DropShipping is known for its significant advantages in direct comparison with classic online trading. Here, the low start-up costs and the low current expenditure are the main factors. With all the positive effects, however, it should not be overlooked that this trading model is also associated with one or the other disadvantage and risk. However, these do not have a problematic effect if you take care of them in time and with the right strategy. We will introduce you to DropShipping and familiarize you with its advantages and disadvantages. We present you with strategic solutions to the existing risks and thus support you in getting the best out of the trading model.
DropShipping is simple and contemporary
DropShipping is very popular with founders and Internet entrepreneurs. The trading model is based on a very similar business approach to online trading, but makes a decisive difference. The trader does not purchase his goods in advance from his suppliers. Instead, they remain in the latter’s warehouse and are shipped directly from the manufacturer or wholesaler to the final customer as soon as the latter’s order has been received.
In principle, this difference is not discernible to the customer. He receives his delivery just as quickly as directly. His only contact is and remains the online retailer from whom he has purchased. Interesting in this context: There are definitely traditional models for drop shipping or, as it was often called in the past, drop shipments.
Just think of the classic furniture store. Furniture from many different manufacturers is exhibited here. If you want to buy one of the pieces, it will be made for you by the respective manufacturer. After a few weeks you will receive the delivery. It is delivered directly to your house or apartment and is usually delivered by the respective manufacturer or wholesaler and not by the furniture store.
DropShipping is therefore possible in any situation in which you make a purchase without taking the goods with you immediately. While this used to be common in the furniture trade, we now find ourselves in the same situation in e-commerce. No customer can receive his order directly when shopping in an online shop. It has to be shipped first. And whether this shipment is ultimately carried out via the dealer or his supplier is no different for the consumer.
These advantages make DropShipping so successful
The structure and fundamentals of the DropShipping business model are associated with a number of advantages for shop operators, which we will take a closer look at below. The most important advantages are:
– Hardly any start-up costs
– Low running costs
– Less effort for the dealer
– Sufficient time for support and marketing
– Special advantages for certain products
The low start-up costs are mainly due to the fact that as a DropShipping dealer you do not have to build up your own inventory. Classically working online traders usually spend a lot of money on this in the start-up phase. After all, all products offered in the range must be purchased at least in small quantities, which is associated with high expenditure.
This advantage also continues in terms of running costs. Since no stock is purchased, it does not have to be stored or shipped. As a result, this saves warehousing, personnel and material costs, among other things.
In addition, the DropShipping dealer does not have to deal with small-step order processing. This saves a lot of time and ensures that he can focus more on customer care and the marketing of his shop and offers.
Last but not least, there are special advantages for products that are associated with particularly high transport costs due to their size. Since the supplier ships directly to the end customer, the shipping costs are only incurred once here, while the classic online retailer has to pay for the costs of two routes.
These are the risks for DropShipper and this is how you meet them
Now it would be a completely abridged description if one were to conceal the fact that trade via drop shipping would not also have disadvantages and critical potentials. It is very important that you as a founder and entrepreneur are aware of these limitations. If this is the case, then you can develop solutions in good time. If this is done, the disadvantages and risks of DropShipping can be almost completely eliminated.
In the following we present the most important and most serious risks of DropShipping in detail. We have developed an effective and easy to implement solution strategy for each of the five disadvantages. If you consistently consider these strategies, you can minimize or even eliminate all drop shipping risks.
Delivery programs too large
It’s tempting: As a DropShipping retailer, adding products to your shop doesn’t cost you a cent. In contrast to the classic shop owner, you do not have to finance a corresponding inventory, so the size of the assortment has no financial impact on you. As a result, many drop shipping delivery programs of considerable size can be observed on the market.
At first glance, it is of course advantageous if you offer your visitors and customers many different products. On the other hand, this can also lead to negative effects. If you offer many different types of goods, then your customers quickly lose track of what your shop actually stands for. But this is very important if you want buyers to remember you and return later. Moreover, too large a product range makes it difficult for many consumers to make a decision. Since they suspect that there are still many other offers in the shop, they hesitate the purchase decision always further out and lose sometime the desire at your shop.
Our solution approach:
With all the advantages of large assortments, it is very important that you give your shop an independent profile through its product range. Select your products in such a way that every visitor is immediately able to define what you stand for as a retailer. You would rather decide against certain product categories than deliver your customers to too large a selection of goods. In case of doubt, it is better to work with several shops in order not to overwhelm your visitors. In addition, the larger the range, the more important it is that you offer flawless navigation and usability. Otherwise the customers do not find their way around the shop well and migrate to the competition.
Restricted assortment width
As a DropShipping retailer, you are naturally dependent on purchasing your products from manufacturers and wholesalers who supply you on a DropShipping basis. It should not be overlooked that these suppliers are still rather rare. Many vendors, on the other hand, have never heard of DropShipping and are not prepared to deliver products directly to the end customer and thus only sell them individually.
The consequence for you: Sometimes it can happen that your assortment is not wide enough. You may discover a supplier on a certain topic who can offer you a distinct depth of assortment. However, it is all the more difficult to expand the product range with completely different product categories because you may lack suitable suppliers. This has an annoying consequence for your visitors and customers: they will find one or the other interesting article in your assortment. However, their product range is not broad enough to satisfy all customer requirements. The user may therefore switch to a competitor’s shop and get lost to you as a customer.
Our solution approach:
In order not to let it get that far in the first place, you should make sure from the very beginning that you offer your visitors and customers a wide range of products. To do this, you need different suppliers who each cover different product areas. However, the search for drop shipping suppliers is sometimes very difficult. They either have to search for a very long time or first convince manufacturers and wholesalers. Identifying suitable suppliers is much easier if you work with a platform like DropShipping.com. Here you have direct access to hundreds of DropShipping providers with millions of products.
Poor purchasing conditions
We’ve already figured it out: As an online merchant, you do not spend money on your own inventory. Since you only order products individually after an order has been received and you have already received payment from your customers at this point, you do not even go into the pre-financing of goods. This is the main reason for the distinct advantages of DropShipping.
In return, however, this also means that you sometimes receive worse purchasing conditions from your suppliers. Of course, if you purchase many products at the same time, prices will fall. Conversely, you pay a little more per product if the purchase quantity is always only one piece. Problematic in this context: You cannot simply pass on the price disadvantage to your customers. If you simply increase your prices in the shop significantly, then you will have difficulty finding buyers at all. After all, prices on the Internet today are more transparent for consumers than ever before and a price comparison costs even inexperienced users only a few seconds.
Our solution approach:
In principle, there are two different solutions available to you in this context. On the one hand, you can accept the disadvantages in terms of conditions and use a price calculation that takes into account the higher purchase prices. Since you have less work compared to the classic shop operator, you can consider it quite ok if you earn a little less per order. On the other hand, you can also negotiate harder with your suppliers in order to obtain comparable conditions. After all, you will buy as many products as a classic shop of a similar size on a temporary basis.
Underestimated start-up costs
One of the main advantages of DropShipping is that the start-up costs are so low. We are dealing with a kind of democratisation of the founding scene, because everyone is able to start such a company, even if they do not have any special capital. The entrepreneurial risks are also significantly lower and additionally protect you. Access to a drop-shipping company of one’s own is generally much more barrier-free than access to almost any other form of self-employment.
However, it happens again and again that DropShipping founders assume that they would not incur any costs at all when starting their company. This is not the case. Expenditure is significantly lower than in traditional online retailing. But here, too, it is not possible to do entirely without expenses. Finally, certain administrative fees, at least a small workplace, a little technical equipment and office supplies, as well as one or the other purchase or rental fee for software have to be paid. Last but not least, you should also take into account that your own livelihood must be guaranteed in the start-up and start-up phase.
Our solution approach:
It is important that you know your costs exactly and that you take them into account from the very beginning. If you are aware that you need a certain amount to cover the essential expenses and your livelihood, you can adjust to this need early and save or borrow the required sum. In order to be absolutely sure of the costs involved, you should draw up a detailed business plan. This contains all the expenses and income of your company and provides you with a clear picture of the concrete financial requirements.
Problems with returns
Returns in online trading are a double-edged sword. On the one hand, e-commerce in its current form would not exist if purchasers did not have the right to return goods to the trader. After all, you usually buy a product that you have never personally held in your hand or had a closer look at. Who would be willing to buy a pig in a poke. On the other hand, returns cause problems for any online retailer because they are associated with high costs and considerable effort.
Another problem occurs during drop shipping. While the customer of the classic shop simply returns every product to the retailer, the returns in your case would actually have to be returned to the respective supplier. In the case of a return, however, you would first have to disclose this to the customer. It also raises the question of what happens when a purchase order consists of several products from different suppliers. Should the customer then actually send different parcels to different suppliers? Here it is not easy to develop a suitable solution.
Our solution approach:
In this context, we propose the following procedure. On the one hand, you should always accept all returns yourself. So you don’t have to disclose your suppliers to the individual customer and there are no complications when it comes to several products in only one order. On the other hand, you should use all possibilities to keep the return rate as low as possible. Describe products in detail and precisely, mentioning limitations and disadvantages. Avoid long delivery times and ensure that the outer packaging of all deliveries is professional, clean and undamaged. In this way, the return rate will be kept within limits and you will not be overwhelmed to receive and process the few returned orders yourself.
Conclusion: A good pension plan protects against losses
No question: DropShipping is a modern trading model in which the advantages clearly outweigh the disadvantages. As you have noticed, however, there are also some risks and problematic potentials. These can result in your business model being less positive than it could be.
For this reason, it is essential that you deal with these risks in good time and counter them strategically. Follow our descriptions and instructions and consistently implement the various solution approaches. In this way you get the most out of DropShipping and profit permanently from good sales and profits.
Besides the risks of DropShipping, which can be a burden for every DropShipper, there are also special errors which could be avoided without problems. Nevertheless, there are always some DropShipping dealers who commit these mistakes again and again and thus suffer shipwreck in the long run. We explain in which fat cups are most frequently kicked and how you can easily avoid them.
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