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Dropshipping Business Model: What It Is and How It Works

 

What is the Dropshipping Business Model

Dropshipping is a business model where a business doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product directly.

The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders. 

Here are some companies that help facilitate the dropshipping model:

  • Oberlo: Connects Shopify merchants with suppliers who dropship products, streamlining the process of product listing and order management.
  • SaleHoo: A directory service for dropshipping suppliers, offering a platform for retailers to connect with vetted suppliers.
  • Printful: Specializes in print-on-demand products, allowing businesses to sell custom designs without holding inventory.
  • Doba: Acts as a dropshipping marketplace, connecting e-commerce stores with a vast range of products from multiple suppliers.

Who Is This Model Best For?

The dropshipping business model is not right for everyone. That is because, for some, the upsides of this model are not as attractive as other business models. For some others, they may feel that the business model’s downsides are not worth even considering. We’ll get into some of these advantages and disadvantages later in this article. But for now, let’s take a look at who this business model works best for.

For new entrepreneurs who are motivated, this model may be a good option. Because it really doesn’t take much to start a dropshipping business, new entrepreneurs can begin their journey into entrepreneurship without needing to hold inventory. This also makes it a great business model for startups who do not have a lot of funding.

Another possible group that is best fitted for the dropshipping business model is entrepreneurs who are already familiar with e-commerce. Entrepreneurs who already have some sort of e-commerce business will understand the dropshipping model’s benefits of not holding inventory. They will also appreciate the fact that there is no need to manually ship products themselves.

These individuals with e-commerce experience will also have a really important knowledge base which is online marketing. Already knowing how to drive traffic to a website or landing page will pay off well for these seasoned entrepreneurs.

While just about anyone can start a dropshipping business, the entrepreneurs who may benefit the most from entering the market are the two types above. We mentioned that there are many reasons why this aspect of this model will work for both types of entrepreneurs and others. Now let’s get into some of those aspects by reviewing the advantages and disadvantages of the dropshipping model.

Advantages of the Dropshipping Model

Low Startup Costs

One of the most attractive features of this model is how inexpensive it is to start. A resourceful entrepreneur can probably start this business with less than $100. This is because many dropshipping sites allow joining for a low introductory cost or offer a free trial. And since there is no need to buy inventory, or find storage or office space, the costs are minimal.

The costs you can expect to accrue are related to marketing. Even though you will be able to start the business, finding people to purchase is something separate. The good news is that, depending on the product a business owner intends to sell, marketing costs may be limited by using paid ads on search engines or social media sites to drive traffic.

Ease of Setup

Another advantage of this model is how easy it is to set up. Platforms like Shopify, WooCommerce, and others make their interfaces very user-friendly. Entrepreneurs can select products from dropshipping suppliers and integrate them into their websites with very little trouble. Even people without technical expertise can launch a dropshipping business and begin selling fairly quickly.

Flexibility 

As far as flexibility goes, there are not too many other business models that compare to this one. Entrepreneurs can pretty much run their business from anywhere in the world as long as there is an internet connection.

Wide Range of Products

When it comes to dropshipping, there are seemingly endless amounts and types of products you can sell. The variety makes it easy for entrepreneurs to establish a business. This is because an entrepreneur who is interested in starting a dropshipping business will most likely find a product category where they are knowledgeable. 

Here is a list of some of the most popular dropshipping products:

  • Beauty and accessories
  • Fitness / Sports
  • Childcare (Baby products)
  • Animals
  • Textile / Clothing and fashion accessories
  • Kitchen and interior decoration
  • Children’s toys
  • Luxury
  • Electronic gadgets

While this list isn’t extensive, it gives you a good idea of the variety available for dropshipping entrepreneurs.

Reduced Risk

 The dropshipping model significantly lowers the risk typically associated with buying and storing inventory. Traditional retail models can lead to overstocking or stockouts. Both of which can be costly. In dropshipping, the store owner only purchases products from suppliers after making a sale. That puts all of the product risk on the supplier.

Keep in mind that reduced risk does not mean ‘no risk”. There are some risks associated with a dropshipping business. We’ll explain some of those later in this article.

 

Disadvantages of the Dropshipping Model

Low-Profit Margins

One of the major disadvantages of this model is the profit margins. A dropshipping company can expect margins to be around 15%-20%. This, as we mentioned before, is because there is very little overhead and risk to the seller. The dropshipping supplier is doing much of the work so they require more of the profits.

High Competition

The low barrier to entry in dropshipping attracts many entrepreneurs. This means that the dropshipping marketplace is a crowded one. Finding a niche that isn’t already saturated can be challenging. And, even the less crowded niches are still fiercely competitive as dropshipping businesses compete to maintain thin margins.

Businesses must invest more effort and resources into marketing and finding unique ways to differentiate themselves to stand out from competitors.

Shipping Complexities

As a business owner who ships products, you have control over some of the shipping details for your business. If you’re confident in your company’s ability to pack and ship products promptly, you can do things like give customers free returns or delivery guarantees. However, in the dropshipping model, you don’t really have any control over those things. 

If the suppliers have issues with shipping, it may bode negatively for your brand. With nearly 90% of customers reading online reviews before buying, if too many customers complain about shipping issues, there is very little that you can do about it. This may lead to less sales over time.

Limited Branding and Customization

 Since products are shipped directly from the supplier, there’s little scope for personal branding or customization of products. This limitation can make it challenging to build a unique brand identity, which is a key factor in customer loyalty and business growth. Dropshippers often have to find creative ways to add value to their products or brands to overcome this disadvantage.

Customer Service Challenges

Along with shipping issues, other problems can come up. When they do, dropshipping entrepreneurs may have difficulty solving these issues for the customer. For example, if there is a product defect. The drop shipper is often the middleman between the customer and the supplier. This can lead to slower resolution times and a lack of direct control over the situation. Similar to the shipping issue, unresolved or unsatisfied issues can hurt the brand.

Conclusion

While the dropshipping business has its disadvantages, it is still a model that entrepreneurs of all kinds are attracted to. It provides benefits and convenience not found in other, more labor and cost-intensive business models. As with many types of internet-based business models, dropshipping businesses continue to pop up so if an entrepreneur is interested in starting this type of business they should move quickly after doing their due diligence.

Also read:

5 Business Models Used By Clothing Brands

21 Different Types of Business Models With Examples

Thomas Martin
Tom is a member of the Editorial Team at StartUp Mindset. He has over 6 years of experience with writing on business, entrepreneurship, and other topics. He mainly focuses on online businesses, digital publishing, marketing and eCommerce startups.

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Tom is a member of the Editorial Team at StartUp Mindset. He has over 6 years of experience with writing on business, entrepreneurship, and other topics. He mainly focuses on online businesses, digital publishing, marketing and eCommerce startups.

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