Are you planning to begin an e-commerce business with low overhead? Are you planning to enter the online-store business world?
Are you looking for an easy money-making business model?
Then, dropshipping must be one of your choices. I will tell you why only if you come along with me throughout this blog.
What is Dropshipping?
I am sure that you must be aware of the booming e-commerce business world. This is where dropshipping is adopted by e-commerce retailers as an order fulfillment method that only wishes to sell the products but not ship them to the customers.
Yes, you read it right.
Dropshipping is an e-commerce business model where the retailers/store owners will only hold the responsibility of setting up an online storefront where customers can visit and order products.
In dropshipping, Store owners need not handle products, manage inventory, warehouse space, or order fulfillment processes as in other businesses.
They only need an online storefront and once an order (the item must be in stock) is placed, the sales order will be passed to the third-party supplier (a manufacturer, wholesaler, or another retailer) who will directly ship the order to the customer.
So, dropshipping retailers receive orders for products listed on the shop front and then forward them to the supplier for shipping.
Dropshipping retailers don’t retain the inventory themselves. Instead, they outsource procuring, storing, and shipping products to a third party—typically a supplier.
This way sellers never handle products directly and can focus on maintaining customer & supplier relationships.
Dropshipping has become a great and popular business model as it doesn’t demand employee hiring, product stocking, order management, and fulfillment process as in a standard retail model.
This biggest difference serves as a great advantage for entrepreneurs who wish to begin a business with less operational cost.
Key Players in the Drop Shipping
A successful dropshipping operation involves multiple parties working together in sync. The key players involved in drop shipping are
- Manufacturers
- Wholesalers
- Retailers
- Customers – The prime key player The dropshipping business model
From Production to customer delivery, here is how the dropshipping model works. So far, we generally know that once the customer orders a product,
It will be passed to the third-party supplier which will then be transported directly to the customer’s place by that third-party supplier. The concept is the same but you must also know the explanation behind the concept.
A Manufacturer is a person who manufactures and sells the products in bulk at a marked-up price to the wholesalers and retailers but not directly to individual customers.
A Wholesaler is one who finds the relevant manufacturers to stock the specific type of product/variety of products he/she wants to sell. Both the manufacturer and wholesaler enter into an agreement for the regular supply and purchase of goods with the manufacturer.
The wholesalers sell the purchased bulk products to the retailers at a marked-up price slightly higher(covering the shipping costs) than the purchased price from the manufacturer.
A Retailer is one who is in a direct relationship with the customer. They serve as a direct selling point to the customers via their physical or online storefront.
Yes, retailers are obliged to handle the customer service seamlessly and they see this as their major responsibility. Retailers list the product online after confirming the availability with the dropshipping
supplier and ensuring that the dropshipping supplier has received the customer order as well. The price of the product will be fixed and listed by marking up the selling price a little higher than the cost price in a way gaining a profit margin.
So, let’s imagine that a customer A places an order with an e-commerce retailer.
When the retailer receives an order, he/she processes the order and forwards it to the dropshipping partner (supplier) along with the specifications of the product who will do the package and ship the product to the customer.
To carry over the dropshipping process, the retailer is charged by the drop shipping partner for the service, and in turn, the retailer charges the customer.
Though dropshipping seems an easy setup it is a crucial concept.
Before entering into the dropshipping business, a dropshipping agreement must be drafted and signed by the retailer and dropshipping suppliers to work together.
The agreement/contract must be clear and should clearly state the terms of the agreement including definitions, vendor’s role, supplier’s role, shipment problems, responsibilities, taxes, return policy, non-payment terms, products provided, billing, and other responsibilities.
It is said that the “shorter the supply chain, the greater your profits will be” Why?
It is said so because a short supply chain is one where the retailers deal directly with the manufacturer without involving the suppliers (middlemen) or any other fewer parties taking a cut.
But,
Dealing with suppliers is much easier than dealing with manufacturers because manufacturers have minimum purchase requirements that are high for retailers, which will involve the costs to store, stock, and ship the products.
Though it is a simple process to make purchases directly from the manufacturers, you’ll mostly end up benefiting when buying from suppliers
Advantages
Startup costs
Clearly knowing the dropshipping business model, by now you must have also understood that there is no need in leasing a store, stocking inventory or paying staff.
All you need is to set up an online business where you can sell your products to the customers without worrying much about the investments as in traditional supply chain management methods.
Dropshipping avoids the risk of stocking the products that doesn’t fly off the shelves and also avoids other investments which clearly proves that the start-up costs are relatively less when compared to the traditional store setup.
Business Operations
No need to procure, maintain and supply products. Doesn’t this ease the process of running an e-commerce business?
Setting up an online shop and the background processes such as accepting orders, processing orders, handling returns, forwarding to the supplier, and accepting and making payments are not going to be a tough one as a physical retail store.
Having enough information about the product availability and specifications, and the ability to list a wide range of products on your site without worrying about the other factors is the kind of flexibility in dropshipping business operations
Scalability
Without the risk of costs associated with inventory and shipping, scaling up the business operations becomes an easier task.
With a robust platform to handle traffic and with the right supplier partnership, a lot of time is saved which can be efficiently utilized to land on marketing strategies that will help in listing a winning combination of product offerings to the audience that will quickly scale up the business.
Alongside, answering customer inquiries as fast as possible pairing up with the perfect customer service component of your business helps in the smooth running of the business and is a key to success in dropshipping business.
Disadvantages of the Dropshipping
There may be various retail businesses offering the same product. Though all retailers don’t sell the same product, competition from fellow retailers in your sector can be very high in the dropshipping business due to lower barriers to entry.
This is where focusing on customer experience will help you stand out in the dropshipping business.
The other factor to focus on is the profit margin. Offering products at a lower price than your competitors can help you beat your competitors. Operating on the volumes can avoid low margins and make a good profit even in areas of stiff competition.
Product Information
Retailers adopting drop shipping as a sales strategy usually works with multiple suppliers who own the inventory and shipping process.
This is where retailers will face difficulty as they will not have a real idea of what is happening as a result of which they will find it complicated and hard to immediately answer customer queries (product’s dimensions, quality, weight, ease of use, returns, refunds, etc).
So, less control over products, information, inventory, and shipping is not only an advantage.
It can also be a big disadvantage as a retailer must always depend on a supplier which
will consume time and creates a communication gap with customers which will be immensely frustrating for customers. An automated system that updates the necessary information regularly throughout the day can eliminate the problem and improve customer experience.
Customer support
As mentioned earlier, Dropshipping not only removes the responsibility of inventory, shipping, handling returns, and refunds it also removes customer experience from control.
Also, a lack of necessary information at hand creates a dependency on suppliers in resolving a customer’s complaint or inquiry which will lengthen the waiting time as the query have to go through a third-party supplier before it can be solved.
Wrapping up
The low overhead entry costs and simplicity of starting a drop shipping business, have made it a popular and convenient business model for e - commerce retailers to run profitable stores with easy setup and very little risk.
On factoring in all the drawbacks, obstacles, and day-to-day management, drop shipping is far from easy and can be a lot of hard work.
But if you approach it in the right way with
- Careful consideration of the benefits and potential problems,
- Detailed planning and
- A clear line of communication between you and your supplier Drop shipping can still help you build a successful business.
