For many companies, organizing all stages of logistics is a big challenge, especially for e-commerce companies that are just starting their operations. One of the biggest difficulties is the management of the stock, which needs to be well controlled so as not to hinder the fulfillment of orders.
Thus, businesses that do not want to deal with storage, storage and shipping processes can benefit from the incorporation of dropshipping, a solution that allows the delegation of these procedures to another partner company.
Thanks to this technique, large institutions like Amazon have managed to increase their sales and grow in the market.
To find out how this methodology works and if it is suitable for your business, continue with us and find out everything about dropshipping now!
What is dropshipping?
Dropshipping is a business model, largely adopted by e-commerces, in which the seller makes certain products or services available in his sales channel, but he does not deliver or hold items in stock.
Thus, we can say that the storekeeper acts as an intermediary when closing orders. His e-commerce works like a virtual showcase, but this entrepreneur uses the stock and distribution structures of third parties to reach his end customers.
For this reason, dropshopping is an interesting alternative for businesses in its initial phase, in which many entrepreneurs cannot make large investments in goods.
In addition, dropshipping allows retailers to put all their ideas into practice and offer the most varied products, as they will not have to deal with stock management or delivery.
How does this model work?
The dropshopping process is simple and works, in general, as follows:
- The customer accesses an e-commerce or contacts a store. At that moment, make your choices and close a purchase. Most of the time, this transaction takes place virtually, in an environment where the withdrawal of products is not immediate.
- The shopkeeper receives the orders and passes them on to his dropshipping partner, who is often the supplier himself.
- The partner manufacturer is responsible for separating, packing and sending the items it keeps in stock to end customers on behalf of the selling company.
- The reverse logistics is also due to this partner, if the customer need to exchange or return your purchase. However, all contact is made directly with the shopkeeper.
As we can see, all delivery logistics are done by suppliers, and the retailer does not even have access to the items. Usually, the store profits from the difference between the price disclosed to the customer and the amount charged by its dropshipping partner.
What are its advantages and disadvantages?
Logistics is composed of a complex chain of processes, which also generates high costs. Therefore, delegating these activities to another more experienced company can be an excellent option for small and medium businesses, for example.
On the other hand, working on reselling third party articles can present risks and challenges for strengthening a brand. Is dropshipping, then, the ideal tool for all types of business? Understand its pros and cons:
1. Reduced costs
Undoubtedly, an attractive benefit of dropshipping is low costs, since the entrepreneur will not have expenses with stock, storage, handling, transportation, among other costs.
Therefore, the fixed expenses of a business that adopts this distribution model are very low and, thus, a person can maintain a store of this type by spending little per month, compared to a traditional company. The entrepreneur will only have to disburse an amount needed to keep the site up and running.
With this system, the entrepreneur has the freedom to manage his business from anywhere. As transactions normally take place online, all he needs is an internet connection to communicate with suppliers and customers.
3. Possibility to expand the product mix
To add a new item to its catalog, the retailer only needs to contact a new supplier and establish an agreement with it. In this way, a store can offer a wide variety of products.
4. Focus on strengthening the brand
As the shopkeeper does not need to take care of all the logistical work or the manufacturing – which consumes a company’s time and investments a lot – he has the opportunity to focus only on the growth of his brand, customer service, among others aspects that will reinforce your brand in the market.
1. Low competitiveness
One of the main aspects that guarantees the success and prominence of a company in the market is the exclusivity of the products or services that a brand offers. A store that works with innovative, creative or differentiated items, for example, is more likely to win the attention and preference of consumers.
An obstacle of dropshipping is to be able to make available a variety of articles that are unique since there are many other companies offering very similar items or entering into partnerships with the same suppliers.
2. Limited profits
If competition tends to be higher, a retailer is unlikely to be very successful if he prices too high to be more profitable. Profit margins are reduced, since much of the value of the products remains with the manufacturer. Consequently, it is necessary to sell a significant volume for the adoption of the model to be economically advantageous.
3. Uncertainty about item availability
A very risky factor in this model is to be able to efficiently control the partner’s inventory. So, it is necessary to invest in the appropriate technology so that the synchronization between the store catalog and the availability of the supplier is perfect.
Otherwise, the entrepreneur may have serious problems such as selling articles that no longer exist or are currently inaccessible. This ends up reflecting on changing delivery times, customer dissatisfaction – which ends up generating losses.
Dropshipping is an interesting model that allows a business to sell without having to spend so much on logistics processes. However, it is not always the most suitable method for all companies.
For its adoption to be successful, the entrepreneur must select his partners well and invest in a good website, among other steps that make the customer’s experience positive.
Did you like to understand how dropshipping works? Do you believe that adopting this system would be interesting for your business? Have any more questions? So, share your thoughts with us in the comments!
What is dropshipping? Learn how to set up an online store, even if you don’t have a product
You have been thinking about opening a virtual store lately, right? Great idea! Today it is easier than ever to set up a virtual store thanks to the technology available.
It is normal to be in doubt. It is possible to create a flawless website , but what about the initial investment in the product? Ultimately, it is your capital at stake.
But what if someone offered to pay their inventory costs for thousands of products? What if that someone also offered to manage all of your order processing and shipping operations, so that you could focus on other areas of your business?
It sounds crazy, doesn’t it? But no, it has a name: dropshipping , or direct shipping , in Portuguese.
In the video below I will explain exactly how drop shipping works, how to find dropshipping suppliers and suggest solutions to common problems related to dropshipping.
DROPSHIPPING BUSINESS IN 2020: PROFITABILITY PROS AND CONS
The concept of dropshipping is simple: a company has to list products on an online platform (eCommerce). The products are manufactured and held by a third party (supplier). When someone places an order to a company (seller), the third party ships it directly to the consumer.
Many dropshippers have emerged in China, since 2006. This is mostly thanks to the increase Internet bringing eCommerce to live. These companies have been able to compete with distributors because of improved logistics.
Some reports indicate that nearly 33% of internet retailers use drop shipping as their main method for their eCommerce. Now-a-days drop shipping suppliers are mostly based in the USA.
What kind of business model is it?
Dropshipping allows businesses to start an eCommerce and sell products. It is a retail method without a warehouse. As a result, the seller doesn’t have to handle the product directly. The supplier does that for them.
The most important difference between dropshipping and a standard retail model is that the seller does not have the stock. Instead, the seller purchases inventory as needed from the supplier to complete the orders.
4 pros of dropshipping
Dropshippment doesn’t requiere inventory management. Standard retailers offer clients products that are available in their warehouse for the shop/eCommerce. If they run out of stock of an item, sales are lost because costumers can’t make a purchase.
Inventory management requires storage and handling costs but businesses that dropship remove costs risks. A third party controls the inventory for them and so the products are always available to the customer on demand.
While standard retailers have to go through a process in order to sell: invest money in order to purchase products, wait for them to arrive and then sell to customers. Dropshipping businesses receive payment for the products they sell at the same time they pay the providers.
In order to keep the engagement of clients, it is necessary to invest money into innovating. Dropshipping lets businesses test new product lines without investing too much.
This happens because they can test the products online without paying before hand. So, if customers don’t respond positively to a new item, they can just remove it from the store and add a new one.
4 cons of dropshipping
Not everything is as simple as it seems. There’s a low barrier to entry in the market. So, dropshipping creates a heavy competition because different stores are selling the same products from the same third-parties.
When a business decides to start the dropshipping method, inventory rarely passes through them. This means that they don’t have the control on the quality of the products.
It is not until a store grows and develops a strong reputation that they have the possibility to get exclusive deals with suppliers in order to have control over this. But until then, without quality control, there’s a chance some products are not on top conditions and therefore it can lead to not satisfied costumers or lost sales.
Big box retailers can sell products a low prices because they get major discounts on products just because of purchasing large volumes. Therefore they can create amazing discounts to shoppers.
With dropshipping, this doesn’t happen because at the end of the day the business is essentially buying products one at a time. So bulk discounts don’t happen.
If a company has a variety of products listed on their online store, that can mean that they may come from different suppliers, not just one.
In this degree, customers may purchase an order with products from multiple suppliers and receive multiple packages for it. This can lead to high shipping costs, wasteful packaging and not so happy customers.