1. What Is Dropshipping?
Dropshipping is a supply chain management model in which retailers don’t have to worry about managing their own inventory. They can easily promote the products of suppliers and earn handsome commission on arbitrage.
The dropshippers work as intermediaries suppliers and customers. They transfer the order information to the suppliers while keeping a certain amount as commission, who then dispatch the product from the warehouse to the customers.
2. Dropshipping Model vs Affiliate Marketing
Dropshipping and affiliate marketing are two lucrative online business models. Let’s see what the actual difference between them is.
Dropshipping involves the supplier, the dropshipping store, and the customer. Customer orders a product from the dropshipping store. The dropshipping store transfers the details of the customer to the supplier. The supplier then ships the product to the customer. The dropshipping store makes a profit by selling the product for a higher price.
For example, if the price of the product on wholesale is $150, the dropshipping store can sell it for $200 to $250 making a commission of $50 or $100 easily.
- You set your own prices.
- You can start wholesaling any product without partnering with the manufacturer using Aliexpress, Ebay, and Amazon.
- You earn through arbitrage.
In affiliate marketing, the affiliate sells the products of the company that he is marketing for at a set commission. There are many online programs available for affiliate marketing but the commission is usually set by the company whose products the affiliate is selling. Unlike Dropshipping, the marketer doesn’t have the liberty of setting his own prices.
The good thing is that both of these are profitable, free to start, and people can make a career in both types of ecommerce marketing models with some hard work.
- You work at a fixed commission.
- You have to either join an affiliate program or partner with an ecommerce store.
- You earn commission on the number of products sold through your reference.
3. Benefits of Dropshipping
Dropshipping is a highly lucrative business opportunity for entrepreneurs. The good thing is that it doesn’t have a barrier to entry and anyone having little or no investment can easily enter the market. It is practical and convenient for anyone who would like to start their ecommerce store in 2018.
Here is a list of benefits of a dropshipping store.
i. Low Barrier to Entry
- In dropshipping, you don’t have to pay upfront for the products. So, you will only pay for the hosting and domain charges.
- As you have no excess inventory, hence your business is less prone to loss of revenue.
- You can upsell your own products along with best-selling ones on your store.
ii. Convenience for Supplier and Dropshipping Store
- With dropshipping, neither the dropshipping store has to worry about shipping and packaging of the product nor the supplier has to worry about marketing and promotion of his products and both reap decent profits.
- Dropshippers can work with multiple wholesalers at once.
iii. Easier to Scale and Remodel
- As dropshipping stores don’t require storage facility and are completely digital, they are easier to scale.
- Even if one niche or product doesn’t sell well, dropshipping stores owner can easily move to a better selling product.
iv. Minimum Risk
- A dropshipping store can be started for free. Just get a domain and hosting and you are good to go.
- Even if you lose the store, not able to scale or profit from it, you can easily back out with no risk at all.
4. Drawbacks of Dropshipping Model
Just like any other business model, dropshipping also comes with certain drawbacks. However considering the benefits, you could ignore these drawbacks. Nonetheless, all potential dropshippers need to know about the hurdles and challenges they might face before making the jump.
i. High Competition
Almost all ecommerce businesses have high competition. That’s why the online store owners try to stand out by providing quality services and unique products that their customers would love to buy. The high competition can become a problem for dropshippers who aren’t too careful about the way they market their products. New stores pop up everyday because it is very easy to duplicate and they will copy your store code by code. That’s why changing strategies, and keeping above the trends is the only way you can keep yourself ahead within the competition.
ii. Lower Margins
Yes! Most dropshippers tend to simply give up because the profit margins are too low. However, if you look closely at it, dropshipping isn’t a short-term business. It is all about staying in the game and moving up the ladder one step at a time.
Think about how you can turn lower profit margins into huge ones? Sell more products. If you have a formula that sells products at a margin, then just scale it further. If you were selling 10 products per day, simply scale it to 50 and you will have more profit margin.
The important aspect of a dropshipping business is that you don’t have to worry about the logistics. Simply get the tracking code and forward it to your customers and you will not have to worry about a thing. In this way, you will be making more profit on lower margin.
iii. Complete Liability of Products
Dropshipping is one business where you will be selling a product that you haven’t actually seen. Therefore, chances of a product failure are high. When that happens the whole responsibility of returning the actual amount to the customer and returning the product to the supplier lies on you.
But this doesn’t mean that you start to panic. Instead, devise a 30-day refund policy in which the customer can return the product if (s)he is not satisfied with the purchase. The individual buyer will simply have to send the product back on the shipping address.
Note: This may cost shipping charges to the customer. Hence, you must ensure to clearly mention this clause in your return and refund policy.
iv. Managing orders can be burdensome
One place where most dropshippers will pull their hair is when one of their products goes viral. They will then have hundreds of orders to fulfill. Managing orders can be a strenuous task. But thanks to many dropshipping plugins available, this is not a major problem now. Dropshippers can now install AliDropship or WooDropship plugin on their WooCommerce dropshipping store and fulfill orders with a single click.
iv. Side Hustlers
Side hustlers have a permanent day job. They are just trying to make a few bucks on the side. They are ready to learn new technologies that can bring in more money. They might require some training in the start, but once they figure out how the whole dropshipping process works, they will be ready to take things into their own hands.