If you are considering starting a dropshipping business, you are certainly not alone. According to Google Trends, searches related to dropshipping hit an all-time high at the beginning of 2020.
The business itself is simple! You list a product for sale on your site and wait for a buyer. These products are created and managed by a third-party manufacturer. So when a customer places an order, the third party handles all aspects of the order, delivery, and returns to the customer.
With that said, we are now faced with a bigger challenge; Is dropshipping really worth it for you? By exploring some of the trade’s advantages and disadvantages, it will be easier for you to decide if dropshipping is a good fit for you or not.
- Low startup requirements
Both online and traditional stores often demand substantial financial investment as capital. This includes money to develop, manufacture as well as source finished goods. Moreover, additional costs include maintaining a physical presence, stocking inventory, marketing to new customers, and staffing locations, which can really drain your pockets. However, the case is not the same as dropshipping. This venture poses a much lower barrier to entry since it eliminates the need of having to worry or deal with developing new products or purchasing and carrying an inventory.
- No inventory management needs
In traditional business markets, retailers had to meet the production cost and wait for the products to be delivered before stocking them in a warehouse or shop. As a result, retailers experienced a loss in sales if products were unavailable for customers who wanted to make their purchases for those items. Managing inventory also requires additional costs for handling and storage -you need enough staff to arrange the goods and attend to incoming customers. Inventory management also involves significant risks since you might purchase large volumes of inventory to drive the cost down, which ultimately may not sell. On the other hand, businesses that dropship doesn’t have to face such risks. Since a third party handles all products, customers’ orders are met upon demand, and only the manufacturer deals with the excess of products.
- You don’t need a physical warehouse or storefront
Since it is a virtual proceeding, dropshipping nixes the need for an on-premise storefront. Subsequently, this translates to no mortgage, no lease, no construction, no utility bills, and no maintenance costs.
- Enhanced cash flow
It is typical for retailers to first purchase products and waits for their arrival before selling them to customers. Over time, they will unknowingly have spent a substantial amount of money, which cannot be recovered. In contrast, dropshipping allows you to receive your payment at the same time you pay your provider or even before. This leaves you with enough cash for marketing and growth.
- Invest in new products without risking
Fortunately, with dropshipping, you can easily test new product lines without risking a large amount of your hard-earned money. For products that do not receive the required response and attention from customers, you simply remove it from your store. It’s crucial that you are doing the following – keeping customers engaged, the fear of investing money into new, untested products prevents business owners from advancing.
- Generate passive income
Passive income is the revenue earned with only a little or no daily effort.
Although it requires some upfront work and consistency in monitoring, it is practically free money. This is because dropshipping allows you to work on other areas of your business, all while order placement and fulfillment occur automatically. Unlike in traditional retail models where products couldn’t move without your involvement, this venture is ideal even for those with tight schedules.
- Stiff competition
Since it offers a low barrier to entry, dropshipping, in turn, is bound to create high competition. Not only are you selling products similar to other stores, but you are also selling similar products from the same third-party manufacturers. Therefore, you will have to be more innovative in finding ways of attaining a competitive advantage.
- Lack of control
In dropshipping, inventory will rarely pass through your hands. As a result, you do not have the opportunity to inspect the products and know what type of quality they offer. Consequently, a lack of quality control puts your store’s reputation in the hands of a third-party. It only takes a single batch of poor-quality products to ruin your sales and have unsatisfied customers. Similarly, this makes it impossible to use unique packaging in order to make your store stand out unless you make a special deal with your third-party supplier. Robbing you of the opportunity to include coupons to drive higher purchases, thank you notes to keep customers encouraged, or customize envelopes and boxes.
Also, product pricing can be quite complicated and can be subjected to change prior to or with little notice. As your store develops a strong reputation or grows into a leading brand, you may start to negotiate exclusive deals with your supplier. But before that happens, you will be a lower priority for vendors and, in turn, enjoy fewer profit margins.
- No Bulk discounts
Economies of scale are one of the reasons for big-box retailers to be able to sell their products at such low prices. Since they purchase large volumes of goods, they enjoy major discounts, which can then be passed down to shoppers. However, with dropshipping, you forget about bulk discounts since you practically purchase a single product at a time. Unless you generate enough sales to gain you a bit of negotiation leverage, you will have to pay what the supplier asks.
- Incoherent orders
If you have different product varieties listed in your store, they may be coming from different suppliers. Resultantly, customers may receive multiple products for the same order. In turn, it leads to high shipping costs, confusing branding, wasteful packaging, and above all, annoyed customers.
Like every other business, dropshipping has its advantages as well as disadvantages and involves risk. Successful dropshipping begins by selecting the right vendors and products. Delayed shipping or sloppy packaging may reflect poorly on your brand name. By taking the time to scrutinize your vendors, you are bound to enjoy success in your new venture. Since the pros outweigh the cons, it wouldn’t hurt to try dropshipping as your next income-generating activity.