More and more online businesses today are drawn to the dropship model over traditional warehousing. What they do is partner up with other businesses (usually wholesale suppliers), buy the items from them, and have those items shipped directly to their customers. The key difference is that the retailing buys the product AFTER the sale is made.
This retail method is currently preferred by a lot of business owners from across the globe, especially those who seek to minimize startup costs and avoid the hassles that come with keeping products in stock and so it is more often utilized by online businesses. This type of retail method is what you call dropshipping.
The Process of Dropshipping
So here’s how dropshipping works: A customer orders a certain product from an online shop and goes through a certain process to complete the purchase. Usually the customer provides the retailer with a few points of information such as name, shipping address, contact information and the mode of payment he or she wishes to use. Once this has been completed, the online shop is alerted and the customer is sent a confirmation that the order has indeed been placed. Sounds pretty straight forward so far and doesn’t differ from a traditional ecommerce transaction.
The online shop will then notify the third party supplier, which basically entails sending them the order confirmation or separate purchase order. Once the notification is received, the supplier will then charge the retailer for the product (at wholesale price) and for any other fees they’ve agreed upon like shipping cost. Once that’s done, the supplier will then ship the product to the address provided by the customer, and the retailer will inform the customer that the product is en route, also providing the customer with information regarding the sent package (ie a tracking number and shipping method).
Pros and Cons of Dropshipping
Although dropshipping is quite the hassle-free transaction, it isn’t perfect. It has its pros and cons. First, let’s talk about the pros. For one, it is probably the easiest way to start a business since you’ll be working online. And so long as you have access to the Internet, you can do business anytime, anywhere. Dropshipping is also less expensive. This method makes starting your own business much less of a gamble and significantly lowers entry barriers. There is no warehousing or real estate issues to contend with. CharlesBarnes.com cites an interesting study done by Cassidy Turley that reveals there is roughly 780 million square feet of mega bulk warehouse space in the U.S and that more and more e-commerce stores are leveraging that space for their dropshipping needs.
Next, you won’t have to worry that much about order fulfillment since you’ll be working with third party suppliers, which allows you to instead use your time to brainstorm marketing strategies or entertain customer queries. Also, you get to provide a wide range of products without having to keep and check inventory.
As for the cons, dropshopping makes for quite a competitive market BECAUSE the barrier to entry is so low. Many will be interested in setting up their own online businesses that retailers will be forced to sell their products at the lowest price possible to edge out the competition.
Because of that, it may take a long time for a business to expand. Dropshopping also allows retailers to partner with multiple third party suppliers. And with the number of orders they receive per day, operations can be overwhelming. Plus, when customers order multiple items from separate suppliers, the retailer gets charged with separate shipping fees. But the worst would be having to receive all the blame when customers aren’t satisfied with the product they receive. Not only will your reputation be at risk, you will also be left with the task of apologizing.
So while there are many pros to droppshipping, there are just as many cons which need to be considered for the sustainability on your online business.