Dropshipping is a new form of e-commerce that is becoming more and more fashionable, especially in stores that use eBay as a platform.
In the US, they have been taking advantage of this formula for years, and for some time companies, especially from China, with really adjusted prices have also signed up.
What is dropshipping
Dropshipping is an e-commerce business model with the big difference that the seller does not need to store the products or have stock since all the logistics management is carried out by the wholesaler.
Explained in another way, in this business 3 participants come into play: customer, seller and wholesaler or dropshipper. In a typical e-commerce business, the process to follow would be for the seller to buy the products from the distributor and store it at their facilities, at the moment the seller receives an order from a customer, the seller would be in charge of processing the order and send the product to the customer. On the other hand, in the dropshipping mode, the seller does not have stock by himself but has at his disposal that of the wholesaler or dropshipper, then at the time of receiving the order instead of processing and sending it as we would in a normal case, the seller contacts the wholesaler so that he is the one who sends the product to the customer.
1. The initial investment required is minimal. Thanks to the numerous savings in infrastructure and consequently in personnel, the only costs come, initially, from the design of the web in addition to the costs of having a company or being registered as a freelancer. Later on, promotion and customer service expenses will have to be added, as in any store.
2. You do not need to have infrastructure for the storage and shipping processes of products. As the wholesaler himself is in charge of logistics, we save ourselves the need to have space and staff to handle it.
3. You have all the stock that your wholesaler / s has. You are no longer limited by the stock of your warehouses nor should you be aware of stock outs, you will always have the stock of your supplier. The larger the supplier, the less the stock problems.
4. Your list of products is always updated. Most of the dropshipping providers have fully updated systems available with the product catalog, from which we can automatically feed our website to always be up to date. In some cases the process must be manual.
5. You do not take care of the logistics process. You don't worry about negotiating with courier companies and having to contact them every time an order arrives. The dropshipper will do it for you.
6. You partially ignore the issue of returns. In some cases, the problems in terms of changes and returns are solved by the wholesaler himself, obviously at a certain cost.
Disadvantages
1. Very limited margins. As the dropshipper is in charge of most of the processes associated with distribution, the price of the products is higher, so if you want to be competitive, you will get limited margins. Depending on what you save in logistics, the move can go well or badly.
2. Customs problems if your supplier does not reside in the same country. Finding distributors that offer dropshipping in your country is quite difficult, and if you are also looking for a specific sector, the search becomes much more complicated. In the US and China there is a good supply of dropshippers but shipments must go through customs and there is a certain probability of running into problems.
3. Delivery times if your supplier does not reside in the same country. It is quite common to find stores that serve in 24 or 48 hours maximum, and if your supplier resides in your country, they will surely offer these terms. The problem comes when the dropshipper resides outside of your country, with which in addition to lengthening delivery times, possible delays come into play that can cause your customers to back down.
4. Extra work in terms of taxation if your supplier does not reside in the same country. Doing operations outside of your country implies an increase in work to have your accounts in order, this may mean a higher cost for your accounting-tax agency and the need to have certain paperwork in order depending on the country.
5. Suppliers of doubtful reputation. There are quite a few suppliers that directly turn out to be fraudulent companies or that do not comply with the agreement, with which there is a high risk of fraud if we do not document ourselves well and go to specific lists, such as Salehoo, of dropshippers that have verified the legality of the suppliers they list.
6. The cost of transportation is usually non-negotiable. The cost of transport per order is usually set by the supplier, according to its negotiations with the courier company, and is usually not negotiable. Here we lose the factor of choosing the courier company that best suits our characteristics.
7. Legal loopholes and liability issues. In South America there are many sellers who take advantage of the benefits of dropshipping to sell on eBay, but many of them are not even within the law. There is great legal ignorance by entrepreneurs around the world about the conditions they must meet to operate normally, so it is more than advisable to seek professional advice on this matter. There are also risks in terms of liability for misuse or a product in poor condition, which is why it is necessary to have liability insurance.
Conclusions
As we have seen, setting up an e-commerce business based on dropshipping has a number of advantages and disadvantages compared to common e-commerce businesses. Although an in-depth study is needed to evaluate whether we are interested in this modality, dropshipping is a very attractive business for novice entrepreneurs or those who do not have a large capital, since it is possible to start the business with really low costs.
