What is Dropshipping Business
Tue Mar 23 2021
Coffee & cornetto
If you have some experience with online business operations, you may have an idea about dropshipping. A popular online business model offers attractive returns to eCommerce business owners.
The fact that it is possible to start this type of business with little or no capital makes it even more attractive. As the business grows, it's easy to scale up by creating and building brand awareness through advertising campaigns.
So how does dropshipping operate, what are the pros and cons, and is it a worthwhile investment? Let's begin by understanding what dropshipping is.
What Is Dropshipping?
Dropshipping refers to an order fulfillment method where a business or store doesn’t store the products it sells at a physical location.
When a customer buys a product, the dropshipping retailer buys the product from a third party. The third party can be different retailers, dropshipping wholesalers, or manufacturers. The third party then delivers the product directly to the customer.
There’s no point in the buying process where the dropshipping retailer handles the product itself, and they don't have to fulfill the orders or buy inventory in bulk.
Dropshipping is an excellent option for budding entrepreneurs as they require significantly less capital than they need to run a regular retail store. There’s no need to hire employees, cover overhead costs, acquire storage, or lease a physical store location.
What Is Dropshipping Business and How Does it Work?
A dropshipping business is trading products that do not need stock. Essentially, the company runs an online storefront that sells other businesses' products.
Once a customer pays for the product, the business then pays the third party for the product. This minimizes inventory costs and eliminates other challenges such as shrinkage.
The dropshipping retailer can agree with the third party to handle the customer service and marketing aspects as they handle the fulfillment side.
Pros and Cons of Dropshipping for a Store
1. It’s Easy to Start a Dropshipping Business
You can start a dropshipping business without previous business experience. You only need to know a few business basics that you can learn as your business grows.
Setting up also takes a short time, and the start-up capital is low compared to a similar business with a physical store. For instance, you can learn how to start a boutique with no money in less than a day.
As the store manager, most of your work is hands-off, which is manageable on your own. Since you don't have to buy or manage inventory, your overhead costs will remain low. You won’t have to deal with outdated products that fail to sell or count losses due to product mishandling.
2. Dropshipping is Scalable
As your business grows, your business model remains almost similar. Much of your effort will go towards sales and marketing. Day-to-day activities stay the same, and the only difference will be handling more orders.
With minimal overhead costs, you’ll have more funds to boost your sales and marketing campaigns. Additionally, you'll have more time to deliver an exceptional customer experience that has a positive impact on your business.
3. It’s Flexible
A dropshipping business allows you to work on your terms. You’re able to plan your time effectively and make business decisions that are in your best interest. You can adjust or enhance your business strategies at your own pace.
Since you have no physical inventory, you can operate your business anywhere with an internet connection. You can automate all business processes and increase your revenue even on vacation.
4. You're Able to Accommodate a More Comprehensive Product Range
Without a physical inventory, you're able to switch your products based on market trends and new products. You can also adjust prices easily without worrying about the back stock.
1. Dropshipping Has Slim Profit Margins.
Most drop shipping businesses record minimal profit margins initially, and it's more challenging to find a niche with higher margins due to competition.
Unless you optimize advertising strategies to drive more sales, it's challenging to achieve higher margins, and sales begin to stagnate.
2. Order Processing Can Be Complex.
How dropshipping operates seems easy and direct. Challenges increase when you expand, and you're dealing with several suppliers.
Different suppliers use different shipping methods or have other fulfillment processes. This creates a challenge between you and your customers, and products can also have extra shipping costs.
You’ll also have to deal with varying processing and billing structures, which can delay payments.
3. You Have Less Control Over Some Processes.
Most of the processes in supply chains, such as shipping, product stocking, and order fulfillment, are out of your control. Dropshipping suppliers determine your business success since you have to trust them to keep their end of the deal, which creates a problem with customer complaints.
Is Dropshipping Worth It?
Dropshipping is an excellent way to cut costs when starting a business. It's easy and affordable to set up and manage, plus you can successfully run your business without previous experience.
The business has some downsides that can lower the already thin profit margin. There’s also high competition due to the minimal start-up requirements.
The success of your dropshipping business depends entirely on your hard work and ability to make sound business decisions.
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