Dropshipping is ecommerce without the hassles of inventory management. It is a retail fulfillment model that entails having a wholesaler or manufacturer ship directly to the end customer. The retailer or ecommerce store does not have to maintain physical inventory of the products which it sells to its customers.
Once an order received, the retailer forwards the order’s specifics including customer information to the manufacturer or wholesaler, who then packs and ships it directly to the customer. In their early days, companies like Zappos, Amazon, and Sears have successfully leveraged dropshipping to fuel their growth.
Its benefits are threefold:
1.) Low Startup Capital
The costs of buying and storing inventory can be daunting for a business. Dropshipping afford would-be retailers to bypass this substantial investment completely.
The cost of experimentation with product offerings are basically nil and a retailer can test out product demand relatively easily. Should things work out it scales naturally with no added burden or complexity on the part of the retailer. Adding new products is simply a matter of identifying reputable manufacturers and testing out the product quality and fulfilment processes.
Since inventory management, shipping, and fulfillment are outsourced, a retailer only has to focus on marketing and customer satisfaction.
That said, Dropshipping is not without its drawbacks. The two main ones are highlighted below:
1.) Quality & Customer experience
By outsourcing inventory management and fulfillment a retailer loses control over the product’s quality and the delivery experience. Social media is littered with horror stories tied to subpar product quality and poor delivery experience. Frankly, the only thing that are under the control of the retailer are the price and the look and feel of the webstore.
2.) Competition & Profit margins
Given the relative ease of getting started, there are likely thousands of vendors offering the same goods which puts downward pressure on profit margins as retailers still need to pay for shipping and fulfillment costs incurred by the dropshipper.
Overall, while Dropshipping can be a very attractive way to launch an eCommerce business due to its low startup capital costs, flexibility, and convenience, the drawbacks can be significant and should be mitigated via careful planning and a thorough vendor selection process.