Dropshipping is a booming or dying industry—depending who you ask. However, as online shopping continues to increase, the demand for dropshipping stores does as well. Dropshipping stores have been opening at a rapid rate throughout the past five years, with numbers expected to continue growing.
Dropshipping is defined as a method of online order fulfillment where the business does not keep what they’re selling in stock; instead the seller purchases inventory as they need it from a third party. These third parties are typically wholesalers or manufacturers.
How Does Dropshipping Work?
The most distinguishing difference between dropshipping and the standard retail model is that the seller isn’t stocking and doesn’t own their inventory. The dropshipping store acts essentially as a middleman in the transaction.
Dropshipping can be a rather profitable model of business. It’s a low-risk business venture as well. If done correctly, it’s a scalable business, averaging profit margins between 15% and 20%. The dropshipping industry in the United States is estimated to be about a $15 billion market.
There are plenty of opportunities for eager entrepreneurs to get involved in the ecommerce industry and make a name for themselves. Due to the flexible and low-risk nature of the industry, dropshipping can be an incredible way to start a company fast, build an ecommerce site with appealing merchandising, and have a running online store within hours.
However, it will take some hard work and knowledge of the industry to do so. Below, we’ve put together some pros and cons of dropshipping to help you figure out what you need to know before launching a dropshipping store.
Pros
Flexible Location
Dropshipping stores can be run just about anywhere, as long as you have an internet connection. This means you can run your dropshipping store from a remote location, giving you the flexibility to go about your day while checking in on your virtual store to ensure things are running smoothly. However, be aware of different time zones and how that may affect the suppliers you’re working with.
Inexpensive Barrier to Entry
Dropshipping stores allow you to open an ecommerce store without spending thousands stocking your inventory. Working with manufacturers and wholesalers gives you the freedom to test out what products work for your audience. You don’t have to pay for these products until someone purchases them from your store, meaning that there’s no real upfront loss when it comes to your inventory decisions.
Easy To Scale
Compared to traditional retail and other online selling options, it’s much easier to scale a dropshipping store endeavor. Working with drop shipping suppliers means you can focus on the expansion of your business while they complete your orders.
Staying on top of trends in the market and seeing what products are in-demand can help ensure your business can scale. While any increase in sales will cause a little more work on your end, it will be worth it for the bump in profit.
Cons
Supplier or Inventory Issues
Since you won’t be stocking or producing your items, you rely heavily on your suppliers and their inventory. If they are to face any problems, it’s a problem for you and your business. Make sure to diligently research the manufacturers and suppliers you decide on working with.
You’ll want to know if they’ve had any malfunctions or misshapes in the past years and what they do in cases where they cannot meet the standard you agreed to.
Low Margins
This is one of the biggest disadvantages of the dropshipping world and it’s mainly due to the highly competitive nature of the business. Since creating a dropshipping store is considerably easier than other money-making options, many different stores will sell the same items at low prices in an attempt to kick-start their revenue growth.
This pollutes the market with low prices and lots of options for consumers, leading to low margins for dropshippers. You can mitigate this by choosing a niche market that lacks the type of product pollution others have.
Complex Shipping Processes
The shipping processes of dropshipping stores can become tedious. You’ll most likely be working with multiple suppliers on your online store. That means there will be products shipping from multiple warehouses. It’s up to you to ensure your shipping is paid for, which means you need to account for it within your budget, or shipping prices are included in the final charges to customers.
It’s not advised to pass shipping prices onto your customers, as they’ll be more inclined to find another way to get the product with free shipping.
