When I started working on my FREE directory of UK dropship suppliers, a question I was often asked by my friends and family was “What is Dropshipping?”. To try and answer that question, I put together this quick and easy guide to dropshipping, covering what it entails and what the pros & cons are .
Dropshipping is a retail fulfilment model where a seller doesn’t stock the products they sell. Instead, the seller selects, promotes and sells the merchandise of a third party, known as a dropshipper or dropship supplier. When the seller sells a product, they then purchase the item from the dropshipper and have it shipped directly to the customer.
The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t actually need to own inventory or the goods they are selling. Instead, the merchant purchases stock as needed from the dropshipper – generally a wholesaler or manufacturer – to fulfill orders as they are placed by the customers.
As a result, the seller never actually handles or sees the products they sell. In most cases the operation is invisible to the customer, who think they have received the product directly from the seller.
The dropshipping model has grown in popularity with the rise of e-commerce as it offers numerous advantages. However, as the saying goes, “Nothing is perfect!” and dropshipping also has certain drawbacks.
Advantages of dropshipping
Focus on what you do best: selling!
Merchants who operate using the dropshipping model can focus on marketing their business, advertising their goods and doing what they do best: selling! They can leave the manufacturing, shipping, warehousing, inventory management, packing, dispatching and customer returns to the dropship supplier. As another saying goes “Jack of all trades, master of none!” and by focusing on a limited number of specific areas of strength, merchants and dropshippers alike can become better at what they do.
Low capital investment
Undoubtedly one of the biggest advantages of dropshipping is that it makes it possible to set up an e-commerce business without having to invest into stock. Sellers purchase their inventory as they sell, and generally only once they have received payment from the customer. They then use that money to buy the merchandise from the dropshipper, keeping the difference between their retail price and the cost of the merchandise + delivery fees as their gross margin. With the classic retail model, business owners have to buy their inventory up front, before selling it, and without any guarantee that they will sell it.
Access to a wide selection of goods
Not having to invest in stock before and unless a sale is made, and not having to physically handle and store these goods, enables merchants to list an almost unlimited number of items for sale. From a seller’s perspective, they can offer a greater selection and variety of goods to their customers.
No stock = lower overhead expenses. Simple equation. Indeed, not having to receive, handle, store and dispatch goods means that merchants save on storage costs (no warehouse needed), labour costs and logistic costs. Combined with the fact that an internet business can be run from home with as little as a laptop, a phone, a printer and a good internet connection, it’s easy to understand why the dropshipping model is increasingly appealing to entrepreneurs keen to start up and run a business on a shoestring.
As the focus is on selling, an online merchant using the dropshipping model doesn’t need to be close to the stock they are selling and can operate from virtually anywhere in the world (well, providing they have access to electricity and a decent internet connection).
Tight profit margins
Just as low capital investment and low overheads are the main financial advantages of dropshipping, low margins are the flip side of the coin. This can be explained by two main factors, mainly low retail prices and high product costs, which pressurise margins from both ends.
Retail prices of dropshipped goods are generally kept low via the high level of competition the sellers have to face. As start up investments and overhead expenses are so low, a large number of entrepreneurs are starting e-commerce businesses and are ready to sell the dropshipped goods at prices which barely enable them to break even, in order to sell more items, build up their reputation, drive traffic and gain a foothold in the market.
At the other end of the spectrum, the cost of goods sold is high. Dropshippers need to make a profit too and get rewarded for purchasing the inventory up front, without being guaranteed to sell it all. As a result, the price at which dropshippers “retail” their goods to the merchant (i.e. the cost for the seller/merchant) is higher than what the merchant would pay if he were buying the goods in bulk. It’s a fact that the more goods one buys, the lower the individual cost of each one of those goods is…and the opposite is also true.
The merchant cannot have his cake and eat it, and the price to pay for low investment and overheads is low retail prices, higher costs and ultimately tight margins.
Taking responsibility for dropshipper’s mistakes
Have you ever ordered an item and received something else instead? This is the sort of mistake that can happen when purchasing online. If you are a seller and one of your customers receives an incorrect item because the dropshipper made an error and picked and packed the wrong product, you will have to take responsibility for this and handle the fall out. If this happens repeatedly, your online reputation could be damaged with potentially fatal consequences for your business. Therefore, it is important to minimise risks by carefully researching, selecting, trialling and working with reliable and trustworthy dropship suppliers.
As explained above, using the dropshipping model enables sellers to list and offer a wide range of goods to their customers. The downside is that if a customer orders several items from a merchant’s site which are all then sourced from different dropship suppliers, this will lead to high shipping charges (as all the goods will be individually packed and sent separately, minimising synergies and savings on packaging and shipping costs). Also, the customer will receive a number of different parcels, with potentially different appearances, for a single order. It’s recommended to offer free shipping and actually include a mark up to cover for this in the retail price. This way the actual combination of goods purchased, hence suppliers involved in dispatching them, will have no visible bearing on the shipping costs from the customer’s perspective.
Managing “out of stocks”
Anybody already familiar with dropshipping will be only too familiar with the “inventory update” emails that dropshippers send out generally daily, to keep their customers (the seller/merchant) informed of the stock situation of the different items they supply. As a multitude of merchants purchase their goods from any given dropshipper, stock levels can vary dramatically and unpredictably from one day to the next…leading to some goods being on limited supply or totally out of stock. The challenge for the merchant is to accurately reflect these stock levels on his own sales platforms (website, amazon, ebay or etsy stores) in real time. The risk is that a customer will order an item which is actually unavailable at the dropshippers. As a result the merchant will then need to communicate the out of stock to the customer, potentially cancelling the sale and disappointing the customer. The bigger and more advanced merchants will have systems which will automatically update stock levels on their platforms for them, but this requires complex systems which come at a cost and aren’t available to the smaller internet entrepreneurs.
I hope I have answered the “What is dropshipping?” question and helped some of you gain a better understanding of how it could benefit you and what to watch out for.
Now that you know all about dropshipping, should you wish to start your own online business selling dropshipped merchandise, please feel free to browse through our listings in order to FIND NEW SUPPLIERS.
If you are a dropshipper and you wish to increase exposure of your business to potential new clients and to search engines, please feel free to SUBMIT A FREE LISTING.