Meaning of Dropshipping Business Model and How Its Works

If you are new to the online business world, you would have probably come across the term “Dropshipping” as a business model in the E-commerce niche.

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Dropshipping is a business model that enables an individual (entrepreneur) or company to operate without maintaining inventory, owning a warehouse to stock the products, or even having to ship the products to their prospective customers by themselves.

How it works is that a dropshipper (Individual/retailer) partners up with a supplier that manufactures and/or warehouses products, packages the products, and ships them directly to the dropshipper’s customer, on the dropshippers’s behalf. That is: The customer places an order for a product on the dropshippers’s online store, the dropshipper/retailer automatically or manually forwards the order and customer details to the supplier and the supplier packages and ships the order directly to the customer in the dropshipper/retailer’s name.

This business model is extremely interesting and attractive in the sense that you don’t need to have a physical store or warehouse to stock the products, all you need is a laptop and an internet connection

What are the Advantages of Dropshipphing Business Model?

Dropshipping as a business model, has several benefits as well as some disadvantages. Some of the advantages are:

• It is a business model that is very easy to set up. You can set up a dropshipping business in five easy steps which are; determine your niche, find a droshipping supplier, buy a domain name and hosting services/use an existing E-commerce platform, set up your store and marketing.
• Dropship business model requires little or no capital to setup. On like the traditional business models, where the majority of the costs are related to setting up and running the retail operations. Dropshipping actually eliminates that step and the cost of it, all you have to pay for is the associated costs of running your website. The fixed cost of managing the website is all that a business owner has to worry about. i.e domain name, hosting, theme, apps, etc.
• Dropshipping as a business model requires little or no risk at all. If the business doesn’t sell products, it still doesn’t lose anything, so there is little to no pressure about having to sell your inventory.
• The business can be run from the confort of your home or anywhere in the world. You don’t need an office, a warehouse nor do you need an employee to run the business.
• As a dropshipper, you can sell virtually any product in any niche or a combination of different niches as you may desire with no restrictions. There is a dropshipping supplier for any product that you would like to sell.
• In dropshipping business model, there is reduction on losses on damaged goods. The shipment goes directly from the supplier to the customer, there are fewer shipment steps involved which drastically reduces the risk of damaged items while moving from one place to another.
• For entrepreneurs that require a high level of business and product validation before investment, Drop shipping can be a great way to test new products before investing heavily into inventory that may not sell, making this the perfect business model
• Drop shipping is definitely the least expensive method of selling online because you don’t have to purchase any inventory upfront. Because of this, the drop shipping method works well for entrepreneurs who have a limited budget or would prefer to keep startup costs as low as possible.
• This business model also gives room for freedom and more resources to scale your business, on like the traditional retail business models, which runs on the basis of more profits more work and investment. With dropshipping all you have to do is send more orders to your supplier and then let them handle everything else while you earn the profit and more time to develop your business plans and scaling strategies.

Disadvantages of Dropshipping Buisness Model

Just like any other business model, dropshipping also has its own Cons.These are;

• When an individual or a business man/woman source and stock products, the profit margin is definitely going to be higher compare to the profit margin of a dropshipper. There is a slight lower profit margin in comparison to sourcing from an wholesaler or manufacturer directly and stocking the products. Although, itsdepends on your niche, location or requirements. Dropship suppliers and vendors do charge higher prices for dropshipping products, which does eat into your profit margins.
• The dropshipping business model lacks control on the products being shipped to the customers, since the total shipment procedure is in the hands of the supplier, the personalized branding and packaging as well as freebies which are parts of the things that ensure customers’ satisfaction may not be possible. A dropshipper cannot control how his/her brand is presented during the delivery and fulfillment process as the supplier is the one who ships the products. However, there are some suppliers who may be willing to go that extra mile but, at a cost.
• Level of competition is relatively high in dropshipping business model due its popularity. More and more retailers are coming up daily making a whole lot of niches to be saturated already. Unless you are catering for an extremely specific segment or niche.
• When something goes wrong, it is the dropshipper that will bear the whole blame or fault even when it is the supplier’s fault.Since the customer is purchasing the product from the retailer’s website, if the supplier messes something up, it’s still the dropshipper/retailer’s fault as the brand is the face of the retail process. This is one of the reasons why it is very important to choose the right supplier in dropshipping business.
• Selling multiple products may seem like a good way to drive up sales and make a substantial profit, but this could actually be a problem in cases of multiple orders from your store. If the dropshipper has multiple suppliers for these products, it means that these products will be shipped diffenrenetly by different suppliers charging different shipping rates based on some factors like location, type of products, etc. If a customer orders multiple products which will be shipped from different suppliers, the dropshipper/retailer will have to work out and pay the shipping costs separately. Transferring these varying shipping costs on to the customer may negatively affect conversion rates and can also have a negative effect on the profit margins of the dropshipper.
• Keeping track of the stock of the supplier is nearly impossible. Attimes, there might be issues such as cancellation of orders due to miscommunicatios and having to place orders on back order. But there are numerous softwares now that can take care of these problems on automation. You can use softwares like Alidropship , Woodropship , Dropified and lot more.

How Profitable is Dropshipping Business?

Profiting massively from dropshipping business depends on a lot of factors. Typically, the profit margins for dropshipping can range from 10% – 40% but there are some products that give a hopping returns of about 100%. It all depends on your chosen niche and how well you can market the products. Its also depends on finding the right supplier while entering a market that isn’t already over saturated. A good way to ensure higher margins can be to source directly from a manufacturer instead of a vendor/supplier. Once the business is off the ground and gains a little traction, it can quickly turn into a money making machine that only requires minimum input and efforts.

A brief summary is given in the video below;

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