Is Dropshipping a Viable Business Model?
The internet provides a virtual shop window for any retailer or supplier. It removes the need for real-world premises, and it can greatly reduce the cost of setting up a business. However, there are still significant costs incurred in building up a comprehensive stock portfolio – from acquiring and storing the items to distributing them and accepting returns.
Dropshipping represents an ingenious workaround. Online retailers enter into a partnership with a wholesale supplier, handling stock and distribution on a white label basis. The retailer’s direct involvement effectively ends at point of sale, with the exception of customer services. By eliminating the need for warehouses or distribution facilities, startup costs are slashed and the practicalities of warehousing are delegated to specialists. It’s the equivalent of paying an accountant to handle your taxes, rather than doing them yourself.
Of course, dropshippers don’t work for free. Subcontracting is laced with potential pitfalls, and this is a particularly unforgiving industry.
So what are the pros and cons of dropshipping as a business model?
- Initial outlay. One of the biggest costs in setting up any business involves stock and premises. If these are eliminated, the startup costs are hugely diminished. Creating a website becomes the primary focus, and it’s possible to run a thriving online retailer business from a laptop. There are no warehouse rental costs, no up-front purchases of items in multiple sizes or colors, and no insurance premiums for these balance sheet assets.
- Simplicity. Just because someone is good at choosing items to sell or creating an ecommerce portal, that doesn’t necessarily mean they are skilled at handling finances or packaging fragile items. Outsourcing logistics simplifies any company’s day-to-day running, which will enable entrepreneurs to play to their strengths. Time saved can be reinvested in creating an optimized customer-facing portal, maintaining a social media presence or responding to customer comments and reviews.
- Portability. Stock levels tie a business down to a particular location, whereas outsourcing enables an entrepreneur to work pretty much anywhere. It isn’t even necessary to be in the country where custom is being generated. That in turn means international orders can be accepted, or dedicated websites launched in different countries – with ccTLDs helping to optimize domestic SEO performance.
- Diversity. Building on the last point, it’s hard to stock every variant of a single product line, let alone hundreds of ranges. Outsourcing this to wholesalers can support a far wider array of products being marketed online, helping to increase custom and boost the website’s perceived value.
- Specialisms. While some dropshippers are wholesalers, others specialize in particular niches. A company selling antiques or fragile items could find a dropshipping partner that understands any specialized packaging and distribution needed to transport these delicate items.
- Unprofessionalism. Although there are many genuine and committed dropshippers out there, this industry has more than its fair share of scammers and fly-by-nights. Even legitimate operators can have terribly dated websites that perform poorly in Google or Bing searches, and it takes a leap of faith to trust your company’s reputation to a firm that doesn’t present itself very well.
- Invisibility. Holding items in stock makes it easy to describe them in detail, or answer specific enquiries. When the items are off-site, that’s not possible. Larger or high-value goods can be researched online, but it’s easy to upload outdated or inaccurate information if there’s no way of physically checking.
- Margins. Buying at trade prices and selling at retail prices creates an obvious and significant margin. There are substantial costs involved in managing warehouses and handling parcel deliveries, and these will inevitably be passed on. Outsourcing distribution to a third party will slash achievable profits.
- Competition. Wholesalers serve multiple masters, and dropshippers will be supplying products to a variety of businesses. Each one will be trying to undercut its competitors, which can trigger a race to the bottom where little – if any – money is being made on each sale. It takes ingenious marketing or a real USP to stand out in a mature market where everyone is offering low-margin prices.
- Communication breakdowns. From rival retailers clearing out a product range to inaccurate database management, there are numerous communication issues that may arise when outsourcing distribution. Customers will be enraged if a newly-ordered item is suddenly out of stock, and undoing the damage of fulfillment errors is often expensive. Orders might be cancelled and clients lost, and consumers won’t accept blaming a subcontractor as an excuse.
If you do want to pursue the dropshipping route, look on directories like World Wide Brands. Portals like Doba and Dropship Direct offer multiple wholesaler interfaces in exchange for an additional broker fee, which reduces any risk of items being discontinued or suddenly going out of stock. This will further eat into profit margins, though it maximizes the likelihood of customer orders being fulfilled satisfactorily at the first time of asking.