Dropshipping is a strategy that involves taking orders for products without actually keeping that product in stock. Instead, the order will be passed on to a separate fulfillment center. This strategy can eliminate the need to maintain a warehouse or even a brick-and-mortar storefront. Therefore, dropshipping can save a company a lot of money, or allow them to sell additional products without expanding on physical operations and facilities. According to one report: “The global drop shipping market size was valued at USD $102.2 billion in 2018 and is expected to register a CAGR [compound annual growth rate] of 28.8% from 2019 to 2025.”
With the growing prevalence of technology and remote options in the business world, dropshipping is becoming an increasingly feasible option for many companies. However, there are downsides to dropshipping, and therefore it is in the best interest of businesses to consider the pros and cons (especially as they relate to their own business model) before going forward with a dropshipping strategy.
Advantages of dropshipping
The advantages of dropshipping go far beyond savings on inventory storage and management.
Easy to start
Relatively speaking, it is easy to start a dropshipping business. Since so much of the work related to compiling, managing, and shipping stock is being outsourced, it takes less space (and start-up capital) to get you started. Instead, you can focus your energy on finding the right partners and building your team, and setting up an optimized e-commerce storefront online. The faster you get the basic elements in place, the sooner you can shift your focus to marketing and building a name for yourself. Plus, you will open up for business with a broader geographic reach (again, depending on the nature of your business) and don’t have to worry about drawing in physical traffic.
Dropshipping is a business model often conducted through e-commerce platforms, and therefore doesn’t usually require a physical storefront. This not only saves money, but also time and energy, since dropshippers don’t have to maintain and clean a store. The costs of opening a physical storefront can range from $2,000 to more than $100,000; setting up an e-commerce website, by contrast, generally only costs between $3,000 and $27,000, depending on features and customization options. Similarly, maintenance on a physical store is likely to entail a number of fixed costs, while maintaining a website can be largely automated or rolled out on demand, depending on the scale of changes you wish to make. However, e-commerce comes with its own challenges, such as a stronger focus on site management and communication with customers.
No inventory management
Similarly, businesses that utilize dropshipping don’t have to worry about the challenges of traditional inventory management. This can further reduce costs, and simplify your business model. It can also improve the efficiency of your business by allowing inventory management to be handled by companies that specialize in that realm.
Dropshipping can also improve the quality of your business by allowing you to expand your product far more quickly and easily than you likely would be able to otherwise. This is because you don’t need to worry about expanding your space and operations to account for product growth. This is especially true when dropshipping is managed through an e-commerce platform, as this once again doesn’t require any physical expansion. Additionally, the implementation of an effective, integrative e-commerce platform can further improve scalability and customer experience by unifying data and operations across channels.
Because dropshipping is often handled through e-commerce platforms, companies can receive payments for their products more quickly. Beyond the obvious benefits of this, quicker payment options can also allow a business to reinvest in itself more rapidly, which may fuel growth.
Disadvantages of dropshipping
Again, dropshipping does have its disadvantages as well, and for some businesses, it may be more of a hassle than it’s worth.
Due to the many benefits discussed above, many companies are interested in implementing dropshipping. This has resulted in an increasingly crowded and highly competitive field, as dropshippers must compete with countless businesses, small and large. Depending on your niche and the competition you face, trying to stay afloat could pose challenges to your overall pricing, increase pressure to grow faster and achieve economies of scale, or force you to rethink in-house logistics just to regain some measure of control. It takes a lot of industry research and discussion with prospective partners to determine if dropshipping is the right solution.
Low profit margins
Considering the competition issue, many dropshippers earn low profit margins when they are first starting out. Keeping afloat may end up relying on a larger volume of sales, which can be challenging for new and established businesses alike. As a result, it is important that aspiring dropshippers plan carefully, stick with the strategy for the long-term, and price products relatively low starting out (in order to compete effectively). It is also important to consider that you will have to pay the company that is managing your inventory. Depending on your business’s age and access to capital, investing in dropshipping solutions could be a costly gamble unless you’ve done your research.
Because dropshipping involves a physical disconnect between the company and the inventory, the business may have some level of reduced control over said inventory. Depending on your industry, quality control (and as a result, your ability to manage customer service and field complaints) may become more challenging or complex. To avoid these issues, you need a strategy in place from the beginning to intercept complaints and troubleshoot fulfillment issues before they can escalate. It also requires clear, constant communication with a separate company, who may be juggling other clients as well. Delegation can be powerful, but if you struggle to give up control, dropshipping can be a challenge to execute effectively.
Your dropshipping partner is the lynchpin for leveraging all the benefits and avoiding all the downsides. It is important that businesses find a supplier that they trust, that can work well with their business, and whose products and services they can afford. This in and of itself can be a significant challenge, but the business then must manage and maintain that relationship over a long period of time. Bear in mind that you, too, must be an attractive partner in order to compete for dropshipping providers and establish a productive relationship. In a crowded field, you may be at just as much risk for getting replaced as your partner.
Dropshipping: Is it the right solution for your business?
Dropshipping has its challenges, but it can also be highly rewarding when done effectively. It is also prudent for businesses to consider the expanding role of dropshipping and e-commerce in the American economy. While it may be difficult to compete in these markets, it may become a consumer expectation for companies to compete in them.
As previously stated, it is incredibly important that any aspiring dropshippers do a lot of research about the dropshipping process, potential inventory management companies, the overall market, and how their business model would integrate with dropshipping. Because every business is different, there is no one-size-fits-all solution for order fulfillment.
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