Last modified:Thursday 18 February 2021
A lot is being written about dropshipping in the e-commerce world. This online sales technique seems to be the “miracle solution” to generate outsized margins. But what if it’s a huge scam? We take you behind the scenes to discover this trendy concept, its advantages and disadvantages and give you a few tips to help you make the best of it.
What is dropshipping exactly?
Very briefly, dropshipping (or direct delivery) consists in selling products which aren’t in the seller’s stock. The supplier takes care of sending orders directly to the customer.
Basically, this is what happens on an e-commerce site in dropshipping mode:
- The buyer (customer) orders from the webshop. They usually don’t know that their order will be “dropshipped”. Sometimes, the relatively long delivery time may tip them off.
- The seller (e-merchant) contacts the dropshipping supplier and sends them all of the customer’s information.
- The supplier then prepares the order and delivers it directly to the customer.
The e-merchant doesn’t manage the product stock, which is normally the case. The seller tries to find as many customers as possible while the supplier handles production and logistics. The e-merchant earns the difference between the selling price to the customer and the price actually paid to the supplier.
In this article, the focus will be on e-commerce. That said, dropshipping is also possible from a physical location. Think of a trendy furniture store which displays items that aren’t in stock. The customer can order the items of their choice from a catalogue and receive delivery from the supplier via dropshipping.
It sounds super simple in theory. In fact, it isn’t quite so easy!
Dropshipping versus Marketplace
You shouldn’t confuse dropshipping with the “marketplace” model. The two concepts seem quite similar at first but don’t actually work the same way.
A marketplace is a platform that puts third-party sellers and buyers in contact with each other. The operator sets the framework and the rules of the game. Be sure to read all of the terms and conditions to avoid any bad surprises. To be included, merchants must pay a commission which is deducted from their sales, and there are sometimes additional fees. The third-party sellers send the orders to the customers in their name. The same sellers also handle returns and customer service. This technique has been used for a long time by the main e-commerce sites like Amazon and Alibaba.
Dropshipping sites only handle the products of a single seller who sets their own prices based on purchase rates negotiated with their suppliers. The supplier in question sends the orders to the customers under the seller’s name. On the other hand, the seller handles the customer relationship.
As a result, you can opt to open your webshop using dropshipping (full or partial), sell your products via a marketplace or, why not, set up your own marketplace. But, that’s a whole other topic.
dropshipping offers some attractive benefits...
Dropshipping can be very appealing thanks to its obvious advantages for the seller, who no longer has to worry about managing stock.
1. The initial investment is small
The seller doesn’t have to buy all of the products they want to sell ahead of time and risk that they gather dust because there are no buyers, or lease warehouses to store them. Therefore, the initial investment is limited to developing the website (including the domain name, hosting, and any plug-ins) and marketing.
2. the seller can focus on selling
The seller can focus on their skills and core business: selling and marketing to grow their business. They can then spend much more time selecting their products, promoting them and drawing customers via advertising campaigns. The supplier doesn’t have to invest in an online shop. They can concentrate on production and logistics.
3. The seller can offer a broader and more flexible product selection
Dropship sales allow for a much wider selection of products and the selection can be adjusted easily based on demand.
4. Sellers can manage their e-shop from anywhere in the world
Thanks to dropshipping, the e-merchant can manage their online shop relaxing on a sandy beach, as long as they have a good internet connection.
… and some difficulties too!
Don’t be fooled though, dropshipping also involves many challenges that have to be overcome to build a profitable and flourishing business.
1. Sellers lose control over customer satisfaction
By entrusting responsibility for the stock and order processing to the suppliers, the e-merchant loses control over customer satisfaction. Beware of photos that promise unparalleled quality. Reality is sometimes quite different. And there is no shortage of counterfeit goods. The product may also be defective or arrive at the customer’s damaged due to poor packaging. If the customer is disappointed, they will contact the seller since they have no idea who the supplier is.
2. In the event of a hitch, the seller is legally responsible
According to European legislation, the seller is responsible for the sale on receipt of payment through to delivery to the buyer. Selling via a marketplace reduces the risks. Read the terms and conditions carefully to understand the extent of your liability.
As the person legally responsible for the sale, the seller will have to manage any returns and refunds in the event that the buyer changes their mind. The seller is also responsible for ensuring the legal conformity of the products. For example, they aren't allowed to sell Spider-Man lunch boxes or World Cup (FIFA) soft toys if the manufacturers don’t have an official licence. In the event of the sale of non-approved or counterfeit products the dropshipping seller will be open to civil and criminal legal action.
3. Delivery times and shipping costs are often relatively high
Dropshipping enables collaboration with suppliers around the world, which often provides an advantage in terms of manufacturing costs. The flip side of the coin is that delivery times are often much longer than standard e-commerce time-frames (2 or 3 days). It’s important to clearly inform buyers about the delivery times to avoid complaints and disappointment.
International deliveries are also synonymous with high shipping costs. And, a customer could order different products from different suppliers with different shipping costs. Keep this in mind before opening your market internationally. Who pays the costs?
4. The seller’s business depends on their suppliers
If a supplier decides to stop producing a given category of products, or to suddenly increase prices without warning, there can be a huge impact on the e-merchant’s strategy or even be fatal for their business. Even more so if it's their main supplier...
5. The margins aren’t always there
Even though the initial investment may seem small, expenses accumulate quickly and margins are often not as fantastic as expected. Here are some categories of expenses that have to be taken into account in your margin calculation.
- Subscription and commission fees if you opt for a turnkey sales site like Shopify, or the expenses for your own website
- The advertising to generate traffic for your online shop
- Transport costs, customs duties and VAT
- Returns and refunds
- Social charges and taxes
6. Beware of fraud and scams
Not everything is rosy in the dropshipping world. Some e-merchants will do anything to generate revenue using shady business practices. Here are a few examples of the dark side of dropshipping:
- Misleading advertising; there are even modules which display fake customer comments on new pages.
- Mediocre quality, non-existent after-sales service
- Counterfeit products, brand property rights fraud
- Online “get rich with dropshipping” tutorials sold at exorbitant prices
- Manufacturers who take advantage of dropshipping to build a customer database at the e-merchant’s expense
In other words, creativity is unlimited...Be careful!
1. Select one or more reliable suppliers
As you now know, you can’t be successful in dropshipping without reliable suppliers. Here are a few things to think about to direct your choice based on your strategy:
- Production/storage capacity?
- Dropshipping experience?
- Limited selection versus a wide range of products?
- Popularity > Are the products already widely available or not?
- Selection renewed (fashion/trends) or static?
- Is there real-time synchronisation based on the stock (catalogue, orders, etc.)?
- Customer policy > What happens with returns, cancellations, defective products?
- Shipping options > Several carriers? Several countries? (Note: this also implies several languages on your website)
Finding suppliers who will meet their commitments (product quality, delivery times, etc.) is the keystone to the system’s success. And you have to find those nuggets! Here are a few tips to get there:
- Start by testing an order yourself
- Contact the supplier directly to propose a partnership
- Establish real cooperation with the “people” behind the product. If they are your main supplier, why not visit them? Or even visit their production site?
- Prepare your arguments, negotiate margins and sign a clear contract which defines all details, roles, terms and conditions and solutions to problems. Be wary of exclusivity clauses which would prohibit you from selling similar products from other suppliers.
2. Find a differentiator
One of the dangers of dropshipping is that if you opt for products which are already widely sold, you will find yourself in a price war. You will have to find another way to stand out to be successful. Here are a few ideas:
- Identify a niche market with people with a passion and little competition
- Offer very specific products which are hard to find
- Provide added value like a video demo or a detailed review of the product, a loyalty system, a blog, etc.
- Pay attention to your branding
- Provide an attractive catalogue, write the product descriptions yourself, take high-quality pictures
3. Don’t underestimate the impact of marketing
Your main challenge will be to generate enough traffic on your e-commerce website. How will you get your webshop known? Listing on Google, Facebook adverts, blogs, newsletters and other online advertising options are among the channels available. You will have to create your communication plan!
How to get started ?
You have two options to create your e-commerce website:
Option 1 - You can opt for a “ready-made” e-commerce website like Shopify or Dropizi which already include all of the standard functionality in exchange for a monthly subscription and a commission on revenue. These turnkey solutions have a module which automatically adds the products of known dropshipping suppliers like Aliexpress and BigBuy. You can import hundreds of products to your online shop with a few clicks. It’s a good solution to get started quickly with few resources. On the other hand, you don’t own your website. Which makes it more difficult to stand out and do marketing.
Option 2- You can create your own e-commerce website. The initial investment is greater, but you’re the owner and you can develop the website the way you want.
You can also start small with option 1 and move on to option 2 when you reach a given revenue threshold.
Despite the many tutorials available on the subject, which promise you the moon, the art of dropshipping isn’t as easy as it seems. Before going all out with this adventure, it’s essential that you understand the ins and outs and outcomes of the method. If selling is your speciality and you have a clear strategy, dropshipping can be a good lever to get started in e-commerce, grow your business or test a new market.