting or copyright infringements. Ask to see samples, or even tour their facility. Ideally, they will already have a track record of successful business practices and will most likely stay around for a long time. Taking the time to find the right manufacturer can mean the difference between a success and failure.
Work with a manufacturer that also fulfills orders. Seek out suppliers who have already negotiated the best rates with shipping carriers, have a trained warehouse staff, and have experience with selecting the best packaging for your items. It is a plus if they can also assist you with any customized, branded packaging needs. Ask your potential manufacturer where their warehouses are located and how long it will take them to send orders to your customers. Often you will want a manufacturer that can ship from the same country where most of your customers live in order to balance fast delivery times with affordable shipping costs.
Seek a manufacturer that can also handle returns and provide customer assistance. If you want to encourage your customers to refer your site to others and keep coming back (and if a manufacturer is going to earn your business), the manufacturer has to respond to all relevant customer communications in a prompt and agreeable manner. You might even try calling them as if you were a customer to see how easy it is to navigate their help line.
Drop shipping has the potential to be a profitable way for ecommerce sellers to provide products for sale without incurring inventory costs. There are potential downsides, but strategic planning and research can help you overcome them.