Every Friday, we answer a common question about fulfillment, shipping, or business. This week’s question comes from one of the TV fans who entered our giveaway contest for a Fire Stick. Today we will answer the following question: “what is dropshipping and how does it work?”
What is Dropshipping?
Dropshipping has become a popular idea in the last few years. When a concept becomes as buzzy and popular as dropshipping, it becomes difficult to tell what it actually means. That’s because people just throw around the term.
So let’s make this really simple. Dropshipping is a supply chain management method where the seller does not keep inventory. The manufacturer is the one that ships inventory. In this sense, dropshipping is nothing more than the leanest possible supply chain.
Dropshipping has variably been described as a work-from-home scam and a golden opportunity. Indeed, it can be both. That’s why were going to talk about how it works.
How Does Dropshipping Work?
When dropshipping, it’s necessary to find a manufacturer who is willing to send goods directly to the buyer on your behalf. As a matter of fact, that is the only real requirement that must be met in order for dropshipping to work.
However, there are a number of hidden requirements that determine whether a given dropshipping scheme is viable in the long run. For example, there has to be a big difference in the wholesale price and the manufacturer price in order for you to make a profit using the method at all.
A Better Lemonade Stand goes on to specify a number of additional criteria that bear mentioning here. They include:
- Items are typically small and light, which reduces shipping costs.
- Disposable and renewable items tend to perform better because of repeat purchases.
- Cross-selling makes the entire business model much more viable.
- Turnover rate of inventory needs to be high enough for your contributions to be compensated well enough. You’ll have to create a great website, strong copy, take great photos, and so forth. What’s the point of doing that if you sell two units per month?
Benefits of Dropshipping
Don’t get us wrong, dropshipping has a real allure to it. There are a number of tremendous benefits to the business model, which Oberlo discusses on their site. Here are a few benefits:
- Anyone can start. You need neither experience nor a large amount of capital to get started.
- It scales beautifully.
- You can work at your own pace.
- There are relatively few commitments.
Drawbacks of Dropshipping
Of course, dropshipping can be a highly problematic model in other ways, too. Just to name a few:
- The barriers to entry are low, making the model a highly competitive one.
- Order processing is done through suppliers, and their processes might be confusing, time-consuming, or complicated.
- Shipping multiple products from different suppliers can be needlessly complex.
- When you don’t carry your own inventory, you are entirely at the mercy of your suppliers.
- Similarly, because the manufacturer is bearing the burden of large parts of your business processing, customer service is very difficult to effectively provide.
As a business model, dropshipping is available to anyone for better or worse. Anyone can do it, it’s easy to scale, and it lets you work at your own pace. That makes it a tremendous candidate for a lucrative side hustle.
However, with the approachability of the model comes intense competition. You become highly dependent on your suppliers. For this reason and others, dropshipping may not be the right model for your business.
If you decide after a considered review of the facts that dropshipping is not right for you, that’s okay! Handling inventory doesn’t have to be a hassle. That’s why companies like ours exist – to give you the time-saving benefits of dropshipping without the loss of control 🙂