Dropshipping Simplified
By: Ray Gaur
Tags: Retail, Dropship, Ecommerce, Small Business, Dropshipping

Dropshipping allows an online business to sell products it doesn’t have. It sounds scary, but actually a lot of online businesses are doing it and in many cases without the shopper knowing what happens behind the scenes. An order is placed online and then forwarded automatically or manually to a wholesaler or dropshipping business, which then packages the product and ships it to the customer. In some cases, the labels that are placed on the packages bear the name, address and branding of the selling online store.

Dropshipping can be a great vehicle for online businesses to grow and increase sales. There are several companies in the market that offer dropshipping services and most marketplaces such as Amazon and eBay allow them. Online businesses can save up the capital that they would normally have to invest in stock, storage and shipping of products.

But dropshipping business model as attractive and lucrative as it may sound, is actually laden with several challenges that should be recognized, understood and addressed. Here is why:

Low profit margins: There is a cost for someone else to do the purchasing, storing, shipping and in some cases handling returns for your business. The online market is competitive and to sell on suggested retail price is already a challenge. Customers compare prices and look for the best deals pressurizing online businesses to offer discounts. On top of that, you have all your other overhead expensenses to pay. Unless you do huge volumes, which in itself would be a challenge for a small business, there is very little margin left to take home.

Highly competitive market: Not having to deal with and invest in the product, storage and shipping qualifies and attracts a lot of businesses. Some bigger players have the capacity to undercut prices, which makes it even more challenging for a small business to compete, unless more funds are invested in marketing to stand out from competition.

Lack of control over supply-chain: Most online sellers who use dropshipping model have to rely on the dropshipper for the service and quality of the product. The best you can do is communicate with the customer, but everything else is dependent on the dropshipper, which can affect your reputation, customer retention and repeat business.

Difficulty with brand building: It is important that the customers who shop at your website come back in the future to buy the same or other products. But if your name gets lost in the process of dropshipping then you are losing value by having to invest more in customer acquisition while failing to retain your existing customers due to lack of branding. In some cases you can have agreements in place with dropshippers to use your branding on shipped products and packaging but it can be very challenging to enforce these agreements.

Volume based economy on shipping: If you have a brick and mortar store or other channels such as marketplaces to sell your products and you do fulfilment with your own stock, you can combine shipping from all channels and negotiate lower shipping rates with shipping companies. But if you are using other parties to ship your products then you will be at a disadvantage when it comes to lowering your shipping rates based on volume.

Sharing of customer information: Customer data is valuable information and sharing it with suppliers is not a good idea. You may have an agreement in place with your suppliers not to use your customer data for any other purposes such as sending marketing materials or selling other products, but the best you are able to do is rely on a third party to keep your trust.

Some wholesalers now also offer dropshipping for retailers, which is a great option to use if there is already a relationship in place built on trust. The retailer can list a wider range of products online without having to stock them and order as needed or get the wholesaler to dropship. It is not a bad strategy to stock popular items and dropship less frequently ordered items.

To conclude, as reward in general is commensurate with effort, dropshipping offers limited reward in terms of net profitability as compared to self-fulfilment of orders. A business entirely dependent on dropshipping model may face serious sustainability issues and should be thoroughly researched before any investments are made. But if the business is already established based on a self-fulfilment model, dropshipping can be utilized profitably on incidental basis.