Dropshipping Online Business – The Pros and Cons

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dropshipping

Dropshipping is a relatively new type of online business, but one with a rapidly increasing popularity. Dropshipping allows you to get involved in the e-commerce industry with a relatively small entry investment. In fact, you can start your dropshipping online business almost entirely for free.

In traditional e-commerce, you will own an online shop where you offer your customers certain products that you own. Which means you first will have to purchase (or manufacture) the products yourself before selling them with a profit. Your business then also involves a lot of operational costs such as warehousing, delivery and general infrastructural costs. Not to mention the legal and insurance costs that you will likely not be able to avoid as a normal online shop.

Dropshipping makes all of that much easier. Why? Because in the Dropshipping business model you don’t actually stock the items you are offering to your customers. Instead, you only buy the items in question from a 3rd party AFTER your customer has placed the order.

So instead of buying tons of items beforehand, which you then pretty much have to sell with a profit, you only spend money IF and AFTER a user of your shop was willing to buy from you. Aside from that, your online shop works just as a “normal” one, only with the lower risk of not having to make these initial investments into your product inventory.

So, to summarize, Dropshipping gives entrepreneurs the opportunity to get involved into the e-commerce business and open up an own online shop, but without the ugly and risky stockpiling side of it. Interested? You should be, because there’s a lot of money to be made through Dropshipping. And because you don’t have to invest and build into your infrastructure as much, you can start right away and make profits off Dropshipping pretty fast.

dropshipping business model

The Pros of Dropshipping

Here’s a more extensive list of the pros that a dropshipping online business brings with it:

1. MUCH less initial investments needed

This was already mentioned, but it is worth repeating: As a Dropshipper, you will need MUCH MUCH less initial capital to get your business started.

Opening up a traditional online shop comes with a lot of initial investments one has to make. You don’t have to make any risky investments into inventory nor into warehousing costs. And by that, you also don’t risk losing that investment should your business fail.

As a Dropshipper, you can start your business for less than $100 and rarely will you have to spend more than $1,000. This is pretty much unthinkable for any other kind of e-commerce business.

2. Fast Set-up

This advantage is connected with the previous one. For the same reasons you won’t have to spend as much money from the get-go to open up your dropshipping business, you will also be able to start it considerably faster.

All you pretty much need is a website / online shop in which you can offer your visitors the products owned by the respective third party seller. That’s it. You have that, your business is ready to go. This entire set-up can literally be done within one single day. A few hours actually.

Compare that with a traditional retail shop where you first will have to search and pay for a warehouse, buy or manufacture your products and set up your packaging and shipping infrastructure. This usually takes months to organize. By that time, your dropshipping business may already be an established profit maker.

3. Less hassle with accounting and legal aspects

Owning a business always comes with a certain amount of legal responsibilities. You have to always make sure that your online business complies with all the laws in your country (and/or your clients’ countries) and of course also pay taxes which requires you to keep a functioning accounting of your revenues and profits. This is generally true for all kinds of business or e-commerce businesses, regardless if dropshipping or not.

However, a dropshipping business will demand A LOT less from you when it comes to these unpleasant parts of doing business. There’s a reason most traditional online shops hire separate legal and accounting departments, while dropshippers can usually easily do without such. It’s just a lot less to keep track of, which allows you to concentrate more on the pure business and marketing aspects your dropshipping shop.

4. Easier to grow and scale

As business grow, so does usually also the workload the owners / CEOs will have to put in it. This is because a bigger business usually means more customers which in turn means more business transactions which ultimately results in more work that needs to be done to satisfy the growing demand for whatever your business offers.

This is generally als true for dropshipping shops, but far less so compared to retail shops. This is due to the fact that the nature of the dropshipping concept doesn’t really change no matter how big your show may grow. The shipping is still managed by a third party regardless of how many orders are being processed due to the growing demand of your customers.

You will likely have to expand certain business fields such as your customer service or accounting (e.g. by hiring qualified employees), but your growth will still be much more easy to scale compared to a traditional business.

5. Wider product choice

Since you don’t have to pre-purchase anything you offer your shop visitors, you are pretty much free to offer them whatever you want without much risk. Of course, for targeting purposes it is still advisable to offer products of the niche your business operates in, but within that general field of interest, you are at liberty to offer a wide, almost unlimited variety of products.

As long as you find a third party seller that can sell you the item, you can offer it to your clients with a profit.

6. Better testing ability

For the same reason you can offer your clients a wider variety of products, you can also test their selling success better. Just offer a certain item in your shop and see how it goes. Your visitors are loving and are buying en masse? Great! Or are they ignoring the product and not buying at all. Oh well, who cares! At least you didn’t lose any money on purchasing the item yourself.

Since you don’t assume any financial risk for the items offered in your shop, you are at liberty to test as many products and sale strategies as you wish. You can for example try selling a product for a particular high price. If it proves to be too expensive, lower it and test how your customers will react until you find the perfect price between high profit margin and high buying rate.

This risk-free testing ability is a luxury traditional retail shops do not enjoy. Another point for Dropshipping.

7. Work from wherever you want

The last but certainly not least reason that speaks for Dropshipping is the geographic freedom this kind of business offers you. While even an online retail shop will always bind you to a certain location (where your warehouse / shipping infrastructure is located in), as a Dropshipper, you can pretty much operate your business from almost every corner of our planet. This is possible, because you will just tell the third party shop you’re buying from to ship the item directly to your customer anyway. Meaning you, if everything goes right, will not ever have to hold the product in your hands yourself. It is therefore completely irrelevant where in the world you are at the time of the transaction.

The only condition for your dropshipping business is a stable and 24/7 available internet connection.

The Cons of Dropshipping

As most things in life, dropshipping does also come with a few disadvantages that you should definitely consider before starting your business:

1. Lower Profit Margins

Compared to a traditional retail business, dropshippers will have to expect lower profit margins when selling their products. This is due to the fact that your profit will always just be the difference between the sales price paid to you by your customers and the buying price you will have to pay to acquire the item in question.

Your profit margins thus will always depend on the price your customers are ready to pay for a product compared to the price you will have to pay for it. Obviously in order for your business to make sense, you will always have to put the price in your shop higher than the price is in the third party shop you’re buying from. In practice you will usually not be able to sell a product for considerably higher than the normal market price. Hence, your profit margin will always be somewhat limited.

How limited the margin is depends on you and your sales strategies. But compared to a traditional retail shop, which usually buys (or manufactures) products in high quantities and by that, usually gets to take advantage of bulk discounts, you will usually have to expect to make less profits per sold item.

To address this problem, many Dropshippers therefore prefer to work with third party sellers from countries where products are generally cheaper, e.g. in various Asian countries.

2. Shipping complications

As mentioned above, one of the big pros of the dropshipping business concept is that you won’t have to deal with the shipping yourself. It is done by your dropshipping partner shop. However, if you choose to work with several dropshippers for different kinds of products, it may complicate things somewhat.

If one of your customers orders, say, 4 different products from your shop which are offered by 3 different suppliers, then you may end up having to deal with 3 different shipping policies and prices. In the worst case scenario, 3 different shipping bills will have to be paid. You can pass those costs along to your customer, but that may turn him/her off from the order since it is a highly unusual procedure and will make many question the professionalism of your online shop. So you may not have a choice and will have to settle at least part of the shipping costs yourself, which will eat away your profit margin.

A solution to this problem may be to just concentrate on working with one single seller who offers every item you plan to sell in your online shop.

3. Dependence on your supplier

In order for your shop to flourish, you need to satisfy your customers and offer them the best possible shopping experience. That way you make sure they will come back as well as recommend your shop online and in real life to their family and friends.

Problem is, in the dropshipping business, it is not you who is responsible for best possible customer experience. Aside from the design and ordering process on your website, every other aspect of the shopping experience depends entirely on the third party supplier who will package and ship the ordered items to your customer. If that supplier makes a mistake or disappoints your customer, that will fall back on you and your shop’s reputation in the end.

So always make sure to only work with third party suppliers that are reliable and trustworthy.

4. Limited inventory control

Dropshipping means you won’t have to stock up your own inventory, which is generally a good thing. But it will also mean that you won’t have as much control over it. It will be a bit harder to track it and know exactly which items are out of stock or are running out of stock and when the items will be restocked.

This is somewhat problematic since you may end up offering your customers products that are actually out of stock occasionally which could prolong the delivery time. Even worse, your supplier may not restock the item in question at all which would force you to cancel your customer’s entire order.

While this is certainly a problem, it can thankfully be solved by special apps which connect you to your supplier’s inventory and shows you the available quantities of a product. You will definitely want to use such apps as a responsible Dropshipper.

Bottom Line: Is Dropshipping worth it?

Short answer: Yes, Dropshipping can be a highly profitable business for you. Despite the lower profit margins, dropshippers can make a limitless amount of money if their online shops are well visited and convert well.

But the absolute best thing about Dropshipping is the low risk you assume as an entrepreneur. So even if your business fails, your financial loss will unlikely be bankrupting. All you will have done is waste a bit of your time. If you’re successful, on the other hand, you can make it your full-time job. That’s a dreamy risk-reward model.

All you risk is your initial investment into your Dropshipping business which, as mentioned, can oftentimes be as low as $100. If you can afford to lose these give or take 100 bucks, Dropshipping can ABSOLUTELY be worth it.

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