What Is Drop Shipping?
How the dropshipping model works.
Table of Contents
What dropshipping refers to is a method of retail fulfillment where a store does not have products in stock that it sells. Instead, whenever a product is sold by a store using the dropshipping method, it buys the product from a third party that then directly ships it to the customer. This results in the seller not needing to directly handle the product.
The biggest difference between the standard retail model and dropshipping is that the seller does not need to own or stock inventory. Instead, inventory is purchased by the seller as necessary from a third party – normally a manufacturer or wholesalers – in order to fulfill their orders.
Dropshipping is an excellent business model that aspiring entrepreneurs can get started with since it is readily accessible. Dropshipping allows you to test various business ideas quickly with only limited drawbacks. This allows you to learn about how to select and market products that are in demand. The following are some other reasons why dropshipping has become a very popular model.
1. Lower amounts of capital are needed
The largest advantage that dropshipping probably has is that an e-commerce store can be launched without thousands of dollars worth of inventory needing to be invested upfront. Retailers have traditionally needed to up large amounts of capital to buy inventory.
When the dropshipping model is used, you don’t need to buy a product until after you have made a sale and the customer has paid you. Without needing to make large investments in inventory, it is possible to begin sourcing products and get a successful dropshipping business launched with just a small amount of money. And since you are not obligated to sell any inventory bought upfront the way a traditional retail business must, launching a dropshipping store involves less risk.
2. Easy to start
It is much easier to run an e-commerce business when you don’t need to deal with any physical products. When you use a dropshipping model, you don’t need to worry about the following:
- Manage stock levels and continuously order products
- Handle inbound shipments and returns
- Tracking inventory for accounting purposes
- Pack and ship orders
- Pay for or manage a warehouse
3. Low overhead
Since you don’t need to manage a warehouse or buy inventory, you will have very low overhead expenses. Numerous successful dropshipping stores are operated as home-based businesses, which only require a laptop and a couple of recurring expenses for running their business. Those costs will probably increase as you continue to grow but will be low still when compared to what brick-and-mortar businesses need.
4. Flexible locations
You can run a dropshipping business from almost anyplace as long as you have an internet connection. You just need to be able to easily communicate with customers ad suppliers to manage and run your business.
5. Broad selection of products available to sell
Because you don’t need to pre-purchase the products you want to sell, you can offer your potential customers a wide range of trending products. If an item is stocked by suppliers it can be listed on your online store for sale at no extra cost.
6. Easier to Test
Dropshipping is a very useful fulfillment method to get a new store launched and for business owners who are wanting to test the interest that customers have for other product categories such as accessories or entirely new product lines. The major benefit of dropshipping is once again, being able to potentially list and sell products before you commit to purchase large amounts of inventory.
7. Easier to scale
When you have a traditional retail business, when you get three times the amount of orders, usually you will need to do three times the amount of work. When you can leverage dropshipping suppliers, a majority of the work of processing additional orders is going to be done by the suppliers, which allows you to expand with less incremental work and fewer growing pains.
Additional work always comes with sales growth – especially when it comes to customer support. However, businesses that make use of dropshipping scale very well compared to traditional e-commerce businesses.
All of the benefits that we discussed above it what makes dropshipping such an attractive model for anybody wanting to start an online store or people who are wanting to expand their current product offerings. However, like all methods, there are downsides to dropshipping as well. In general, flexibility and convenience come at a price. The following are a couple of shortcomings that you need to consider.
1. Low margins
One of the biggest disadvantages to selling in a very competitive dropshipping niche is low margins. Since getting started is so easy, and there are minimal overhead costs, numerous competing stores set up their stores and sell products at very low prices to try to grow their revenue. Because they have not invested a lot in starting their business, they can work on tiny margins. If you are going to start to dropship on Amazon in addition to your Shopify store, then your margins are going to be a lot thinner on that sales channel.
These sellers will typically have low-quality websites and non-existent or poor customer service. You can use this to differentiate your business. However, that will not prevent customers from comparing your prices with theirs. As fierce competition increases, it can harm the potential margins within a niche very quickly. Fortunately, there are many things that can be done to mitigate the problem by choosing a vertical or niche that is suitable for dropshipping.
2. Inventory issues
When you stock all of your own products, it is fairly easy to keep track of which products are out of stock or in stock. However, when you source from several different warehouses, which fulfill orders for other merchants as well, inventory can change every day. Fortunately, there are several apps that are available these days that allow you to sync with suppliers. This allows dropshippers to pass their orders along to a supplier with one or two clicks and see in real-time the amount of inventory that a supplier has.
Whenever a product is not available any longer, the quantity can be automatically set to zero.
3. Shipping complexities
When you work with multiple suppliers, the products in your online store are going to be sourced from various dropshippers. That will complicate your shipping expenses.
For example, a customer orders three products, and they only are available from three separate suppliers. That means you are going to have three separate shipping charges to send each of the products to your customer. However, it is probably best to not pass all these charges to your customer. Even in situations where it might make sense for those charges to be included, it can be hard to automate the calculations.
4. Supplier mistakes
Has someone ever blamed you for something that was not your fault, but you still needed to take responsibility for the mistake?
Even the most successful dropshipping companies make mistakes while fulfilling orders – and these are mistakes that you must take responsibility for and apologize for the mistake. Low-quality and mediocre suppliers will cause lots of frustration with low-quality packing, botched shipments, and missing items can all harm the reputation of your business.
5. Limited branding and customization
In contrast to print on demand and custom-made products, dropshipping does not provide you with much control over the actual product. Usually, the dropshipped product is branded by and designed by the supplier.
There are some dropshipping suppliers that are able to accommodate the product changes for your business, but the supplier has most of the control over the actual product. Any additions or changes to the actual product usually require you to order a minimum number of products to make it affordable and viable for manufacturers.
How do dropshippers earn money?
Dropshippers work as product curators, choosing the top dropshipping products that can be marketed to their customers. Keep in mind, marketing is an expense that you will incur, both in terms of money and time, to help potential customers to find, assess and purchase the right product. There is also the expense is providing customer support when there is a shipping or product problem. Finally, there is the supplier’s original price that they sell a product at.
With all of those expenses to take into account, dropshipping companies mark up product prices in exchange for their distribution. That is why suppliers are fine with having their products marketed by dropshippers. Additional sales are driven by dropshipping stores that the supplier would not have otherwise. To earn a profit with a dropshipping business, you need to determine what the cost is for acquiring a customer and then use his information when pricing your products.
Is dropshipping really a legitimate business?
Dropshipping is just a fulfillment model that many retailers use and is completely legal. Like with all other types of businesses, the key to long-term success is satisfying the expectations of your customers and building a brand that will resonate with the intended audience.
Usually, this question arises due to not understanding the way dropshipping really works. A majority of retail stores that you shop at are not selling products that they make themselves. This curated approach is taken by dropshipping and it is turned into a fulfillment model used for online businesses.
The best way to get a business started is dropshipping. You don’t need to buy products wholesale until you have been paid by your customer. The product will be shipped by the wholesaler to your customer and your information will be on the shipping label. Your customers will not even know a wholesaler is involved.
Since 1986, Safety Technology has been in business as a dropshipping wholesaler.
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