Dropshipping: What does it mean?
Dropshipping is an alternative retail strategy that allows brands to manage their product inventories and sell them directly. Instead, the company sends information such as the product number, delivery address and order date to third parties to fulfill an order.
The dropshipping process follows five main steps:
- A customer places an order with dropshipping retailers.
- The order is processed by the retailer and forwarded to the wholesaler.
- The order is delivered to the wholesaler.
- The order is shipped by the wholesaler.
- The order is delivered to the shopper.
Dropshipping is different from traditional retail fulfillment in that neither the retailer maintains the inventory nor the associated infrastructure. Dropshipping also fundamentally alters the dynamics between suppliers and retailers. Dropshipping allows retailers to place orders on behalf of suppliers, rather than buying products from them and then reselling them. Dropshipping is only available to eCommerce retailers and not traditional brick-and mortar businesses due to the absence of physical inventory.
Dropshipping Benefits
Dropshipping has many benefits for eCommerce merchants.
- Dropshipping has lower startup costs. Companies that dropship don’t need to invest in inventory acquisition or setting up a storage location. You don’t need to spend your time organizing inventory or hiring staff to fulfill orders. Dropshipping is a low-cost way to start your business, even if you don’t have enough funds to operate a traditional retailing business.
- Scalability
Dropshipping retailers can scale quickly, as order fulfillment does not depend on where a customer is located or how many workers are needed to deliver it. Dropshipping is a great option for retailers who experience seasonal fluctuations in sales or any other reason. - Inventory management at a lower level
Dropshipping eliminates the need for physical inventory and reduces the overhead that retailers face in managing their stock. Dropshipping eliminates the need for retailers to track inventory and manage infrastructure. - Wide range of products
Dropshipping offers more product options. Dropshipping allows retailers to offer a wider range of products, so a small business that might not otherwise be able offer as many options without storage can offer a wide selection. - Flexibility
Dropshipping allows for flexibility in many aspects of a retail store. Dropshipping allows a brand to operate anywhere and offer different products. It can also easily change its offerings as market preferences change.
Dropshipping Challenges
Dropshipping is a popular retail strategy but there are some challenges. Dropshipping is only possible if the workflow and goals of your business are aligned. Dropshipping can have negative consequences, including lower profit margins and potential legal problems.
Rely on Third-Party Suppliers
Dropshipping is a service that allows retailers to rely on their suppliers. The retailer is responsible for any order that is not fulfilled by a supplier. The retailer will also be affected if the supplier goes out of business suddenly.
If a retailer had physical inventory, it would make these types of problems less severe. This would allow operations to continue while they search for a supplier. A working contingency plan is essential for any new brand.
Dropshipping gives third parties control over quality control and product availability. Dropshipping denies retailers the ability to inspect products before shipping to customers. It also makes it difficult for them to offer value-added services such as pre-installing software or customizing jewelry messages.
High level of competition
Dropshipping is a simple way for retailers to make money. This means that you will likely face significant competition. Unless you have an exclusive arrangement with a supplier for dropshipping certain products, your business is open to selling the same products as others.
Dropshipping will make it harder for retailers to stand out among the crowd as they won’t have unique products and services. Retailers will need to compete in other ways, such as providing an exceptional customer experience or providing a memorable, user-friendly eCommerce experience.
Strenuous Profit Margins
Dropshipping is a way to reduce your revenue by outsourcing a part of the order fulfillment process. To make the same profit as traditional retailers, you’ll need to increase your sales volume.
Difficult Customer Service
Retailers who don’t have inventory control may find it more difficult to provide customer support if something goes wrong. The retailer might need to deal with the third-party seller if the customer has questions about the product or claims that it is defective. This adds to the management overhead and creates more work than if there was no supplier involved in order fulfillment.
Dropshipping: How to Get Started
You must develop a strategy that will set you apart from your competitors before you start a dropshipping company.
Finding your niche and planning for growth
First, identify the market opportunity. It’s not difficult for retailers to start dropshipping. Therefore, you will need to identify a market opportunity that isn’t already saturated with other sellers dropping the same products you plan to offer. It is a good idea to identify products that are difficult to get without contacting a supplier, but not easy for retailers to keep in their physical inventory.
For example, take specialized automotive parts. These parts aren’t usually available off the shelves in retail shops. They are also difficult to stock in retail stores, as each part is likely not to be sold very often. Each would cost more to stock than the revenue it generates in a given time period. Dropshipping these items can make it profitable for a smaller retailer.
You can sell in a specific market if you have an agreement with a supplier for fulfilling orders. This will give you an edge over traditional retailers that may want to sell similar products.
You should also consider which market is the best for your long-term growth. Even if others start dropshipping similar products, focusing on products that you are an expert in will give you an edge over your competition. Do your research to find out how the market for items you sell will grow over time.
Create Your Own Dropshipping Website
Once you have decided on your product focus, it is time to start a dropshipping website. You have many options for eCommerce platforms to assist you in this task. It is important to choose one that suits your business goals.
You should also consider how extensive the platform’s capabilities. You may prefer to use a single platform that offers everything you need to create a dropshipping website, rather than using multiple solutions.
Another factor is how much visibility your dropshipping site and associated tools will give you into the order management process. You should have as much information about the order process after it has been sent to the supplier as possible to help you run customer support operations.
It is important to think about the online user experience. Providing a seamless digital commerce environment can make you stand out in crowded markets. Your site should be easy to access, browse and buy from via their preferred devices.
Handling Finances
Dropshipping is a low-cost way to make a profit, but it does require a small initial investment. If your current product line isn’t producing the revenue you expect, keep track of each sale.
Dropshipping relationships should be reviewed on an ongoing basis. It is possible to find a supplier that offers lower prices for the same products. Dropshipping is a great way to maximize your revenue potential.
Last, consider taxation when calculating your financial budget. Dropshipping can make taxation more complicated because sales tax calculations are dependent on the location of the supplier. Check out this tax rules guide for details on how to approach taxation for a dropshipping business.
Work with Suppliers and Fulfilling orders
Dropshipping suppliers play an important role in fulfillment. It is crucial to find reliable suppliers that can process orders quickly. Look for suppliers that have a track record of successful partnerships with retailers.
You can build relationships with multiple suppliers to ensure that you always have a source of replacement goods in case one supplier runs out of stock or goes out-of-business. To test each supplier’s ability to deliver high-quality goods on time, order and test a few of their products. You’ll also get firsthand knowledge about the products you are selling, which will help you market them better to your customers.
Be aware of the terms and conditions that govern what happens when a supplier runs low on stock. This is known as a “backorder” situation. You should find out whether the supplier cancels your order completely or if you will fulfill it when it is back in stock. If a customer reports a problem in an order, and you decide a refund is appropriate, you should find out whether the dropshipper will refund your costs or if you must absorb the cost. Also, you should look for suppliers that offer contractual guarantees that items will be shipped within a specified time frame.
Good communication is key to overcoming any problems that may arise. Pay attention to the ease of communication with dropshippers when you first contact them. This is particularly important because many dropshippers are located overseas. Language and time differences can make communication difficult.
How to address legal issues
Dropshipping is legal in and of itself, but improperly handled can lead to legal problems.
To avoid underpayment of sales tax, it is important to consider where your inventory is located. Dropshipping retailers could also be exposed to legal risk if you sell counterfeit goods. Your shippers could be held liable for trademark and licensing violations.
These risks can be reduced by choosing reliable and reputable suppliers. You can also review the products you sell to identify potential problems. If your dropshipper claims they can supply designer handbags at a fraction of the cost elsewhere, make sure you have proof that they are authentic and have all licenses in place.
Dropshipping made easy with the right platform
The key to launching a dropshipping website is choosing the right platform. Magento Commerce has many features such as catalog management tools that make it easy to track large inventories even if you don’t stock the products. Magento Commerce offers a powerful tax calculation system that allows retailers to account for all variables when working alongside dropshipping suppliers. Analytics and reporting tools allow retailers to track orders and keep their profitability high at all scales. Dropshipping is an ideal model for small businesses that need to sell high volumes of products while keeping a small staff.
