Dropshipping has become a popular logistics approach with today’s online entrepreneurs. In fact, at the beginning of 2020, searches for “dropshipping” hit an all-time high according to Google Trends.
Why has it become so popular? It eliminates the need for warehousing- an expensive endeavor that calls for careful inventory stocking, not to mention a whole host of other manual tasks such as picking, packing, shipping and let’s not mention the additional cost of hiring staff to do all of the work.
What is dropshipping?
The concept is simple: you list products for sale on your site and the products themselves are made and held by a third party. When someone places an order, the third-party ships the order directly to the customer. All you have to do is to forward the order to your supplier.
This offers dropshippers the ability to add inventory without having to deal with all the complications that come with manufacturing, stocking or fulfilling orders. Sound like a dream, doesn’t it?
Starting a dropshipping business isn’t the right choice for every entrepreneur. There are significant tradeoffs between dropshipping and traditional wholesaling.
Let’s have a look at the pros and cons of dropshipping to help you make the right choice for your business today.
The Pros of Dropshipping
- Minimal startup cost
It requires a lot of capital and hassle to stock a warehouse. With dropshipping, you can eliminate the risk of going into debt, because you will be buying the products from your supplier with the money your customer already paid you. Instead of purchasing an extensive inventory with a variety of products and hoping that they sell, you can start a dropshipping business with zero inventory and immediately start making money.
- Low cost of inventory
The cost of inventory is one of the highest costs you will have if you own a fully stocked warehouse. With a lot of inventory, there comes the risk of ending up with a lot of obsolete inventory – forcing you ways to find ways to remove slow-moving inventory. Another possibility is that you might end up overselling and having no inventory to fulfill the orders – causing damage to your reputation and store.
Dropshipping allows you to avoid such issues and focus on growing your customer base and building your brand.
- Low order fulfillment cost
To fulfill an order, you are required to warehouse, organize, track, label, pick and pack and ship the product from your warehouse. This takes up time and resources. With dropshipping, the third party supplier that you are working with takes care of all this for you. Your only job in this arrangement is to make sure that they get your customer orders. Everything else will be handled by them.
- You can focus on selling more and testing new products with less risk
Without the limitations of a warehouse and constant worry of overselling, you can focus on marketing and on improving your sales funnel. This way you can increase your sales without having to worry about fulfilling them. If you see that a competitor is selling a product that is doing well, you can immediately offer the same product to your customers without having to wait for it to arrive in your warehouse. One of the other pros of dropshipping is that it allows you to test new items without the risk of carrying obsolete inventory because you basically pay for what you sell.
- It allows you to create a passive income flow
Passive income is earned with little to no daily effort – though it requires upfront work and consistent monitoring. Once you set up a dropshipping store, you can focus on other aspects of the business or focus on your day job while orders are placed and being fulfilled automatically.
The cons of dropshipping
- No control over the order fulfillment and lead times
Even though you don’t carry the cost of warehousing, picking and packing of the products you sell, you will still pay for dissatisfied customers.
The third-party providers (manufacturers, wholesalers) you do business with are responsible for managing and shipping your stock. If they mess up, the customer holds you responsible and will ask for a refund and might go buy the same product from a competitor.
This is why it’s essential that you make sure you work with high-quality partners.
- High competition
The same low barrier to entry that makes dropshipping attractive creates heavy competition. The fact is that other stores aren’t selling similar products – they are selling the same exact products from the same third-party manufacturers. This is why you will have to find ways to stand out in order to compete with them.
- Say goodbye to bulk discounts
One of the main reasons big-box retailers can sell products at such low prices is because of the economies of scale. They get major discounts on products because of the large volumes they purchase directly from the manufacturer. When doing dropshipping, you can say goodbye to bulk discounts, since you are essentially purchasing products one at a time.
- Reliance on other people’s stock
Being able to offer new products immediately or stop selling slow-moving products is a major benefit of dropshipping, but the drawback to this perk is that you don’t control your supplier’s inventory. If they run out of stock, you run out of stock – it’s that simple.
- Bad customer service
If your supplier delivers products late, damaged or delivers the wrong items, the customer will take it out on you. We already mentioned this problem when it comes to order fulfillment and lead times, but it extends much further than that.
Since you’re dropshipping, you won’t be able to maintain the personal touch that retailers who manage their own stock can provide customers. You won’t be able to quickly resolve customer issues without overseeing the inventory yourself – you’ll have to deal with your suppliers in order to solve the problems you customers might have.
How can dropshipping be made easier?
Now that you know the pros and cons of dropshipping, it’s important for you to know how can this process be made easier with software.
An order management system can help you keep track of all of your orders and if the software is as advanced as JustShipIt is, it will allow you to dispatch all of your orders from one interface.