Pros and Cons of Dropshipping
Can you imagine that without manufacturing, stocking, and shipping, you can still run a business? With dropshipping, you can. But before you do, you must consider the pros and cons of dropshipping.
If you’re considering starting a dropshipping business, this article will help you understand the pros and cons of this popular business model.
Understanding the Dropshipping model
The concept of Dropshipping business model is simple. You list products on your site and don’t have to manufacture or store products. Third-party performs all these tasks on your behalf.
When a customer places an order, third party retailer ships products directly to the customer, and you get your commission.
Dropshipping: The advantages and disadvantages
You do not need huge money to get started – you can create a dropshipping ecommerce business with no financial risk.
Extremely competitive. Anyone may start a dropshipping business because of the low entry expenses.
There is no need for extensive storage for the items you sell, significantly lowering your overhead expenses.
Margin compression is typical – you may feel compelled to sell your items at a lower price than your rivals.
Flexibility – With an internet connection, you can do business from anywhere!
When working with many vendors, shipping issues might emerge.
Shipping must be reliable and timely (complicated when you’re not in charge), and you must address any complaints.
The Pros of Dropshipping
Some significant advantages of Dropshipping are given below:
- Easy to get started
Dropshipping is easy to start because you don’t need to manufacture or stock products. Moreover, there is no need to maintain a physical presence.
On the other hand, You need hefty investment to manufacture, develop, and source products when you start a traditional online store. Moreover, you must pay additional costs to maintain a physical presence, stocking inventory, and marketing investment to target new customers.
- No inventory management
In a dropshipping business model, the third-party manufactures products, store inventory, and deliver products to customers on-demand. Consequently, all the risks relating to stocks are removed for the business owner.
In traditional online stores, retailers pay for the upfront production, wait for the products to get delivered, and then stock inventory in a warehouse. When a customer wants to purchase an out of stock product, you could lose the sale.
Moreover, inventory management includes storage and handling costs. For example, you need labour for storing products. Additionally, there is a significant financial risk because you have to manufacture or purchase large volumes of products.
- No need for a physical warehouse
When you prefer Dropshipping business over a traditional business, you remove the need for a physical warehouse or storefront. It means there will be no mortgage, no lease, no construction, and upkeep costs.
- Improved cash flow
In traditional business, retailers order products and then wait for them to arrive. When products come, they sell them to customers. By doing so, they spend lots of money with the risk of not getting it back.
In contrast, in Dropshipping, you either receive payments before or at the same time when you pay wholesalers. In this way, you get money to invest in marketing and business growth.
- You can test new products without any significant risk
With dropshipping, you can try new products without a substantial investment. If you don’t get an encouraging response from customers, you can remove those products from your store. In this way, you can try different products.
You have to bring innovation to any business to keep your customers engaged. When you want to try new products without a proven track record, you don’t want to take the risk since the chances of failure are high.
Cons of Dropshipping
Every business has some drawbacks, so let’s check some disadvantages of dropshipping.
- High competition
Dropshipping is easy to start; therefore, there is high competition. Your competitors are selling the same products from the same third party manufacturers. So, you have to find some new ways to stay in the competition.
- Lack of control
While not the most significant disadvantage of dropshipping, the reliance on a third party means you relinquish a degree of control.
The inventory doesn’t pass through your hands, so you can’t quality assure the products. As such, you are placing your product’s reputation in the hands of others. One low-quality product batch can end up making customers unhappy, costing in lost sales, and potentially reputation.
Unless your supplier has offered you a special deal, you are limited on how your products are presented. For example, you can’t use coupons to drive additional purchases, unique packaging to make your brand unique, and customize boxes and envelopes.
Additionally, there is a possibility that fee structures may change at short notice.
When your store starts to grow and begin to gain a reputation, you can establish a special relationship with suppliers and negotiate new deals.
Until reaching that stage, you’ll have a short profit margin and lower priority from your suppliers. High fees from suppliers can eat your profit margins and forces you to charge extra from your customers.
- Bulk discounts
Big box retailers offer a discount to buyers because they purchase products in bulk. Moreover, they can pass on this discount to their customers. As a dropshipper, buying only one product at a time will mean you cannot leverage the economies of scale that bulk purchasing offers.
You can’t enjoy this option until you generate massive sales.
- Disjointed orders
As a dropshipper, you list a variety of products in your online store from multiple suppliers. Consequently, customers ordering several products may receive multiple packages for a single order. This can result in wasteful packaging, high shipping costs, confusing branding, and unhappy customers.
- Low-profit margins
With so much competition, dropshippers may feel pressured to lower their product prices to maintain sales. As a result, while the dropshippers sell lots of products, these are at a low price, resulting in small profit margins.
After checking the pros and cons, we can say that dropshipping is still a profitable business. Moreover, it’s easy to start with minimum or zero risks. Furthermore, it allows you to test new products.
If you’re interested in creating a Dropshipping business, read the cons as well, then decide whether it’s feasible for you to start Dropshipping business or not.