Those looking to start an online business may come across a business model called dropshipping. Essentially, dropshipping means that you (the seller) won’t have to keep products in stock. Instead, you act as the middleman between the manufacturer/distributor and the consumer. When customers order an item, you relay that order to a direct manufacturer, retailer, or wholesaler that ships the goods directly to the customers under your name.
Most entrepreneurs fall into the trap of a dropshipping business because it’s hard to find a supplier for the products they want to sell. If you need custom springs in Louisiana, you’ll have to negotiate with manufacturers. That’s a process that many startups don’t want to take on.
Benefits of Dropshipping
There are several reasons it’s beneficial to get into the dropshipping business. One, you don’t need a large area to store the products. You are not holding any inventory. Two, you essentially just take orders and relay that information to the manufacturer. Three, you are not even the one responsible for shipping the items. The manufacturer or distributor will ship the items according to the details given to you by the buyer.
It sounds like a dream business model, right? If it’s such a perfect business, why don’t all entrepreneurs get into it? Why would others want to go through the rigid process of finding suppliers, producing items, and marketing these products?
Disadvantages of Dropshipping
With dropshipping, your profit is based only on the difference in the selling price. While you can double the manufacturer’s price, competition is tough in the dropshipping business. Other sellers can sacrifice their profit margins in exchange for more sales. Generally, the profit margins are somewhere between 10% and 25%.
Aside from that, you also have to deal with customer problems, which are mostly out of your hands. Customers will complain about the quality of the products or the delay in shipment. Since you’re the one technically selling the products to the customers, you have to face their complaints. But what are you going to tell them? How can you assure them that the next time they order from you, things will be different?
Even if you partner with a reliable dropshipper, there will still be customer complaints. You’ll have to deal with problems that are not your fault. You are basically staking your reputation on a third party that does not have your best interests in mind.
Mix and Match Supplies
Not many people are aware that they can mix and match their inventory with dropshipping. For example, you have three products in your inventory. You are missing out because your competitors have five or more products in their lineup. You can mix dropshipping into your own inventory. Just make sure that your customers know that the other products will take a longer time to ship.
While it is not advisable to depend your whole business on dropshipping, it works for many startups because they don’t want to risk a lot of money. They can dip their toes in the water without fully diving into entrepreneurship. The key is to find a dropshipping company that has a good reputation for quality and fast shipping.