With the aggressive growth in eCommerce in the past few years, particularly during the COVID-19 crisis, more business owners are reaching customers where they spend most of their time–online. eCommerce platforms such as Shopify offer new opportunities for consumers and merchants. Dropshipping, which is kind of like freelancing in retail, has become an inexpensive way of earning extra money, but is it worth it?
What Is Dropshipping? How Is it Done?
The growth of eCommerce has created a place for dropshipping. This involves opening an online store, taking orders, and dealing with customer service without storing inventory or dealing with shipping. Dropshipping is outsourcing the supply chain, which helps businesses focus on marketing, driving traffic, and making sales.
eCommerce platforms such as Amazon and Shopify make dropshipping relatively simple. Potential merchants can set up an online store in less than a day and start uploading merchandise. The next step is to locate suppliers and wholesalers. Finally, the merchant markets the store and brings traffic that will be converted into sales.
What Are the Advantages of Dropshipping?
No Inventory
Not having to deal with inventory is one major advantage of dropshipping. Inventory problems not only occupy a significant amount of time and labor, but they can be expensive. According to Stifel, for every $1 sold by retailers, $1.43 is tied up in inventory. Dropshippers do not own their inventory, so working off their inventory is not a concern.
The lack of inventory problems means that there is no need to have fire sales out of desperation to eke out some sales from merchandise that is not moving. With dropshipping, there is no guesswork concerning what customers want. When they make an order, the merchant buys the item from a supplier without wasting money or time.
No Handling of Shipping and Packaging
Many people who choose dropshipping prefer to focus on marketing and customer service and find dealing with shipping and packaging problems a headache. When these issues are taken care of, a significant amount of time is saved and can be invested in growing the online store.
Outsourcing shipping and packaging duties to experts prevent expensive mistakes. It is hard for those starting to find the most affordable ways to send items and understand what type of packaging must avoid damage in transit. Entrusting these duties to expert shippers will save time and reduce customer complaints.
Flexible Pricing
Drop shippers can set their prices. This flexibility is valuable for winning customers by setting prices lower than rates charged by competitors. Sometimes online pricing wars can arise spontaneously, and it is a distinct advantage to change price levels quickly to keep up.
Dropshipping is profitable when merchants acquire low-cost items and sell them at significantly higher prices. Finding the balance between low prices and ensuring healthy profits can be a challenge, but dropshippers at least have the flexibility to implement and update pricing strategy.
Ability to Sell Low Volume Items
Since there is no need for large stock amounts of inventory with dropshipping, it is possible to sell low volume items that may be hard to find. Selling low volume items can help online shops find their niche. This can circumvent the issue of selling duplicate products on Shopify.
Cons of Dropshipping
Competition-Red Ocean Selling
Red Ocean refers to a crowded, competitive marketplace. This is the environment many drop shippers have to deal with since dropshipping is increasingly popular, and there are many online stores on eCommerce platforms selling the same products. The key to success in eCommerce is standing out from competitors, and this is a significant challenge. Unfortunately, many online merchants have to dramatically cut costs to do this, which cuts into margins.
Branding Is Difficult
Branding is a bit like being a ghostwriter. It means doing a lot of the work without promoting one’s brand name. By selling products from outside suppliers on an eCommerce platform, it is hard to directly create a relationship with the customer or create brand recognition.
Lack of Control over the Supply Chain
The chief advantage of dropshipping can also be a drawback–lack of control over the supply chain. Although outsourcing inventory, packaging, and shipping can save money, time and work, it can also mean that merchants will have to deal with customer dissatisfaction but not be responsible for their complaints if items arrive broken or late. There can be few options for improving shipping without changing suppliers, which can be complicated and cause delays.
Lower Margins
Although there are almost no overhead costs and little capital needed to set up an online store, the margins are also low with drop shipping since much of the money goes to the supplier, and the dropshipper earns whatever is left. The intense competition means that drop shippers also have to keep prices low, which eats away at margins.
Is Dropshipping Right for You?
Any type of business carries certain advantages and disadvantages. For people who prefer a low-maintenance way of earning some extra money on the side, dropshipping may be the best way to secure a nice side income stream.
Although it is too risky at the very beginning to quit one’s day job in favor of dropshipping, starting small and scaling an online store can be a profitable venture which has room for growth.