In the eCommerce world, Dropshipping has become one of the buzzwords that everyone has on their minds. With the projected rise of eCommerce sales to $56 billion (2020), it would not be a surprise if small businesses started to opt for dropshipping their products to meet this new and ever-increasing demand.
You may be wondering what exactly is dropshipping?
Dropshipping is a relatively “new” retail fulfillment method where the “store” does not keep its product in stock. This means when a customer places an order online, rather than the small business owner shipping out the product themselves, a third party ships the product directly to the customer.
Now that we understand what dropshipping is, let’s talk about the advantages and disadvantages of using dropshipping for your small business.
The Advantages of Dropshipping
- Low capital cost
As you could imagine, the biggest advantage of dropshipping is that there is a relatively low capital cost upfront for starting your business. Not only that but because dropshippers are not paying for inventory and may see some cost-savings on shipping, costs in general for dropshippers can remain relatively low even as they grow.
- Low barrier to entry
Dropshipping is relatively easy to start. The barrier to entry to this form of eCommerce fulfillment is low and you can save time on shipping, handling returns and avoid or prolong the need for warehousing.
- Flexible hours and location
Dropshipping feeds into the idea of the small business “hustle” culture. It allows small businesses flexibility with their hours, entrepreneurs can virtually operate their business from anywhere in the world and can essentially sell any product that can be marketed effectively.
- Multiple product selling choices
Since all you need for dropshipping is an online storefront and a supplier, there is nothing stopping you from investing in multiple dropshipping companies (selling different products). This can allow you to diversify your product catalogue and save you from the fluctuations of the market in relation to some products.
- Easier to scale
With a combination of selling multiple products, relying on multiple suppliers and leveraging the cost savings from customer support etc, dropshipping becomes easy to scale and test for different products.
The Disadvantages of Dropshipping
- Low profit margins
The biggest disadvantage of dropshipping would be lower-profit margins. Dropshipping in many ways provides a “cookie-cutter” product, due to this it is unrealistic to charge a premium for your product. If you were creating your products by hand and had for example unique packaging, this would add to the “experience” of using your product, an experience that you can not give to your customers with dropshipping.
- Competitive landscape
As there are very low barriers to entry in the dropshipping market, it is extremely competitive. You may find 15 other green tea products similar to the ones you’re trying to market. In this case your storefront becomes your key differentiating factor.
- Reliant on external supply chain
It is a great advantage that you can use multiple suppliers to ship a variety of products, however, dropshipping leaves you completely reliant on your suppliers. Let's say you have a huge sellout due to some special event, your suppliers may not be able to keep up due to their constraints. This is an issue that you may have been able to plan for if you control your supply chain.
- Harder to brand
If there are 15 similar types of green tea that your competitors are selling, you can imagine it would be much more difficult to not only differentiate your product but it would also be difficult to create and establish a brand identity. Low-profit margins also contribute to this as even if you’d like to create a better brand, the costs would ultimately add up, which would drive up the market cost of the product. Thus you’d need a delicate balance to create a proper brand for your company.
This is a brief overview of what dropshipping is and the advantages and disadvantages it poses. Should you try dropshipping? If you are a small business who has found a niche product that you think you can effectively market and supply then go ahead and give dropshipping a try! The costs are low and you can test out your theory.
However it is important to note, if you have not researched the market thoroughly and do not have a niche in mind, you may struggle to compete in an already competitive market.
Whatever you may choose, we wish the best of luck to you in your small business/entrepreneurial endeavours. For more articles on best small business practices check out our blog and if you still have questions you please feel free to reach out to us.