Dropshipping is a retail business model in which a retailer buys stock as customers place confirmed orders, avoiding the expense of buying stock upfront and removing the risk of unsold stock. The retailer sends each individual customer order to a supplier who then ships the physical product to the customer.
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Dropshipping - the benefits
Dropshipping has several benefits for a retailer:
- Working capital is not required to purchase stock upfront
- Do not need to forecast demand for the product, fulfilment operations can scale with the success of your marketing and sales
- There is no stock risk - the risk that stock will remain unsold after the season or the useful life of that inventory, or in the case of low demand
You can treat dropshipping as an addition to your established traditional ecommerce business, or as a lower risk model with which to start your business.
Dropshipping - the catch
There is no one specific drawback to dropshipping, but there are several disadvantages:
- It can be difficult to find a supplier willing to provide a dropshipping service at an attractive price, especially if you are not willing to commit to a specific volume of units sold
- You have no exclusivity over the product - other retailers can sell the same products from the same manufacturer and there will always be other businesses that see your success and replicate it but at a lower margin. Your success, if you achieve it, will therefore be short-lived
- The price you pay your supplier for each individual unit of a product ordered via dropshipping will be higher than if you can commit to buying wholesale (in bulk) and having them all shipped in one consignment to your warehouse.
- In common with other forms of B2C ecommerce, it takes money to run marketing to attract people to your dropshipping store with no guarantee they will buy your product. In fact you should assume the "conversion rate" of your website will be less than 2% and in many cases much much lower than that. The risk associated with this marketing spend is therefore a catch.
- Since you never see the product beyond the initial samples, it can be difficult to assure ongoing quality of the product and its packaging. You might only start to hear of problems once many customers have already received their products and become dissatisfied.
- Shipping can take much longer, as the product is often supplied from the Far East to a customer in your local market in the US.
- There may be customs duties to be paid by the customer when they receive the shipment and duties not paid by consumers may fall on you as the retailer to pay on their behalf, ruining your margin.
- Returns can be more difficult and expensive to handle, especially if you expect a consumer to ship a parcel internationally.
How to start dropshipping
To start dropshipping you must do the following:
Find a niche product or product range for which you believe you can successfully attract customers at an acceptable cost.
Find a supplier willing to work on a dropshipping arrangement and then contract with them to cover packaging and carrier requirements, unit or tiered price, minimum order commitment per month, service levels, support, returns handling.
Create your marketing campaigns to attract customers, which will often be advertising on social networks (Facebook, Instagram, etc.).
Implement strong order management processes to control the processing of each order.
Finally you must deliver an excellent customer experience - from the purchasing, through fulfillment and into after sales customer service.
Adding value through dropshipping
As your business volumes increase, try to establish a brand rather than be a simple seller of individual products. Acquiring customers is expensive for an unknown merchant - advertising costs money. A brand which establishes authority and trust with customers from their first purchase gains permission to promote other products from their range. Repeat customers are more valuable than a customer that must be attracted through costly marketing.
To make a margin on the products you sell, you must add value to either the product itself, or to the consumer's transaction with you as a business. To sell a $20 product sourced from China at a solid margin and make a good profit overall (after shipping, marketing, payment fees, returns, etc.) you might need to sell it for $50. To do this, you need to add value in the eyes of the customer. This can be:
- Product value for example by providing complete product descriptions, images, videos showing the product in use, detailed specifications, high quality packaging, making the product available at short lead time, or celebrity endorsement
- Transaction value - being a trustworthy business with which to do business, authority in the product category you are selling, customer reviews, attractive returns policy, common payment methods with which the customer is comfortable
In dropshipping you have a hands-off approach to the physical product, but play a very active role in marketing, branding and finding customers. If your skills are in digital marketing, data analytics and building buzz around a product or brand, or you have a solid social following, dropshipping can work well.