Dropshipping Guide: Pros & Cons + Alternative Options
Dropshipping is a fulfillment method where a business doesn’t keep inventory in stock. Instead, the store sells products and transfers the sales order to a third-party supplier who handles shipping directly to the customer.
However, despite common misconceptions, the dropshipping business model is not a shortcut to instant wealth.
While it may appear to be an effortless way to make money by selling others’ products and earning a profit, the reality is quite different. Dropshipping entails various challenges, obstacles, and day-to-day management that require hard work and dedication.
Nonetheless, if approached correctly, dropshipping can still contribute to building a successful business, albeit not as quickly as one might initially expect.
Five Harsh Realities of Dropshipping
If you’re a business owner seeking to ship products for your online store (such as a traditional retail business selling t-shirts) without the burden of stocking inventory yourself or adding new products, the dropshipping model can be a viable solution that offers benefits to an ecommerce store.
Once a customer places an order online, the dropshipping business handles the shipping of the product directly to the customer. It allows companies, big or small, to source products, earn profits, and save storage space simultaneously.
However, implementing a successful dropshipping business is not as simple as it sounds. Before investing your savings into a dropshipping store, it’s crucial to understand the challenges you may face. Here are some factors that make dropshipping difficult:
1.Narrow Profit Margins
While dropshipping offers the advantage of low overhead costs and no need to manage inventory, it also means lower profit margins.
With lower initial investments, the returns are correspondingly diminished. Generating significant profits becomes challenging, especially considering that a substantial portion of the revenue goes to the supplier. These meager margins may barely cover expenses such as marketing, website maintenance, search engine optimization (SEO), order management, and operational costs.
To estimate potential income, you can utilize the following average variables (which may vary depending on your industry and circumstances):
20% profit margin
2% conversion rate
Using this formula, you can calculate a rough estimate:
(TRAFFIC X 0.02) X (AVG ORDER VALUE X 0.2) = PROFIT
However, this approach has a few drawbacks to consider:
Your discounts from manufacturers and wholesalers may be less than 20%.
Additional expenses not accounted for in the equation must be covered from your profits.
In order to stay competitive, you may need to lower your profit margins further, especially for products where competitors offer lower prices.
Your profit heavily relies on the amount of traffic you attract. If you are starting from scratch on platforms like USAdrop and Shopify, building a customer base can be a prolonged and challenging process.
Despite the perception of being hands-off, dropshippers must still handle supplier relationships, order processing, returns, and customer service. Therefore, it is advisable to approach dropshipping when you already have an established source of consistent traffic.
2.hntense Competition
Despite the clear evidence presented above, there are still entrepreneurs who overly focus on the “low overhead” aspect and disregard the challenges involved.
Due to the minimal capital required to start a dropshipping business, the barrier to entry is low, resulting in a highly competitive landscape, particularly in popular markets.
Large companies can significantly reduce their markups to offer the lowest prices, exacerbating the competition.
To add to the challenge, it is unlikely that you have an exclusive agreement with your suppliers. As a result, numerous competitors may be selling the exact same products as you. As a small business just starting out, your more experienced rivals possess the resources to undercut your prices.
Consequently, potential customers can find the same products elsewhere at a lower cost, diminishing their motivation to purchase from you.
3.Lack of Control in the Supply Chain
In traditional ecommerce, you have the ability to handle and resolve issues related to product quality, fulfillment speed, and return policies when customers express complaints.
However, in dropshipping, store owners are mostly dependent on the suppliers, while still being responsible for directly communicating with customers.
Dropshippers find themselves in a situation where they have little control and can only hope that the supplier addresses the problems while trying to reassure customers about matters beyond their control.
Furthermore, there can be delays in communication as the dropshipper acts as an intermediary between the customer and the supplier. If either party responds slowly, it hampers the entire communication process and prolongs the resolution of issues.
If customers express their dissatisfaction, particularly on social media, negative reviews early on can severely impact your business and potentially lead to its failure before it even takes off.
4.Potential Legal Liability Concerns
While not a widespread issue, it is important to address the potential legal liability associated with dropshipping. Some suppliers may not be as legitimate as they portray themselves, and the origin of the merchandise may not always be known.
An even more concerning issue is when suppliers unlawfully use trademarked logos or infringe upon another company’s intellectual property, which occurs more frequently than one might expect.
To mitigate this risk, having a well-drafted Dropshipping Agreement Contract can be beneficial. However, many newcomers to dropshipping may not be aware of this necessity.
It is crucial to exercise caution when selecting suppliers and keep this factor in mind throughout the process.
5.Challenges in Brand Building
Similar to ghostwriters or anonymous songwriters, dropshippers must acknowledge that credit for their work is attributed to someone else.
When selling a remarkable product, customers are primarily drawn to the brand associated with the product, often overlooking the shopping experience provided by the dropshipper.
In the end, it is not the dropshipper’s logo that appears on the packaging.
This further emphasizes why dropshipping is more suitable for established brands rather than newly-formed ones.
Effective Strategies for Dropshipping
There are four recommended approaches to maximize the benefits of dropshipping, as it may not be sustainable as a standalone business. However, incorporating it into your ecommerce operations can significantly enhance your overall business. Take note of these strategies:
1.Conduct thorough market research.
View dropshipping as a tool to achieve your business goals, rather than the ultimate objective.
Leverage dropshipping to minimize risks when introducing new products and to gather valuable market insights.
Instead of investing in large inventory quantities for uncertain products, utilize dropshipping to conduct a trial period.
Through this approach, you can not only determine the product’s sales potential but also gain a better understanding of its optimal pricing, enabling you to make more informed decisions regarding your initial stock quantity.
This approach is particularly crucial when exploring new product categories that inherently carry risks.
For instance, if you’ve achieved success in selling dog products, you may be uncertain if the same applies to cat products.
To mitigate the uncertainty, you can test the market by dropshipping a few cat products and evaluate the response before making further decisions.
2.Safeguard against overselling.
Established ecommerce brands understand that market dynamics can be unpredictable. Instead of inflating inventory costs by overstocking to accommodate unlikely spikes in demand, having a dropshipping supplier as a backup allows you to save money while still capitalizing on those sales.
This becomes particularly valuable during seasonal peaks when there is an overflow of orders.
It serves as an excellent protective measure against the uncertainties faced by all retailers.
Moreover, having dropshipping options in place serves as a form of insurance against unforeseen circumstances.
In the event of a natural disaster affecting your warehouse space, you can still fulfill pre-existing orders by dropshipping the products from an alternative source.
Likewise, it helps mitigate unexpected shipping delays, ensuring that customer orders are fulfilled promptly.
3.Strategic shipping strategies.
Expanding your business often comes with the challenge of navigating complex shipping arrangements. As you reach farther distances from your warehouse or fulfillment centers, shipping costs and fees tend to increase.
In such cases, dropshipping can serve as an ideal solution for addressing shipping complications in specific locations that fall outside your profitable regions.
For instance, if shipping to a certain area proves excessively costly, or if storage expenses make establishing a new shipping center impractical, relying on dropshipping can help prevent financial losses.
Furthermore, dropshipping can be leveraged as a tool for testing new markets. Just as it is useful for market research, you can utilize dropshipping to conduct a trial period in a new location and assess its viability before committing to opening a new facility there.
4.Handling high-maintenance products.
Certain products come with higher costs for storage and shipping, making dropshipping a more profitable option compared to storing them in-house.
When we refer to high-maintenance products, we mean products that incur additional expenses due to:
Large size: Some products require significant storage space, but their sales may not justify the costs associated with storing them.
Heavy weight: If the weight of a product results in exorbitant shipping costs, consider dropshipping directly from the manufacturer or wholesaler.
Fragility: Fragile products need special handling during shipping, and suppliers or manufacturers are often better equipped to meet these requirements.
Valuables: Items of high value, such as fine jewelry or antiques, require enhanced security measures that may not be available in all warehouses. Opting for dropshipping ensures adequate protection for such items.
Special conditions: Certain items, such as perishable goods or light-sensitive materials, require specific storage conditions. Dropshipping can be a preferable choice when your inventory requires specialized handling.
Unless your entire business specializes in these types of products, it’s not cost-effective to bear additional storage and shipping fees for a small portion of your inventory.
However, you can still meet customer demands by offering these products through dropshipping, ensuring customer satisfaction while minimizing operational expenses.
In conclusion, dropshipping can be a valuable strategy when implemented effectively. However, the limitations that make it challenging for new companies become less significant as a business grows.
For instance, established companies already have a steady stream of website traffic and are less concerned with building brand recognition.
Therefore, dropshipping serves as a beneficial complement to most experienced ecommerce companies. However, it’s important not to rely solely on dropshipping for significant business operations.
