Dropshipping is an eCommerce fulfillment model that enables merchants to start an online business and sell products without the need of stocking the inventory. In dropshipping, the manufacturer of the item is responsible for shipping the product in the event of sales. The manufacturer ships the item directly to the buyer while the seller is responsible for marketing the item.
3 Types of Fulfillment Methods
Dropshipping is a type of eCommerce fulfillment method that differs from other fulfillment methods such as in-house or self-fulfillment and 3PL fulfillment.
In-house or self-fulfillment is the type of fulfillment when the seller fulfills the orders themselves and maintains complete control of the supply chain.
In the 3PL fulfillment method, a 3rd party logistics company is responsible for the order fulfillment so the seller can focus more on the strategic end of the business. It is a popular fulfillment method that is easy to scale at minimum capital investment.
In the dropshipping fulfillment method, the seller loses almost all the control over the supply chain but also on the quality control of the product.
Dropshipping is no doubt an innovative strategy that requires minimal start-up costs for starting an online business. Although it gained popularity in recent times it comes with its pros and cons.
Let’s take an in-depth look at the pros and cons of the dropshipping business model.
Pros of Dropshipping
Minimum Startup Cost
One of the major advantages of dropshipping is its low starting cost. You don’t have to spend any amount on developing the product or buying and stocking the inventory.
No Overhead Costs
Dropshipping eliminates the need for any storefront or warehousing cost. You don’t have to pay any lease, mortgage, or construction costs.
No Inventory Management
In dropshipping, you don’t have to buy or hold any inventory. It also removes the financial risks of the large volumes of inventory that are failed to sell.
Product & Market Test with Little Risk
You can test new products and markets without heavy investments in the product and marketing. If a product is not selling well, you can simply remove the product from your online store without worrying about the stock.
Cons of Dropshipping
Although the advantages of dropshipping make it an appealing business model, it certainly comes with some disadvantages that are really hard to ignore
Low Profit Margins
Overheads are certainly low in the dropshipping business but so are the returns. Since you are buying one product at a time, you won’t be able to avail of any bulk discounts offered by the manufacturers. Online customers are becoming more aware these days and they always try to find the cheapest prices of the same product online which forces you to further reduce your prices and the profits margins.
The low barrier to entry that makes dropshipping attractive also attracts some fierce competition. Your competitors are selling the same products from the same third-party manufacturers. You either have to offer further discounts or do some extraordinary marketing to keep your business afloat. Online marketing and search engine optimization costs also eat up a major chunk of your margin. Since you are not selling a unique product you cant charge a premium price for the product.
Lack of Control
In a dropshipping business, you have to give up all the control of the supply chain and logistics. Any logistics issue on the manufacturer’s end becomes your issue. Most dropshipping manufacturers are based overseas and it may cause unreliable and delayed shipping. Since your online store is the face of the business and not the manufacturer, the risk of not meeting the customer expectations always remains high. In addition to the lack of control in the supply chain, you also lack quality control over the product since you’re putting your store’s reputation in the hands of a third party. One batch of bad products can result in the loss of sales and customers for your online store.
Disjointed Orders and Shipping
If your customer orders multiple products from your website with different suppliers and receives multiple packages of a single order, it may cause higher shipping costs and annoyed & confused customers.
Since you lack control over quality and intellectual property rights over the product, selling it may cause liability for you in your local country.
Difficult to Build a Brand
It is very hard to build a brand in the dropshipping business. Without a brand, there are few chances of premium pricing and healthy profit margins.
Dropshipping was really profitable a few years back but it has become very competitive now to start a new dropshipping business. Low-profit margins, extreme competition, and lack of brand building are some of the hard truths associated with the dropshipping business.
The Alternative to Dropshipping: 3PL Fulfillment
A better alternative to dropshipping is the 3PL fulfillment model. By partnering with a 3PL provider, you still maintain control over the quality of the product. You can build and scale your brand with heavy capital investment and meet your customer expectations with super fast and reliable shipping methods.
At ShipBots you can integrate your online stores on all the major platforms like Amazon, Shopify, eBay, and more to automate your order fulfillment while keeping control over your brand and business. Contact our eCommerce fulfillment specialist to make a transition from dropshipping to the 3PL fulfillment method and get a custom fulfillment quote.