Firstly, what is dropshipping?
For those that may be discovering this term for the first time, it refers to a method of selling products online. Traditionally, you purchase stock, hold onto it, and then ship it out when someone places an order.
Dropshipping is a business model that makes you the middle-man. You never hold any stock – you sell things online, but you purchase them from third-party sellers and get them delivered straight to your customers. This can open up a world of benefits for business owners – but is dropshipping a viable venture?
Should this be a model you consider? To find out, let’s take a deeper look at the pros and cons:
The Benefits Of Dropshipping
There’s no denying this business model has some pretty enticing advantages. If you’re interested in starting a dropshipping business, here are some of the key benefits you’ll see:
- Low overhead costs – By far and away the biggest advantage is the low overhead costs. You don’t have to create a website or do spend lots of money on stock. You only spend cash when a customer purchases something. This allows you to dedicate more money and resources to other areas of your business – like marketing. You could find a company like Chris Turton Ecommerce to help you generate more dropshipping sales via Amazon. If you have a website, you can spend more cash on advertising to drive traffic. A lack of overhead means your budget can be stretched further
- Improved cash flow – Cash flow problems are common in e-commerce businesses as you purchase lots of stock in one go. That’s a huge chunk of your budget taken up and you might not sell it all. So, your money is tied up and the cash flow slows down. Dropshipping prevents this as you only buy products when you’ve secured a buyer. If no orders come through, you don’t have to spend money. It means every time you purchase a product, you’re already getting that money back from your customer.
- Can start instantly – You can start a dropshipping business immediately as you don’t have to worry about buying stock or finding somewhere to store your products. Just find a third-party seller, head to a site like Amazon or eBay and list your items. It really is that simple.
- Run from anywhere – You won’t need a big office or a warehouse to run this business. It can all be handled from a computer or laptop. This means it’s the perfect home business idea!
- Easy to scale & grow – Traditional businesses are hard to scale as you need extra investment pumped into them. The difference here is that, if you want to scale or grow, you just list more items for sale. You don’t require extra investment or anything complicated; list more products for sale to cater to the added demand.
The Drawbacks Of Dropshipping
On the face of it, dropshipping sounds like it’s the perfect business model. Why wouldn’t you want to try an idea that has low overhead costs, is easy to scale and can be run from anywhere?
Well, it turns out there are some downsides to this approach that must be taken into consideration:
- Smaller profit margins – A traditional e-commerce business has more control over profit margins. You sell direct to the consumer, meaning there’s more room for profits from each sale. The downside of dropshipping is that you’re the man in the middle. You purchase goods from a third-party seller, who will be making sure they already make a profit on the sale. This leaves you with a much smaller margin to sell the product on and generate profits. It’ll mean you have to sell lots of items if you want to make a sizeable chunk of revenue.
- No control over stock – When you purchase stock for your business, you’re in control over it. You decide how many products to buy and whether or not you should purchase more or less. Unfortunately, dropshipping gives you no control over this. If you’re selling something very popular, it could sell out and you won’t be able to just put in an order for more stock. You depend on the third-party vendor to repurchase the items, and then you have to try and buy them before they sell out again. The lack of inventory management can mean your store is regularly sold out for days/weeks before you can start selling again.
- Complicated customer service – Remember, you are the middle-man in this scenario. So, what happens if a customer messages you about a product? They may want to know more about it before purchasing, or they could have issues with something they bought. Suddenly, you have to message the third-party seller and then pass the message to the customer. It can make the whole situation way more complicated and lead to a worse customer experience. You’re heavily reliant on your seller responding quickly, or else you could leave your customer without an answer for days.
- Less control over quality – As you never hold the products in your hands, you can’t tell if the quality is good or not. Ideally, you should research before choosing a seller, but that still doesn’t give you a 100% accurate view of the quality. Less control over quality means you could sell substandard products to customers. At the end of the day, they don’t know you’re buying from a supplier, so all the negative reviews will come raining down on you.
Is Dropshipping A Good Business Idea?
After weighing up the pros and cons, we can come to a conclusion. Is dropshipping a good business model?
Yes – but only if you do it right.
It is a good way to establish an e-commerce business, particularly if you want to work from home or have a small budget. The secret is finding the right products to sell. Pick things that are popular, but also choose products that you trust. It’s worth actually buying items from vendors before listing them on your site, just to see the quality and learn more about them. This helps you avoid selling poor-quality products – and you can respond to customer queries a lot better too.
Dropshipping is only successful when you have a good relationship with third-party sellers and trust them to provide a great service. If you choose any old vendor, then your venture is doomed to fail.