A Guide to Dropshipping—Weighing the Pros and Cons

What is a Dropshipping Business?

Dropshipping is an order fulfillment strategy where the retailer does not keep products in inventory, but relies on wholesalers or manufacturers to actually ship orders to customers. This has several advantages that make it attractive to ecommerce businesses.

With dropshipping, when a customer places an order for a product online, the retailer receives the order and payment for the order, and then either automatically or manually contacts the wholesaler or manufacturer, issuing a purchase order for the item and providing instructions for shipping directly to the customer. The wholesaler or manufacturer ships the product, and the retailer earns a profit. The dropshipper never sees or handles the product, and the dropship supplier never sees or deals with the customer. The customer has no idea that two different companies were involved in their shopping experience

Unlike traditional online retail, dropshipping does not require traditional fulfillment methods to sell products. That means, as a product company you outsource all aspects of the supply chain: including assembly of your products, storing inventory, and working with carriers to get products to customers. All you have to do is choose products, run marketing campaigns, and focus on customer service.

The dropshipping model has its advantages, including lower capital investment, speed to market, and scalability, but it’s not without its challenges. 

Benefits of Dropshipping

Lower Capital Investment

Most notably, dropshipping allows you to avoid spending large amounts on stock upfront. You won’t have the same large overhead costs of all that goes into manufacturing and storage. You’re therefore free to focus on sourcing dropship products and bringing them to market before you have even made a sale.

Low Barriers to Entry

Other obstacles that you would traditionally face aren’t present in dropshipping. You do not need to manage a fulfillment center, pick, pack and ship orders, track inventory and stock levels, or handle returns.

Flexibility

Dropshipping allows small businesses flexibility with their hours and entrepreneurs can virtually operate their business from anywhere in the world and can essentially sell any product that can be marketed effectively.

Without the need for a warehouse or return address, you’re free to run the customer-facing end of your business from anywhere. Your main focus lies in effectively communicating with your customers and suppliers.

Scalability

In traditional retail businesses, the more orders you get, the more work is required to fulfill them. In dropshipping, that responsibility, at least in terms of production, picking, packaging and shipping, is handled by your supplier. This makes it easier to avoid bottlenecks and grow your operation quickly.

Testability

Traditionally, introducing new products to market is challenging because you have to invest in the stock upfront. With dropshipping, you can swap products in and out of your store at will. This makes it easier to test new products in your target market.

Merchants can quickly and easily A/B test new products and product variances. This will allow them to optimize their marketing efforts to whatever product is “performing” the best – highest margin, best shopping cart conversion rate, etc.

Diversification

Since all you need for dropshipping is an online storefront and a supplier, it gives you the ability to maintain multiple dropshipping companies or storefronts. This can allow you to diversify your product offerings and save you from the fluctuations of the market or seasonality that occurs in relation to some products.

Cons of Dropshipping

Competition

Anyone with an online store and a supplier can enter the dropshipping business. This is in stark contrast to the traditional retail model, which requires initial capital investment, product development or research and development, a warehouse and many other moving parts to facilitate order fulfilment. As a result, many markets are highly saturated by companies offering identical products sourced from the same suppliers.

Low Margins

With dropshipping, wholesale prices can be constrained by your relatively small volume of orders at any one time. Combined with high competition, this can reduce your profit margins. You could face a margin as low as 10%, but it will depend on your industry, product(s), marketing costs, supplier and customer location, and other factors.

Long Delivery Times

A natural byproduct of the way the dropshipping process works is that shipping times are much longer than if you held stock in the same country as where your customers live. A product manufactured and then dropshipped from China to the US could take much longer to reach the customer, which is in stark contrast to next-day Prime delivery.

Issues With Suppliers

While keeping packaging and shipping responsibilities out of your hands can be a time saver, when there’s an issue with an order it can have the opposite effect. As the customer’s point of contact, it is left to you to explain what went wrong and how you’ll fix it.

The quality and accuracy of the fulfillment process may suffer as fulfillment is likely not the strength or focus of the manufacturer. As a result, the customer experience when receiving the goods may be subpar and they may choose to return the item or not buy from the seller again.

Differentiating Your Brand

Dropshipping means selling products that are manufactured by third parties. Finding opportunities to put your company’s stamp on the product can be challenging, which can make building your brand harder if that is your goal.

Lack of Quality Control

All manufacturers experience a portion of defective products, even if it is a small one. In the past, manufacturers would inspect for quality with the knowledge that the retailer will also scrutinize when unpacking. When online retailers forfeit this direct oversight of quality assurance, manufacturers may relax their standards resulting in more defective products. This can threaten your business as your rate of returns will likely increase, and as mentioned before, you need to handle that yourself.

Shipping Costs

If you partner with multiple suppliers, then shipping can become rather inefficient. If your customer orders two products that are coming from different manufacturers that will increase the cost of shipping on your end. You would have to cover the cost of shipping from two dropship suppliers while only being able to charge the customer for one shipment.

This cuts further into your profit margins. Additionally, shipping from overseas can bring in challenges with high shipping costs, delivery delays, poor trackability, and tariffs and taxes that are unique to each country.

Stockouts

Turning over the inventory management responsibilities to a third-party supplier means you are relying on them to maintain oversight and communication of inventory levels you have available for sale on your website. If a customer orders a product that is out of stock, it can be a frustrating experience. It is best to discuss inventory management during partnership negotiations and have a plan in place for refunds or replacement.

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How to Start Dropshipping

Here’s a basic step-by-step guide for how to make dropshipping work for an online business.

1. Create Your Online Store

You need to build and launch an ecommerce website. This task is made easier through the many options like Squarespace or Wix that are available today. You can also open a storefront directly on ecommerce platforms like Amazon, eBay, Oberlo, Shopify or Aliexpress to name a few.

2. Choose the Right Products to Sell

With hundreds of categories and millions of products to choose from, it may be a challenge to narrow down your offering. 

Start by deciding who your target market is going to be. When you limit the categories and focus on a specific niche, you can sell more effectively to specific audiences. Specific doesn’t necessarily mean small; your niche market can be anything from electronics to new moms. It is important to do your research and track the latest trends in the marketplace that you find yourself targeting. As long as you dropship, you don’t need to worry about overstocking your inventory. If your first attempts aren’t met with the reception that you are expecting, you can always change suppliers or products.

3. Find a Supplier

Finding dropshipping suppliers will require intensive research on your end. You can search for specific products on Google or another search engine and find options for third-party suppliers that are available. Reach out to dropshipping wholesalers who seem reliable. Look for positive reviews from other merchants to help you decide. To make the process easier and widen your product choices, source through a dropshipping marketplace. A dropshipping product network gives you access to millions of products from thoroughly vetted suppliers. 

Alternatively, you can sell your own branded products with a print on demand service. Print on demand is a form of dropshipping. Product fulfillment and shipping are handled by the supplier. In the case of print on demand, the supplier also puts your custom designs on the items you sell. Select products, add your designs or logo or design, then import the products to your online store.

4. Add Products to Your Online Store

It is important to edit the product listings in your storefront, instead of going with the generic ones that are often provided by your suppliers. Make product pages your own with item details, high-quality images and videos that match your brand.

Next, set your pricing and shipping rules. Think about your profit margin. When setting your prices, take wholesale and shipping costs into account. Find a balance that will increase your revenue while keeping your products affordable.

It is very important to make it easy for customers to find exactly what they want. If someone comes to your ecommerce store and it is a hodgepodge of different products that are not laid out with any foresight they will likely turn to another site. Get into the mindset of your shoppers. View your online store from your customers perspective to better understand their experience. Create filters, categories and collections for your product ideas.

5. Promote Your Business

Once you import dropshipping products to your online marketplace, you can begin the task of marketing your products and website. Spread the word about your business with a marketing plan that works for your target shoppers—this isn’t alway easy, but it is a critical step in attracting customers.

Dropshipping Tips

Succeeding in dropshipping means capitalizing on the advantages the model offers while finding creative strategies to avoid the downsides that arise from dropshipping. Here are four tips for making dropshipping work for you.

Set Realistic Expectations

Many people don’t mind long wait times, providing that they know how long they will have to wait when they order a product. Be clear on shipping times and check how long they are before choosing your suppliers and the products. One way to speed up delivery is to use a third-party logistics provider. In brief, this involves buying goods from a supplier, then sending them to your 3PL that will hold the stock and ship it out when you receive orders.

Focus on Customer Support

Making customers feel valued, respected and important not only pushes sales but helps grow your customer base. When it comes to customer support for dropshipping stores, it is important that they understand that you are responsible, that your customer experience is important and that their satisfaction is your number one priority.

Put Marketing First

If the low margins of dropshipping mean you can’t compete on price, focus instead on providing superior product education to potential customers. Show them how great your goods are through photos, videos and reviews and get them excited enough to make an impulse purchase on that basis. The best dropshippers are the best marketers.

Know the Rules and Regulations

Despite how seemingly apparent this point may be, it’s important that you use extreme caution and attention to detail when forming a successful business. Corporate structure, taxes, permits, and licenses are among the many legal concerns you will need to research in your city, state, or country, and any regions you may be selling products.

Dropshipping with a 3PL

Outsourcing to a third-party logistics provider (3PL) is a way for suppliers to get into dropshipping quickly, easily and with minimal up-front investment.

3PLs already have the people, space, technology and retailer relationships in place to step up as a fulfillment liaison between suppliers and consumers. With this arrangement, suppliers typically pay the 3PL only for what they move, while capitalizing on the 3PL’s negotiated volume shipping rate, which can reduce shipping costs.

On the upside, advantages to hiring a 3PL provider for dropshipping include bringing the supplier up to par with Amazon-like standards. One example is positioning inventory in multiple locations. A supplier with just one warehouse on the west coast would not be able to offer today’s nearly standard two-day shipping nationwide from their single fulfillment center. However if they use a large 3PL with multiple warehouses around the country, they can provide two-day shipping to their customers.

Small and medium sized suppliers may be able to leverage the transportation purchasing power of their 3PL. In the case of shipping costs with the shipping carriers, the supplier may be able to ship to the consignee pre-paid via their 3PL and pay a reduced rate that’s between the negotiated discount rate of the 3PL and the rate they would pay the shipping provider as a small volume shipper.

The decision for suppliers to outsource to a 3PL also allows the dropshipper to focus on more important operational tasks. You can focus on growing their business, instead of leasing warehouses, finding shipping carriers, managing warehouse employees, and complying with different regulations. For most suppliers, order fulfillment is not a core competency, particularly when dealing with the complexities involved with dropshipping.

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Dropshipping on Amazon

Dropshipping on Amazon (or allowing a third-party to fulfil orders) is generally acceptable as long as you comply with Amazon’s requirements.

You must:

• Be the seller of record of your products;
• Identify yourself as the seller of your products on all packing slips and other information included or provided in connection with them;
• Remove any packing slips, invoices, external packaging, or other information identifying a third-party drop shipper prior to shipping the order;
• Be responsible for accepting and processing customer returns of your products; and
• Comply with all other terms of your seller agreement and applicable Amazon policies.

Examples of dropshipping that are not permitted:

• Purchasing products from another online retailer and having that retailer ship directly to customers; or
• Shipping orders with packing slips, invoices, or other information indicating a seller name or contact information other than your own.

Failure to comply with these requirements may result in the removal of your selling privileges.

Dropshipping on Amazon should be done through Amazon’s Fulfilled by Amazon (FBA) program.

With FBA, Amazon will pick, pack and ship your orders for you. They will also provide tracking information to the customer and take care of any related customer service, including returns.

However, this comes at a cost! What you pay Amazon will depend on what product you sell and the time of the year. If your goods remain in Amazon’s warehouse for more than 6 months, you may also be required to pay long-term storage fees.

Bottom Line

If you are a small business who has found a niche product that you think you can effectively market and supply, then it might be worth it to try using dropshipping for fulfillment. The costs are low and you can test out your product viability.

Although dropshipping is a great way to test a new product or supplier, it has its limitations. As the marketplace gets saturated with competitors, it’s likely you will be forced to compete on price. Once you have proven you can reach the target market with your product, it may be in your best interest to transition to a partnership with a 3PL.

If you are looking for a 3PL partner to work with we would love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.