What is dropshipping? How does dropshipping work?

 

Introduction to Dropshipping

With the passage of time, everything is changing rapidly such as technology, way of doing business, marketing techniques, and production methods. In today’s era, it becomes very easy to start a business with minimum investment and no physical outlet. The traditional business model is being replaced by an online business model such as Dropshipping. If you are willing to start a business with minimum investment, less burden of acquiring inventory and its distribution, keeping the stock, problems of handling of unsold stock, etc. then drop-shipping is the best online model for you to start a business.

What is Dropshipping?
Drop shipping is an online retail business model where the seller accepts customer orders but does not have the stock of goods for sale. The seller then transfers the orders and their shipment detail to the manufacturer, a wholesaler, or a fulfillment house, which directly ships the goods to the customers.

How Does Dropshipping Work?
Whenever the customer will place an order, it is forwarded to the supplier, who is responsible for packaging and shipment of product to the buyer. It never meant that the retailer has nothing to do with the dropshipping business model, he is liable for marketing and selling a product. The retailer has either has little or no control over the product quality, inventory management, storage of goods, or shipping. This huge reduction in operating costs leads to an increase in the possibility to maximize profitability. The retailer is responsible for receiving purchase orders from the customer and process orders in drop shipping, so he acts like a middleman.

 Example
If a seller or online seller offers a product on his online store of $100 (the price of a product). He received an order from a customer and transferred all the details to the wholesaler. The price offered by the wholesaler to the retailer is $40. It means the Selling price ($100) – Price pay to a wholesaler ($40) = Profit earned by an online store ($60).

 Merits /Advantages / Benefits of Drop shipping

 1.      Minimum Capital
Commencement of drop shipping or ecommerce store requires less amount of capital as compared to the traditional business model. The requirement of capital is less because of no physical outlet, no acquisition of inventory, no need to hire staff, etc. An entire drop shipping business can easily be built on a single laptop without making huge amounts of investments.

2.      Easy to get Started

The Ecommerce business makes retailers tense free and its operations can easily be handled. It will not take days, weeks, or months to start but requires little effort and few hours. The following points make the drop shipping business tension-free:
·         No storage and handling cost.
·         No burden of packaging and shipping.
·         No inventory acquisition and inventory management.
·         No pressure of handling returns and inbound shipment.

3.      Flexible Location
Location is very important for a traditional business but dropshipping business can be operated from any place, any time with the help of a laptop and internet connectivity.

4.      Extensive Variety of Products to Sell
Since there is no physical outlet, the retailer does not need to purchase the products to sell. The retailer can easily search and offer trending products to potential customers. Adding or listing products on an online store is very simple and easy with no extra cost.

5.      Easy to Grow
To scale a dropshipping business does not require a huge budget. There certain digital marketing tools which help in scaling up the business. Every strategy that a retailer desires to apply in the dropshipping business is one click away and with nominal and controlled costs.

 Demerits /Disadvantages / of Dropshipping

1.      Low Profit Margins
Profit margins will be lower if the seller is operating in a highly competitive niche. So, it is very important for a seller to search and analyze a niche where the demand is high and competition is low. Here, the seller has maximum change to maximize profitability. But in case of higher competition surely leads to decrease the profitability of the business. In case of starting dropshipping on Amazon alongside Shopify store will lead to a decrease in the margins on the sales channels. So selecting the right niche with constant sales revenue will surely give higher margins.

 

2.     Fulfillment becomes Difficult

Generally, the dropshipping looks simple and straightforward. The seller receives order form customers process it and supplier take the responsibility to deliver. But the seller can face problems if he is sourcing products from multiple suppliers. It is up to the suppliers which type of shipping solution they are offering and it may lead to creating a problem for both seller and customers. Shipping multiple products not only can be problematic but also can lead to rising costs. It will be a bit complicated for a seller to deal with different suppliers who have different methods of processing and billing.

 

3    Suppliers Errors may Lead to Less Customer Satisfaction

The major disadvantage of dropshipping is that the seller does not have stock and fulfillment is being managed by the suppliers or third parties. In case of wrong delivery of the product, the seller will be held responsible rather than the suppliers. If the seller has selected average and low-quality suppliers then it is sure that all the fulfillment will be below average and it tarnishes the reputation of online stores.

 

4.      No Control Over Branding and Customization

The seller cannot do anything except transferring customers’ details to the suppliers. Generally, the product drop shipped is designed and branded by the supplier. In any case, the supplier has maximum control over the product and its supply. If the seller is willing any changes or additions to the product, the minimum order quantity is required to make it feasible and affordable for the manufacturer.

Conclusion
Dropshipping is a platform where anyone can easily build an online store with a minimum amount of investment. This form of the business model provides extensive opportunities to deal in multiple products according to the market and potential customers. The seller just needs to select the product after market research and deep analysis, they choose the appropriate supplier to complete the dropshipping process. Yes, there are few drawbacks of this business model but are less than its benefits. The seller can test multiple products, but it is suggested to start with five to ten products at the start and check the sales velocity. Then, with the passage of time sellers can hunt more products having a good conversion rate.