E-commerce is constantly evolving. When you look to open a business, you have to consider the inventory and order fulfilment aspects of it. You might have come across the term ‘dropshipping’ when looking for business ideas, but is it really a good business decision?
What is Dropshipping?
With dropshipping, brands don’t have to directly manage or distribute their products. Instead, when an order is received, they simply contact the supplier, who will then ship the products directly to the customer’s doorstep.
The main difference between dropshipping and a traditional retail business is that dropshipping businesses do not hold any physical inventory. And due to this, dropshipping can only work for eCommerce sellers.
The Pros of Dropshipping
Dropshipping is gaining popularity as a business model because it’s easy to set up and manage, and it doesn’t require a large upfront investment.
- Low overhead costs – Traditionally, retail businesses require time and investment in terms of inventory, storage, and fulfilment. Dropshipping eliminates the need to hold inventory, so you’ll never have to worry about over-stocking your product, or over-ordering on a seasonal item, and being stuck with a lot of inventory you can’t sell.
- Flexibility – Since inventory and fulfilment are managed by your dropshipping supplier, you and your business can work from anywhere, and have the agility to pivot to an entirely new offering potentially within hours should you wish.
- Ability to test new products – When you’re launching a business for the first time, dropshipping allows you to explore whether a product can sell. As a result, you can test profitable niches and products without having to invest in inventory.
- Scalability – A dropshipping retailer can scale quickly even as orders start flooding in. Dropshipping businesses do not have to work longer hours or source for better production equipment because it is done by the dropshipping supplier.
- Saves a ton of time – With logistics and product fulfilment outsourced to a third party, you can focus on other core aspects of your business such as marketing your products and customer service.
The Cons of Dropshipping
So why doesn’t every business utilize dropshipping? Dropshipping is unfortunately not a one-size-fits-all solution. Many businesses avoid dropshipping in the long-term due to lower profits, and lack of oversight of product quality among others.
- Lowered profit Margins– One significant drawback of dropshipping is the lowered profits as suppliers also draw a fee for product fulfilment.
- High competition – With the low entry barrier of starting a dropshipping business, you’re not the only person who’s had the idea. Regardless of your niche, there are likely to be hundreds of others in the same space, who may even be using the same supplier. With no clear differentiation between products, the most common but unfortunate situation is for businesses to compete solely based on price which can push margins down to the point where it’s almost not worth your time.
- Lack of product quality oversight – As you’re not involved in the manufacturing process, dropshippers may risk selling bad products to customers which may erode branding in the longer term.
- Heavy reliance on suppliers – Dropshippers are dependent on their suppliers to execute an order. If there is an issue with product availability from the supplier’s end, your dropshipping business will similarly be disrupted.
Dropshipping: Is It Right For Your Business?
Dropshipping is a strategy that used to work well in the past. But as with anything that works well and has a low barrier to entry, it soon became saturated. Nowadays, more and more people have jumped onto the dropshipping bandwagon, and it shows.
There’s also nothing stopping your dropshipping suppliers or manufacturers to sell directly online. They can cut out the middleman and offer lower prices than anyone else can match.
When your product is similar to others online, it lacks a clear unique selling point. If you have no unique selling point, the only way to make your product more attractive is to lower the price. This ultimately ends up being a race to the bottom where profitability is extremely low.
Having said that, if you have a way to sell a product with a high barrier to entry (such as one that requires a license), then competition disappears. So if you have a way to do this, it can still be a very viable way to do business online.
Wholesale as a Viable Alternative for your Business
To create a lasting business, your product must be differentiated from all the generic dropshippers online. Ideally, you should try to create a unique product that solves the current problems of your target audience.
Once you have this differentiation, you can send it to an outsource manufacturer to produce in bulk. If you have the space to hold the inventory, creating your product in bulk helps both to reduce price per unit, as well as reduce shipping time for customers.
