What Is Dropshipping?

Dropshipping is a form of retail business in which there is no need to keep products in stock for a business.

Updated: November 12, 2021

Dropshipping is a form of retail business in which there is no need to keep products in stock for a business. The orders and their shipment details will be transferred to either the manufacturer, a wholesaler, another retailer, or a fulfillment house in a form of supply chain management, which then ships the goods directly to the customer.

Some facts about Dropshipping:

  • Dropshipping can be a powerful tool for ecommerce brands when used properly.
  • The retailer has little or no control over product quality, storage, inventory management, or shipping. But is responsible for marketing and selling a product. So, the costs of maintaining a warehouse or a brick and mortar storefront, purchasing and storing inventory, and employing necessary staff for such functions can be eliminated in dropshipping.
  • There can be significant losses to the drop shipper because of the cost of processing the return and the loss of the unsalable returned product when customers who receive a drop shipped package return the item to the seller, then reorder the identical item directly from the manufacturer after realizing that they overpaid for the item.

Procedure of Dropshipping:

  • A brick and mortar store is not required in a drop shipping business model. It can be either  eliminated entirely, or combined with drop shipped order fulfillment business model.
  • A virtual retailer only has a website where as potential drop shipped items can be kept on display, details on mail order items can be provided through a catalogue, or a website can be maintained with information available only online by a physical retailer.
  • Merchandise can be shipped without a return address corresponding to the seller in blind shipping that is followed by drop shipping retailers as they are not required to disclose the practice. They can also fulfillment house or private label shipping, in which merchandise can be shipped from the wholesaler with a return address customized to the retailer.
  • A customized packing slip, including details such as company name, logo and contact information of the retailer will be included by the ultimate order fulfiller.
  • The goods to be shipped directly to the customer from the manufacturer or distributor will be arranged by the retailer when a small retailer receives a single large order for a product.
  • Drop shipping can be used as way of distributing products without handling the stocking the items sold.
  • An item will be listed as new by the seller and will be shipped directly from the wholesaler to the customer when purchased.
  • The difference between the selling and the wholesale prices, minus any pertinent selling, merchant, or shipping fees accruing to them will be considered as the profit of the seller.
  • A seller can also fulfills an order by purchasing the item from another online marketplace and shipping the item to the customer.

Benefits of Dropshipping:

  • ecommerce companies can improve their business substantially by leveraging the benefits of Dropshipping.
  • Dropshipping can be extremely useful for temporary projects particularly in market research.
  • Dropshipping can be used to mitigate the risk in trying out new products and used for market research.
  • You can test a new product with a trial period rather than raising your inventory costs by packing your warehouse with an unpredictable product using dropshipping.
  • The inherent risk associated with trying out new product types can be avoided as you will have a better estimate of more accurate number of quantity to buy for your initial stock.
  • Inventory costs can be reduced by stocking up on only the inventory you know will sell. You can satisfy the unexpected demand for sales with dropshipping.
  • Insurance against extreme circumstances can be made with dropshipping options in place.
  • You can still fulfill pre-made orders by dropshipping the products from elsewhere i something like a natural disaster happens to your warehouse.
  • New locales can be tested by using dropshipping for a trial period to see if it is worth opening a new facility there.
  • It is more profitable for you to dropship high maintenance products rather than storing them yourself. These products require extra fees for storing or shipping which can be reduced by dropshipping.

Limitations of Dropshipping:

It can be difficult to maintain a business doing dropshipping alone and to get your business off the ground. However, dropshipping can be used to complement your existing services and improve your business.

Low profit margins:

The overhead is low as you don't have to manage or store your own inventory. But the returns are also low. You have to do a lot of business to turn a profit. Most of that money goes to the supplier for every sale you make and what you earn is not enough to cover your expenses for marketing/advertising, maintaining your site, managing sales orders, and covering your office hours. You will have to struggle for a long time to build a client base if you are building an ecommerce brand from scratch as your profit is largely determined by your traffic.
Dropshipping can give you more profit when you already have a regular source of traffic.

Highly competitive:

A lot of competition is there in dropshipping as the investment is low to start a dropshipping business. Markups of the company can be reduced to offer the lowest prices if it is a bigger one. At a certain point, smaller businesses becomes unsustainable as have to cut into their profits just to stay competitive with their prices. Customers can buy the exact same thing from someone else for cheaper as  any number of competitors could be selling your exact same products with the resources that you don't to undercut your prices.

No control over supply-chain:

customers complain about product quality, fulfillment speed, or return policies can not be addressed easily in dropshipping as everything is under the control of your supplier. There is also a delay in communication as the dropshipper has to go back and forth between the customer and the supplier.

Legal liability issues:

There will be legal liability issues when a trademarked logo or intellectual property of another company is used by your suppliers.
You are automatically complicit to whatever illegal activities your suppliers are up to. The legal liability issues can be rectified with a solid Dropshipping Agreement Contract.

Difficult to build a brand:

You will never get the regular traffic needed to sustain an online business without customer loyalty.

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