What is Dropshipping? How Does Dropshipping Work?

Maintaining merchandise is itself a task to accomplish – hiring a warehouse to store the merchandise, then hiring the workforce to maintain the warehouse and the inventory. How about cutting these costs? Dropshipping is the savior here.

The article deals with everything you need to know about dropshipping business – pros and cons, scope, and Frequently asked questions.

Introduction to Dropshipping Business Model

Dropshipping is the retail fulfillment method where the store physically doesn’t have to stock the products, rather they purchase the items from a third party and get them delivered directly to the end-consumer. This nullifies the cost for warehouses and inventory management for the seller.

Eliminating the need to stock the items is the major difference between dropshipping and retail selling models, this makes dropshipping the best bet for several businesses. The seller doesn’t have to stock the merchandise, instead can order in real-time to the third-party vendor who then will deliver the item to the end-consumer.

How does Dropshipping Model Work on E-Commerce Sites?

Dropshipping business is simply a demand fulfillment business that requires you to sell the product online. You can do it via owning a web store or simply creating a store on various E-Commerce sites or on the brighter side BOTH.

Apart from consumer seller and supplier, there are other parties in the chain facilitating the dropshipping process.

Here goes the production and supply chain:

Manufacturing > Warehousing > Distribution > Supply > Sell > Consume

With Dropshipping…

Consumer Orders > Selling Unit > Supplier > Consumer

Every store seeks out the suppliers that can facilitate the availability of the merchandise as and when ordered by the consumer. The traditional way is to make a list of the suppliers and contact them for the delivery as and when the consumer orders. OR. Create your own store on Amazon, Flipkart, or Shopify that connects you to thousands of suppliers.

On-Demand dropshipping business process:

Step-1: Customer places an order on your store for $200.

Step-2 You then purchase the product for $150 from the supplier, give them the customer’s address and contact information.

Step-3 With the buyer’s information in hand, the supplier then delivers the product to the customer.

From placing the order to door-step delivery, the third-party platforms facilitate the entire purchase process with payment flexibilities under one single roof. All the e-commerce aggregators work on the same ground rules, but the working models slightly differ from platform to platform.

Pros and Cons of Dropshipping

With digitalization at its peak, dropshipping is one of the promising ways to start your own business. The entire process is accessible and the opportunities are immense. But every business model has its own set of advantages and disadvantages. Before we state dropshipping as the sure shot way to financial success, let’s dive into its pros and cons…

Pros

Less Capital Investment 

With dropshipping, you are not exactly spending to launch your store. Moreover, you do not have to invest thousands in maintaining inventory. You are also least bothered about the discrepancy regarding the wrong inventory tally and shortage of merchandise – these are taken care of by the supplier.

On the much brighter side, there is no need for you to make a purchase in dropshipping until you have already sold the product. With this pro in your basket, you can immediately start with your dropshipping business with less inventory investment.  

Easiest Way to Establish a Business 

You are away from inventory investment, merchandise investment, and other financial risks that are accompanied by the thought of starting a business. If you are in a dropshipping business you will be least bothered by:

-> Proper warehouse management

-> Packing and Shipping facilities

-> Inventory keeping

-> Return handling and inbound shipments

-> Re-Ordering and managing the stock.

No overhead expense 

Dropshipping is the most cost-effective deal as the seller doesn’t have to deal with storage requirements (that is different for durable and non-durable goods) plus there is no load for defective merchandise, no packaging, and shipment issues.

Location flexibility 

Several successful dropshipping businesses are home-based businesses that require nothing more than a smart device and a little initial investment to operate. Once the online store is set up the seller can operate from anywhere with internet accessibility.

Wide range of products 

You can sell any commodity you want or select a genre to display under your store name. You can do market research to find out which commodity is trending, if suppliers stock that item your can simply list them under your store name and earn substantially.

Scalable 

In traditional retail businesses, if the orders suddenly hike up by 10x (usually happens with seasonal sales), you send your customers back telling them the item is out of stock. But with dropshipping, if you receive a good sum of orders, the availability will be met by the suppliers. With this, you will earn more with less merchandise stocking pains and incremental work.

Easy Market Testing 

Dropshipping is the best way to fulfill the demands without actually maintaining large inventories or setting up a store. Moreover, you can test your potential customer’s behavior (from their previous purchases) and pique their interests to earn more. With dropshipping, there is the flexibility of selling more than one genre which will fetch you even more profit.

Cons

Low Margins

Now that dropshipping is a low-capital business model many stores will come on board to compete with you, sell the same products, with the same quality. There is the price that distinguishes you and catches the eyes of the viewer.

Other stores are also operating with low investments they can bear the minuscule margins with the bigger picture of ultimate sales revenues. You can also differentiate your business on the grounds of user experience and a good quality website.

Tracking the inventory is tough 

Stocking up your merchandise and maintaining your own inventory is tough but that gives you a clear picture of what is in and out of stock. You can simply track your own inventory. But when you are sourcing from multiple suppliers (who take up orders from other merchants as well) the inventory changes daily.

Fortunately, technology has taken a turn for good and there are apps available that let you sync with the suppliers. You can communicate your orders and see in real-time how much quantity the supplier has.

Shipping Cost Disorientation

Now that you are working with different dropshipping suppliers, the products purchased by the customers will be sourced through different suppliers, this may lead to shipping cost orientation.

For instance, a customer purchases 4 items each of which is to be sourced from different suppliers. You will have to pay 4 separate shipping charges from the suppliers and being in a business that is for the convenience of the customer, passing this charge will not be a good idea. If somehow you adjust the charges, the calculation will be another task to accomplish.

Supplier Errors

If the default item reaches the doorsteps of the customer, this is not your fault but will somehow affect your online store’s credibility as you were the face while dealing. Being the face of the deal, you have to take charge and apologize for the mistake that is done by the suppliers.

Limits on Branding and Customization

Though it is a lucrative business idea, dropshipping doesn’t give you a lot of control over customization and branding. Usually, the supplier designs and puts the brand on the product.

There is a slight silver lining, as there are certain diamonds in the coal mine that are ready to customize and give your store’s branding to the end-product. You cannot brand one or two pieces, branding and customization require a minimum order quantity so that the making is affordable for the manufacturer.

Dropshipping Business – Frequently Asked Questions

People often have queries that obstruct them from starting a dropshipping business, 70% of them are general queries. Here are some general FAQs that might help you solve those puzzles in your mind regarding the dropshipping business model.

Q1. What is the initial investment cost for a dropshipping business?

You cannot predict the actual cost of starting your dropshipping business as it fluctuates based on miscellaneous factors. Here are some factors which will help you predict more than 70% of your costs.

-> Platform selection

Selection of the e-commerce aggregator to host and create your online store, you are willing to go for website development OR both.

-> A Domain Name 

Having a domain name and a website establishes you as a professional firm in the market. If you want your randing, then website development and a domain name are a must.

-> Online Advertisement

You have to advertise your business to get known. Enhancing your digital resonance is a must for any business or it will be lost in the competition. The organic ways to drive customers are content marketing, Search Engine Optimization, Social Media Optimization, and word of mouth. You can also harness the powers of email marketing, social media ad campaigns, Gmail ad campaigns, and a lot more to reach out to your potential clients.

Q2. How Do Dropshipping Businesses Earn?

These online stores have a lot in their pockets, if done right then owning a dropshipping business online can be the wisest decision one can ever make.

1. The two major responsibilities of a dropshipping business are selecting and cataloging the products, digital marketing, and online advertisement. Moreover, the ultimate goal is to help lead the customer to the right product and earn.

2. Being a business (though online) you need to market your store with a USP (Unique Selling Point). The best customer support and user experience can be your USP.

3. Lastly, defining a margin (selling price – the supplier cost).

The dropshipping businesses are capable of fetching sales – especially if they have captured the eyeballs with correct digital and social media marketing. Due to which suppliers are OK with drop shippers selling their products, they can focus on the availability and inventory keeping only.

Fact: To nail your dropshipping business, formulate the cost to acquire a customer with the final price of your product that you have in mind.

Q3. Where does dropshipping business stand on the legal ground?

Ans. 3. Currently, so many retailers are doing dropshipping to sell their products and earn well. It is completely a valid business and is based on a fulfillment model. Moreover, the dropshipping business has to abide by the protocols of the e-commerce platforms that are associated with it.

Just like any other business model, the dropshipping business focuses on user experience, satisfying customer expectations, timely availability of the product, marketing of the brand, etc. There are certain requirements you have to fulfill before starting a business legally, consult a corporate lawyer or who is already doing the business to know the legal grounds of dropshipping business in your region.

Marketing Your Dropshipping Business in 2021 

Online business is competitive, make sure you are not unheard in the crowd. Based on the pre-set budget you can plan your digital marketing and website development to create a never-ending authority of your brand. There are various tools and online marketing strategies through which you can drive more sales to your online products.

Being a professional IT consultancy and a digital marketing agency for more than 20 years now, Vervelogic is here to talk about your website requirements plus digital marketing goals and advertising needs, only to serve you with customed solutions all under one roof.

Dropshipping is undoubtedly a lucrative deal. Just like any other business, this is also not immune from challenges. Though you have certain noteworthy benefits of the same which no other business can give you, you need to maintain a balance between the pros and cons of dropshipping to nail this business niche. The article has some major challenges that will be posing against you, but there is certainly a way through this via proper planning and consideration.