To Drop or Not to Drop: The Pros & Cons of Dropshipping

To Drop or Not to Drop
Who would not like to be their own boss? Decide your own hours, choose your own salary, work from wherever you please and best of all, do exactly what makes you happiest while getting paid for it. What’s not to like?

This leads us to the next logical question.

If being your own boss and running your own business is so awesome, why doesn’t everyone do it? Why do we have millions of unemployed folks hunting for jobs working for other people, when running your own business is next to professional nirvana?

Because running a business is not easy.

Besides a huge helping of sheer guts, starting and running your own business is a 24x7x365 day job. Your business is your baby – a constantly crying and wailing baby that you can’t afford to set down for even a minute. Even with businesses moving online, the demands on a typical entrepreneur’s time can be brutal to say the least.

Setting up a retail business online

Retail is a popular route to market for a lot of wannabe entrepreneurs. It’s easily understandable, most of us have experience about the ‘shopping’ aspect of retail. Besides, setting up an e-commerce store does not take longer than half a day. What’s more, if you already have an existing website that’s live, a shopping cart plug-in like ShopIntegrator lets you set up shop in a matter of minutes. It’ll take care of your store layout and design, your checkout flows, order management, inventory management, accepting and processing payments.

But that is the easy part, the part that can be automated. The tough bit in e-commerce is the part that still needs human intervention – product sourcing and fulfilment.

You can source the products that you want to sell either by manufacturing them yourself, outsourcing the manufacture to someone else or buying a ready item from a reseller. Then there’s the whole fulfilment process, where the item goes from your supplier to you to your shipping partner to finally your buyer’s doorstep.

That’s a lot of work for someone to handle all by themselves. Even the smallest e-commerce companies typically have at least a couple of employees to help with the logistics of procurement and dispatch of the physical goods.

Now, what if you decided that you don’t want to spend any money on getting employees to help with your logistics? What if you wanted to go it all by yourself? What would you do?

Dropship of course.

What is Dropshipping?

Dropshipping is a retail model where the online retailer does not own any inventory directly. When a customer places an order, this order is forwarded by the retailer to a manufacturer, distributor or wholesaler who then packages and ships the item to the customer directly.

In other words, a retail business built on a drop ship model is pretty much a front-end store that takes and processes customer orders, with the backend fulfilment operations being handled entirely by a third party.

This model offers budding entrepreneurs that chance to experience running a business first hand with very little sunk costs. The only things that the retailer would really spend on upfront are:

a. Site design and maintenance
b. Marketing and Demand Generation
c. Order processing
d. Managing the business’ finances
e. Employee costs (if any)

The retailer typically has a re-seller account with the dropship partner. When the retailer receives a customer order, he passes on the order to the dropshipper and rests easy. The dropshipper now swings into action.

He locates the ordered item in his inventory and packages the order with the retailer’s branding on it based on the invoice received. He then prints shipping labels with the end user’s name, address and order details on them and puts the right labels on the right products. Once packaged and labelled, the products are shipped off to customers directly from the dropshipper’s warehouse.

As you can see, the retailer’s degree of involvement in an arrangement like this is minimal, at best. Seemingly, the retailer gets all the benefits of running an online retail business, with none of the real hassles. While dropshipping may seem like a silver bullet for any online retailer, it comes with its fair share of pluses and minuses.

Let’s take an unbiased look at both sides of the tale.

The Benefits of Drop Shipping

1. Hassle-free way of starting a new business

As we discussed in the previous sections, dropshipping is as hands-off a method of conducting a retail business as any. A newbie entrepreneur can go into business in a matter of days once the agreements with the dropship partner are set up. In this sense, dropshipping offers a turn-key solution to starting an online retail store.

2. No Need to Hold Inventory

With a third party taking care of manufacturing, storing and transporting the goods, the retailer doesn’t have to worry about how much stock to hold or where to store the items. All they need to do is raise a procurement order for the dropship partner as and when they receive a customer order and leave the rest to the dropshipper to handle.

3. No Overheads from Warehousing

Storing products in a warehouse or any other storage facility comes with inherent overhead costs. There is rent to be considered, electricity and other utility bills to take care of, cost of manpower to run the warehouse facility and so on. If you choose to lease a portion of a larger warehouse, some of the costs are reduced but there’s still the question of rent and insurance at the very least.

4. Potential to Offer Wider Variety of Products

When a manufacturer starts selling a product directly to consumers, they are restrained by the variety of products that they can manufacture at any given point of time. A distributor or wholesaler is limited by the amount of warehousing space he has and the access to different types of products, when it comes to selling direct to consumer.

The fact that the retailer holds no inventory, means he is free to approach multiple dropship providers if need be, to create a wide range of products to be sold via his online store. This unlimited product variety provides a great win-win situation for both the retailer and the customer in a dropship setup.

5. Lesser Manpower Needed

With all the key manual activities involved in the fulfillment process outsourced to a third party, the retailer does not need too many people to run his business. Most e-commerce software or shopping cart plugins automate of a large chunk of the transaction process, leaving very little to be managed by the retailer. A high degree of automation translates into huge cost savings in terms of paying for employees, their benefits, training costs, administrative costs etc.

6. More Time to Focus on Marketing, Demand Generation and Customer Service

One of the biggest benefits of dropshipping, is the gift of time that it gives to a retailer – time that can be used to focus on more complex and productive activities like creating awareness for the brand, generating demand for the products, building a relationship with users and offering world-class customer service to new and existing customers.

7. Flexibility

Dropshipping means you can now own a business sitting anywhere on the planet as long as the dropshipper ships your products to where your customers are located. Since you don’t need to hold any inventory or request any minimum number of units per order, your customers can order whatever quantity they desire and it will be shipped to them, no questions asked. When your business grows in size, scaling up your supply side is as simple as placing larger orders with your dropshipper or supplementing your existing dropship partner with another one.

The best part? With dropshipping taking away a whole bunch of manual tasks away from your plate, as an entrepreneur you finally have some much desired me-time!

The Problems with Drop Shipping

1. Uncertain Service Levels

One of the most important aspects of e-commerce is shipping, handling and delivery. If a customer does not receive the right product, in the right condition, within the right time frame; it results in a terrible shopping experience. A slip up in even one of these different factors can have disastrous consequences on the customer’s satisfaction and the possibility of a repeat purchase.

In a dropshipping scenario, a retailer can only have service level agreements (SLA) with dropshippers detailing out their expectations in terms of product quality, packaging, shipping and delivery timelines. It is eventually upto the dropshipper to live up to their end of the bargain and fulfill all the promises made to the retailer. While generally a dropshipper would try his best to complete an order as per the SLA, there can be unforeseen circumstances where he is unable to do so. In such cases, the retailer is completely at the mercy of the dropshipper and has no control over when and how the customer will be serviced.

2. More Expensive Than D.I.Y.

That the entire process of warehousing products, sorting through them, packaging, labelling and shipping them to the customer is challenging, is an undoubted fact. However, the cost of doing so in-house is often cheaper than outsourcing the entire process lock, stock and barrel to a third party. The reason for this is simple.

If you carry out your own order fulfillment, you are likely to negotiate the lowest rates possible for each step in the process. However, when a dropshipper offers his services to you, he tacks on a generous markup to each step of the process to ensure that he makes his profit out of the transaction. These markups at every step of the way, add up and raise the landed cost of goods substantially. This in turn results in more expensive prices for the customer, which might run the risk of making the products uncompetitive in the market.

3. Unscrupulous Dropshippers

On paper, the dropshipping process seems like a great idea for both retailers and wholesalers. While the retailer gets rid of the trouble of warehousing and product fulfilment, the wholesaler gets an assured demand for his products with an extra margin tacked on to compensate for the services that he provides.

However, the rising demand for dropshipping services has not gone unnoticed by unscrupulous characters out to make a quick buck any way they can. Horror stories of retailers being duped by so-called dropshippers who take their money and their order but never fulfill the order at the customer’s end are stuff of e-commerce legend. The fact that retailers seldom meet with the dropshippers face to face and all they have to go by is the online reputation of a dropshipper, this scenario makes it a fertile ground for scam artists galore.

The Final Verdict

As we just saw, dropshipping offers this exciting opportunity to start an e-commerce business on the fly, but it also comes with its own share of risks and loopholes. So, is it worth putting your money and time into a dropshipping venture?

I would say, definitely.

Dropshipping is a low risk, low cost method of entering the world of e-commerce. Be extra cautious about picking the right dropshipping partner. Hunt far and wide for the right supplier who offers the products that you intend to sell. Check out their product range and quality. Confirm that they deliver to the locations that your users are located. Compare the pricing of different dropshippers and deeply research their past performance reviews before zeroing in on a dropshipping partner.

Even if you don’t start your own store, you can wet your feet by using dropship services and selling your products on eBay or Amazon to begin with. Once you learn the ropes of the business, become more confident of how to run the business and scale up your eBay store sufficiently; starting your own online store will be the next logical step.

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2 thoughts on “To Drop or Not to Drop: The Pros & Cons of Dropshipping

  1. Great post! It touched me personally because I’m currently running a business that dropships all our supplies.
    One other disadvantage I wanted to add to your list was Dropshippers stealing a retailers business.
    Always try to add your brand somewhere in the packaging or find a dropshipper that will add your branding to the delivery. Some dropshippers also do retail & they see your customers more then you will. If they find a potentially “great” customer they can definitely offer them better pricing since your pricing is just a markup from theirs.

    Great post & advice. Thanks for sharing.

  2. Pingback: Managing Drop Shipping and Your Own Warehouse - QStock Inventory

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