Pros and Cons of Dropshipping

Dropshipping is an order fulfillment method where the retailer doesn’t keep inventory on hand. Instead, they rely on wholesalers or manufacturers to actually package and ship orders to customers. 

Seems like quick, easy money…. Right? When approached the right way, dropshipping has advantages that are attractive to eCommerce businesses. However there are some drawbacks and obstacles that make day-to-day management more difficult than people think.

Benefits of Dropshipping

• Low Barriers to Entry - You don’t need to manage a fulfillment center, pick, pack, or ship orders, manage inventory, or handle returns. Dropshipping lowers the number of obstacles that you would normally face when selling products. 
• Lower Capital Investment - Dropshipping allows you to avoid spending a high amount of money on stock up front. You also won’t have the large overhead costs of everything that goes into manufacturing and storage. 
• Flexibility & Testability - Small businesses can have more flexible hours and operate their businesses from anywhere in the world if they want to. It’s also easy to introduce new products to your target market and see which perform the best. Business owners can adjust their business with ease at any time they want. 
• Scalability - In a normal retail business, more orders would mean more work. In the case of dropshipping, the picking, packing, and shipping is handled by your supplier. This means that operations can grow quickly because you have a seasoned professional handling your logistics. 
• Diversification - All you need for dropshipping is an online storefront and a supplier, giving you the ability to have multiple storefronts. This can allow you to diversify your offerings and create a more year-round business. 

Cons of Dropshipping

• Low Profit Margins - Wholesale prices can be constrained by a relatively small volume of orders at any one time. When combined with high competition, this can reduce profit margins. You could face a margin as low as 10% depending on your industry, product, marketing costs, supplier and customer location, and other factors. 
• Competition - The traditional retail model requires capital investment, product development or research, a warehouse, and numerous other moving parts. With such low barriers for entry, there is nothing stopping anyone with an online store and a supplier from entering the dropshipping business. As a result, some markets are seeing high saturation by companies selling identical products sourced from the same supplier. 
  • Tip - Choose a less crowded niche, build a reputable brand, and prioritize customer service to stand apart from other similar businesses.
• Issues with Suppliers - While having a reliable supplier makes dropshipping a breeze, an unreliable supplier can make life extremely difficult. If there is an issue with the order on the supplier’s end, you are left to explain what went wrong and how to fix it. The quality and accuracy of the fulfillment process may not be the strength or focus of the manufacturer, so it’s possible that customer experience may be subpar. 
• Differentiating Your Brand - Dropshipping is selling products manufactured by third parties. This makes it hard to put your brand’s personal touch on the product. If building your brand is your goal, then this is a potential downside for you. 
• Long Delivery Times - Shipping times can be much longer because a number of manufacturers/suppliers are in other countries. The distance between where products are held and where they are being shipped to greatly affect the time it takes to deliver an order. 
• Lack of Control - In traditional eCommerce, you can handle any product quality or fulfillment complaints by yourself. When dropshipping, store owners are at the mercy of the supplier, but still have to handle customer inquiries themselves. Dropshippers have to hope that their suppliers handle inventory, product quality, and other fulfillment issues with high standards. Not to mention, if there is a long back-and-forth conversation between the customer, dropshipper, and supplier there can be serious delays if one party delays communication.

Considerations If You Are Thinking About Beginning Dropshipping

• Success Takes Time - The more time you are willing to invest into your company building your brand, sourcing new products, finding reliable suppliers, and marketing your products, the better chance you have of succeeding. It can take about a year before you reach the average full-time income using dropshipping. 
• Market Research - You can use dropshipping as an opportunity for market research versus being the end-all-be-all for your company. You can get an idea of if a product sells, how much it sells, and so on. When trying to enter a new market or introduce a new product to your business, you can test with dropshipping instead of investing heavily just to find out the new market/product is a bust. 
• Strategic Shipping Systems - Dropshipping can be a great solution for locations that fall outside of your profitable regions. It might cost too much to ship products to a certain location or store products, but you can use dropshipping to help alleviate some of those pains. Utilize dropshipping to test out new locations and other fulfillment strategies. 
• Prioritize Customer Support - Customer experience can be messy since the suppliers handle all fulfillment, but business owners still have to answer to any complaints, questions, or concerns from customers. It’s important to show the customer that you are responsible and will own up to mistakes that are made. Asking for feedback and having an easy to access FAQ page shows customers you care about their experience and are looking for ways to improve. 
  • Tip - Set realistic expectations for customers. Most people don’t mind waiting a few days for an item as long as they are made aware of the shipping times beforehand. 
• High Maintenance Products - Some products cost more to stock and ship than others. In certain cases, it is even more cost efficient to dropship versus storing items by yourself. Unless your whole business specializes in this high maintenance product, it doesn’t make sense to pay for additional storage or shipping fees. These products that incur extra fees for storing and shipping are items such as: 
  • Large products
  • Heavy products
  • Fragile products
  • Valuables
  • Special conditions (frozen, sensitive to light, etc.)
• Utilize Diverse Sales Channels - If profit is your main goal, it is a good idea to diversify your sales channels. For example, you could utilize dropshipping as well as selling directly to customers through an online store. Profit margins differ depending on the product you’re selling and what channel it is being sold through. As mentioned above, do your research and learn which sales channels are the best options for your business goals. 

Dropshipping success relies on making smart and informed decisions. Choosing the right products and suppliers, maintaining profit margins, and providing quality customer service can help lead your business down the right path. Curious how Brandfox can help with your dropshipping dreams? Contact us today!