What is e-commerce dropshipping?
February 9, 2023
In retail, whether it be online or storefront, one of the biggest challenges businesses face is inventory management. With too little inventory there is a risk of selling out or being unable to keep up with demand, yet with too much inventory you may end up with stock that you can’t sell or have to offload at a loss. E-commerce dropshipping eliminates these risks by allowing the business to sell without holding any physical inventory at all.
Many retailers find that dropshipping can be an easier business model than the traditional system of selling, though it does also present its own unique disadvantages. Join us as we explore the model in more detail with our dropshipping guide.
What is dropshipping?
Dropshipping is a fulfilment business model in which the seller holds no stock at any point. Simply put, the retailer sources a product from a supplier that they think will sell and lists it on their e-commerce store for consumers to buy. However, despite making the sale through the retailer, the consumer is actually buying from the supplier who will also ship the product to them.
Sometimes the process is automated, with the information reaching the supplier immediately, though in some cases the retailer may need to send over the information to the supplier manually. Therefore, the retailer in this case essentially acts as a middleman, and at no point handles any of the stock they are selling.
So what does the retailer do instead? For many, the appeal of dropshipping is that, comparatively, it seems much easier because there is no need to hold or manage stock. However, the product won’t sell itself. It is the responsibility of the retailer to promote their business and the product through marketing strategies. Additionally, since the sale was made through the business, the responsibility of customer service and issuing refunds also falls on the retailer.
Is dropshipping legal?
If you can sell products you’ve never seen from unknown suppliers, from anywhere in the world - surely there must be grey areas?
The answer is that the act of dropshipping is completely legal in the world of e-commerce. Though some consider it to be unethical and may frown upon it, the truth is that 33% of online stores use this model and over 23% of online sales are made through dropshipping. Take e-commerce giant Amazon for example, whilst they do hold some stock in warehouses, they have adopted dropshipping as one of their main methods of selling, allowing third-party sellers onto the platform.
Whilst the act of dropshipping is legal, you may encounter problems if the product you intend to sell has restrictions or legal implications. For example, if you sell candles you will need to make sure that you have product liability insurance. If the candle causes damage or harm to the consumer, they won’t contact the supplier, but will come to you - if you don’t have insurance, this can leave you with a costly lawsuit.
Advantages of dropshipping
As with any business model, there are benefits and disadvantages to dropshipping. Before making it your primary method of selling, there are several points to consider. To understand more about the dropshipping model, we can first look into some of the advantages it presents.
Low startup costs
Dropshipping has become popular with young entrepreneurs as a lucrative business model that has low startup costs compared to a traditional retail business model. Without needing to purchase any stock and without needing a physical storefront or warehouse, your available budget is dramatically increased.
Most of the budget can then be spent on marketing materials such as paid advertising and building a website to generate more sales and increase profit. Depending on your product and supplier, there is a chance for high-profit margins which, combined with a low startup cost, turns dropshipping into a viable model for entrepreneurs looking to make money.
It is much easier to scale your business when you are not restricted by physical space or the number of employees packing orders. As there is no responsibility on the business to create, package or dispatch the order, dropship retailers are also able to manage sales fluctuations that are dependent on the time of year. These elements ultimately make the process of selling less stressful for the retailer, allowing them to focus on marketing and scaling the business.
More and more entrepreneurs are looking to escape the static 9-5 working environment. As long as there’s a good internet connection, a dropshipping business can work from anywhere in the world, at any time.
Disadvantages of dropshipping
Despite the appeal of dropshipping, there are of course disadvantages to the model that need to be carefully considered before deciding whether this is a viable option for your e-commerce business.
Inconsistent Product Quality
In many cases, to make a higher profit margin many businesses will choose a supplier based in China, such as AliExpress. However, this decision comes with added risk, if you aren’t seeing the product, there’s a good chance that it might not be the quality that you expect.
It is a common occurrence that customers who buy from a dropshipping business end up with a poor-quality product. Bad reviews and refund requests can kill a business before it even gets off the ground.
Additionally, you may experience inconsistencies with your supplier. For months they could consistently deliver high-quality products, but as soon as the demand for the product goes up, the supplier may not be able to manage a large number of orders. In this situation, you may start to see shipping delays and poor-quality items being delivered to customers, which will be detrimental to your business.
Hindered Customer Experience
The nature of the dropshipping model means that you won’t have control over shipping methods or customer experience. Your supplier could take months to send out your product, and even if you make the effort to chase the order and convey any updates to your customer, the eventual delivery remains outside of your control. These long waiting times and potential lack of information will put the reputation of the business on the line, especially if the customer receives a poor quality product after waiting a long time.
With a low entry barrier and start-up costs, the competition for dropshipping is high. In order to succeed, you’ll need to sell a very niche product. If we again take candles as an example, selling generic candles will be very competitive. By selling candles that are eco-friendly and vegan, however, your niche may be increased and competition reduced dramatically.
Difficulty Building a Brand
You can build a website, and social media following, and produce marketing materials that all follow your brand guidelines. However, with no control over the product, you may find it difficult to truly enforce this branding. Compared to creating and holding your own products, there is much less opportunity for branded dropshipping, which might include things such as print-on-demand products with your own design. Unless you have a larger budget to find a higher quality supplier who offers some customisation to your products, this might be a deal-breaker for those wanting to start a business.
How StoreFeeder can help
StoreFeeder can help streamline the process of dropshipping by allowing you to manage and track your orders more efficiently. By adding the dropship supplier as one of your warehouses, you can easily send over shipment information and mark the order as dispatched once you have confirmation. This is a particularly useful feature for businesses that may have several suppliers, those who sell products via different platforms such as Amazon dropshipping or their own website, as well as businesses that also hold physical stock. Keeping all of your orders in one place will help your business to stay organised.
Additionally, StoreFeeder can integrate with a variety of platforms and marketplaces such as Etsy, Magento, Amazon, Shopify, WooCommerce, and much more. Allowing you to easily manage your business wherever you see fit. StoreFeeder is also able to integrate with a variety of couriers such as DHL, DPD, Royal Mail, Evri, Amazon Shipping, and many more. Should your supplier utilise any of our supported couriers and provide shipping details, you will be able to further manage shipments in your store, providing an improved customer service experience.
Book a demo
If you’re hoping to start your own dropshipping business, or expand your current eCommerce plan to include this model, StoreFeeder is here to help you make the process seamless. If you’re interested in trying StoreFeeder’s services within your business, contact us or book a demo to see how we can help you.