What Is Dropshipping? Everything You Need To Know
For those of you who don’t know what dropshipping is, let me give you a brief explanation.
In essence, dropshipping is a way for individuals or companies to sell products without keeping any inventory by shipping products directly to the customers from the manufacturers or a reseller.
Let’s say you want to open a shop selling pet supplies, but you don’t have any money for inventory, nor do you want to deal with the hassles of keeping inventory and shipping products yourself.
So, you contact a company that offers dropshipping, get a list of their products, and add them to your Shopify store.
When a customer places an order from your shop, you simply process the order by placing an order with the dropshipper and having it sent directly to the customer.
You never have to touch the product at all, because it’s sent straight to the consumer from the warehouse.
This works beautifully if you can find a reliable dropshipping company because all you have to do is act as a go-between by facilitating the sale and having it sent to the customer.
The customer pays you first, and you use the money they paid you to order the product. You don’t have to have any money at all, beyond paying for your domain and Shopify’s fee, to get started.
It’s a win-win!
Benefits of dropshipping
Dropshipping has a number of benefits other than just saving you from needing a large upfront investment for inventory. Let’s take a look at a few of the biggest benefits.
- Little to No Startup Capital Required – The most obvious benefit of using dropshipping is the fact that you don’t need to pay for inventory upfront, so you can start your store even if you’re on a shoestring budget.
- Less Work Involved – With traditional retail methods, you must keep inventory, remember to restock products before you run out, handle packaging and shipping products, deal with returns, and more. With dropshipping, you just pass the order on to the manufacturer or distributor, and your work is done.
- Lower Overhead – When you stock your own inventory, you must have space for that inventory, which often means renting warehouse space and/or office space. Even if you keep your inventory in your home, you’ll need to set aside space for it and spend time managing it, plus you must buy things like shelving to hold the products.
- Flexibility – Rather than be tethered to a specific location, which would be necessary if you keep your own inventory, you can operate a dropshipping business from pretty much anywhere in the world as long as you have a computer and reliable internet connectivity.
- Wider Availability – Because you don’t need to spend money upfront, you’ll have more products that you can offer your customers than you might in the beginning if you were purchasing inventory upfront.
- Scalability – Your business will also be able to scale upward more quickly if you use dropshipping because adding new inventory is as simple as listing it on your shop. You can scale almost endlessly as long as you can find appropriate products.
As you can see, there are some pretty big advantages to using dropshipping over traditional retail, but there are also a few disadvantages to be aware of, which we will discuss in the next section.
Drawbacks of Dropshipping
Of course, like anything, there are also some drawbacks to using dropshipping for your shop.
Let’s take a look at a few of the biggest problems you might encounter when using dropshipping.
- Delivery & Inventory Issues – Because you’re relying on someone else to ship your items, you may run into problems where the company you’re using to dropship your merchandise doesn’t deliver on time, or they run out of inventory and don’t let you know in time. This can hurt your reputation because customers bought from you, not the dropshipper. Ultimately, this falls back on you, because you trusted the company to deliver. You’ll have to apologize, take responsibility, and offer a refund or other compensation to your customers.
- Shipping Issues – If you’re using more than one supplier, you may run into issues with shipping costs. For example, if a customer orders several products from you and each one happens to be from a different supplier, you’d have to pay several different shipping charges. You cannot pass that cost onto the customer, because they’ve already paid you for shipping when they placed their order. For this reason, it’s a good idea to stick with a single supplier, at least in the beginning.
- Low-Profit Margins – The profit margin on a lot of products, such as consumer electronics, is already incredibly low. It can be difficult to make enough profit, even if you’re buying wholesale and paying for inventory upfront. When you’re using a dropshipping supplier, your margins will likely be even lower, because you won’t be buying in bulk, thus you’ll be unable to take advantage of bulk wholesale pricing.
Dropshipping isn’t perfect. If you’re looking to start a business that will leave you rolling in the dough without a care in the world, it’s probably not the right method for you.
There’s always something stressful happening when it comes to dropshipping, always something frustrating going on that needs to be addressed.
But if you don’t have a lot of money and you’re certain you want to own your own online shop, dropshipping is probably your best option.
You can always stock your own inventory in the future. Dropshipping is simply a stepping stone.
We talked a little about how dropshipping works, but there are a few additional things you should know about how the system works before you decide if you want to use it for your business.
There are three members of the dropshipping supply chain that you need to know about:
- Manufacturers – They create the products, but usually don’t sell directly to the public. Some rare manufacturers may offer dropshipping, but generally, they will go through a wholesaler instead.
- Wholesalers – They facilitate the retail process by acting as a distributor. They buy at the lowest possible price from the manufacturer and sell at a slight markup to retailers. They may offer dropshipping.
- Retailers – Retailers buy from wholesalers, or sometimes manufacturers. They sell to the public, typically at rather large markups. They may also use dropshipping as their product source.
Any of these may actually be a dropshipper, but wholesalers are the most likely to offer it.
The best source for dropshipping would be at the manufacturer level because you will get the best prices, however, most manufacturers know they can just sell their products to wholesalers without all the hassles of dropshipping, so it’s not easy to find manufacturers who will dropship.
You can also find retailers who will dropship, but you would have to charge more than they do to make a profit, and you won’t find as many buyers at those higher prices.
Most dropshippers will be pretty much invisible to the consumer.
They will usually ship the products in your name, often with your logo and return address on the package, so it appears as though your company shipped the product to the customer.
Of course, you’ll have to deal with the occasional return, but in that case, you’ll simply work with the dropshipper to make whatever corrections are necessary.
Because so many people dream of starting their own store and don’t have the funds to buy inventory up front, there are a lot of scammers that prey on those people.
Fortunately, these places are usually easy to spot. Here are a few ways you can spot scams and avoid them.
- Monthly Fees – Stay away from companies that require a monthly fee for “membership”. Legitimate dropshippers will never charge you a monthly fee for access. Often, companies that charge a monthly fee are really just directories of potential dropshippers. And if they claim to be a dropshipper rather than a directory, they are not an honest company.
- Retail Prices – Be sure to check out the company’s prices to ensure they are lower than retail. If they are selling at retail, you should avoid them.
- Selling to the Public – If a dropshipper is legitimate, they will usually require you to apply for a wholesale account and be approved. If they sell directly to the public, they are really just a retailer masquerading as a wholesale dropshipper.
There are many reputable dropshippers out there. Just be aware that scams exist, and be careful about which companies you do business with.
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