No overhead and no warehouse, but plenty of potential for profit. Dropshipping offers a powerful business model for individuals wanting to start an ecommerce business or expand the inventory their e-commerce business sells cheaply without investing in logistics or storage.
However, it’s not a perfect approach to e-commerce. Both prospective business owners and current merchants wanting to use dropshipping should be aware of the benefits and drawbacks the approach comes with.
What Is Dropshipping?
Dropshipping is a business model where the merchant doesn’t own or stock the items it sells. Instead, a network of suppliers provides the items and ships them directly to the merchant’s customers as needed.
The merchant only maintains an online storefront, provides the orders, and handles frontline customer service, acting as a liaison between customers and suppliers.
The approach allows business owners to run an ecommerce business without having to own a warehouse, manage logistics, or fabricate products. It also allows existing businesses to expand their offerings without investing in additional storage space or logistics capacity.
Advantages of Dropshipping
1. Low Barrier to Entry
A dropshipping business requires very little initial capital to start. The merchant doesn’t have to worry about buying inventory or manufacturing products or the cost of shipping. Some writers estimate that prospective owners can launch a new dropshipping business for almost nothing — as little as $150.
Finding suppliers is often the most difficult part about getting started — and tools like dropshipping supplier directories can make this problem easy to solve. While the merchant will still have to spend on marketing, a website, and an e-commerce platform, the barrier to entry for dropshipping is much lower than it is for most e-commerce businesses. You can even use a dropshipping software to automate the whole process.
2. No Inventory Management
Because the merchant’s shipping partners handle inventory from manufacturing to delivery, the owner won’t have to worry about inventory storage or shipping.
This means they can start the business without investing in storage space or having in-depth knowledge about e-commerce logistics. It also means the owner can ship products that require specialized storage without having to invest in refrigerators or similar storage technology.
3. Low Cost of Shipping and Storage
The dropshipping merchant spends very little on storing and shipping goods as a dropshipping business. A typical e-commerce business needs to invest in equipment that allows them to pack, label, ship, and track each individual item.
Shipping partners will handle this for the merchant that is dropshipping. All the dropshipper needs to do is intervene when a customer complains or has a question that can’t be answered with shipping partner-provided info.
Storage costs won’t be a problem, either. Merchants will very rarely be handling merchandise in-house, if ever. The merchant also won’t have to worry about stocking up in anticipation of customer demand. This means the dropshipper won’t be in a position where it is holding on to obsolete inventory or overstocked due to items that won’t sell.
Understocking is also less likely. If a shipping partner runs out of a particular item, the dropshipping merchant may be able to partner with another business that still has stock, providing the same item or a similar product to its customer base.
4. High Scalability
The easy scalability of the business model is one of dropshipping’s most important benefits. Dropshipping businesses can easily scale up or down to meet customer demand exactly where it’s at. Because all the dropshipper handles is order management, the parts of an e-commerce business that are most difficult to scale — inventory and logistics — will be outsourced.
If the merchant needs to supply more items to customers, it can simply get in touch with a new dropshipping partner or send more orders to a current partner.
This means it is possible for the business to scale both up and down fast in response to customer demand.
5. No Direct Management Necessary
At first, the owner of a new dropshipping business won’t need to directly manage any employees. It’s usually possible for an individual to manage a dropshipping business entirely by themselves, communicating with customers and shipping partners as needed.
As their own boss and only employee, the owner will have full control over office equipment, management styles, and working hours.
1. Dependence on Shipping Partners
If a shipping partner makes a mistake, there may not be much the dropshipper can do. Shipping partners may have their own refund and return procedures, may not provide tracking information, and may not offer a wide range of shipping options.
Dropshipping is mostly low-risk, but the dropshipper is still dependent on shipping partners to handle sourcing, manufacturing, storage, and shipping. A lot can go wrong in the time between a product’s manufacturing and when it gets to the customer — and the dropshipping merchant has very little control over how any of these steps are handled.
If a customer has a problem or wants a replacement for their item, the merchant can get trapped: responsible for customer service but with little control over actually fixing the problem.
2. Low Returns
Dropshipping overhead is extremely low, but profits typically are as well. While an owner can make money in dropshipping, profit margins are typically not as high as they would be if the owner were taking on more risk.
Profit for new dropshipping businesses is also typically low because of a small customer base. New businesses typically are building their traffic stream from the ground up. Because traffic and profit are directly related in dropshipping, this means profits tend to start small.
A new merchant may have to cut into profit to keep pricing competitive. Marketing, advertising, web design, and storefront development aren’t free, either — which can further reduce profit margins.
3. Major Competition
The low barrier to entry for dropshipping means the current market is somewhat saturated. There’s a large number of new and existing dropshipping businesses in most market niches. Popular markets are even more crowded than others.
Smaller, newer businesses may struggle to compete with existing businesses that can typically reduce prices further than their competitors, secure better deals with suppliers, and offer cheaper prices on most products.
Often, newer businesses find themselves in a race to the bottom. Without an existing audience or a unique value proposition they can use to differentiate themselves, they focus on becoming a price leader. As a small business, selling goods at the lowest price possible requires cutting profits as low as possible. Without caution, it’s easy to make accounting mistakes and put the business into the red.
4. Fewer Customer Service Options
Customer service options that are available to e-commerce businesses handling their own fulfillment may not be available to a dropshipper.
For example, the business may not be able to ship out products with custom packages that have custom branding. The business may not be able to include personalized “thank you” notes, coupons, or advertisements.
This isn’t true in every case. Many dropshipping partner businesses offer white label or private label agreements. With one of these agreements, the business’s product will come customized with the business branding. It may also be possible with one of these deals — or a similar deal — to include personalized touches with each order.
However, this may require a special agreement with a shipping partner — and not every business may offer this option.
The Appeal of Dropshipping for E-commerce Businesses
Dropshipping provides an accessible business model for owners without much initial capital. It enables a new business owner to get started without storage space, experience with logistics, or an existing audience. However, dropshipping profits can be low, competition is fierce, and building an audience from scratch can be a serious challenge.
The benefits of dropshipping — potential profit without overhead or storage — are attractive, but the costs of running a dropshipping business may be too much for many.