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What Is Dropshipping – Types, Pros & Cons of This Business Model


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If you want to start an online business, there might be several ideas that stand out. For example, becoming a blogger has been a popular choice for avid writers for more than a decade. Similarly, starting a freelance business is another common way to make a living online.

The growth of e-commerce has also opened more opportunities for making money online. From starting your own Etsy store to subscription box services, there’s an incredible amount of opportunity if you know where to look.

However, two of the most daunting aspects of starting your own e-commerce business are upfront cost and logistics. Inventory is expensive and complicated. If you’re starting a business on a tight budget, it might be difficult to secure competitive prices on a small amount of inventory and to deliver flawless customer service simultaneously.

Considering these challenges, it’s no surprise that dropshipping businesses have grown in popularity. If you want to start an online business without the financial and logistical challenges of traditional e-commerce, this business model is one of the best options.

What Is Dropshipping?

Although you might not realize it, you’ve probably bought something from a store that uses dropshipping. In fact, dropshipping is the business model of more than 30% of online stores.

Dropshipping is a type of fulfillment process where the seller never handles physical inventory or shipping responsibilities. Instead, a dropshipping business purchases inventory from a supplier who then ships products directly to consumers following an order.

As an example, if you purchase a T-shirt from a store that relies on dropshipping, that store would accept payment for your order and then purchase inventory from a shirt supplier. That supplier then receives your shipping details and sends you your T-shirt as part of the agreement. You, the consumer, receive that shirt like any normal online delivery. The online store processes the order without ever touching a T-shirt.


Pros and Cons of Dropshipping

Dropshipping is a unique business model that powers a significant portion of e-commerce. However, there are several pros and cons worth considering before you launch your own business.

Pros

Dropshipping’s popularity stems from its simplicity. This fulfillment method removes several links in the supply chain, and there are numerous benefits of dropshipping worth noting:

  1. Low Upfront Capital. Traditional e-commerce might require large purchase orders to secure lower prices on your inventory. Additionally, you have to pay for warehouse space, fulfilment costs, and potentially employees to help manage logistics. In contrast, you don’t need to purchase upfront inventory for a dropshipping business because orders fulfill upon purchase. Warehouse space isn’t a concern either. Dropshipping expenses are more related to marketing costs and running your website, not employees and logistical headaches.
  2. Scalability. Because dropshipping stores pay for inventory as customers place orders, your margins are clearly defined. You have to pay for marketing, and you have to pay the dropship supplier to make and ship your products. Everything else is your profit margin, so it’s easier to adjust product pricing and marketing strategies to scale growth compared to traditional businesses with more complicated expense sheets.
  3. Return on Investment Potential. It’s possible to start a dropshipping business for under $100 because your only necessary upfront expense is creating your website. However, if you find a popular product that sells well online, you can easily recoup that upfront expense and begin generating profit.

Cons

Despite dropshipping’s popularity, there are several disadvantages to consider that relate to competition and finding the right products:

  1. Product Competition. In the earlier days of e-commerce, it was easier to pick a flashy consumer-facing product, find a supplier who could manufacture it cheaply, and drive online sales by promoting your store on social media. These days competition is fiercer, and dropshipping business owners are quick to move on trending products.
  2. Product Lifespan. Another con of dropshipping is that profits often involve chasing trends. For example, when fidget spinners were all the rage, a plethora of dropshipping stores launched. When the hype surrounding spinners fell off, so did the stores.
  3. Supplier Difficulties. To keep prices down, dropshipping businesses usually source products from overseas suppliers. In particular, Chinese wholesale websites Alibaba and AliExpress are two popular options. If you sell multiple products, it probably means you’re working with several Chinese suppliers unless you find a single supplier that manufacturers everything you want to sell. Different sellers have variable shipping rates, fulfillment speeds, and return policies. Ultimately, the more you have to negotiate with your suppliers, the more complex your store becomes.
  4. Customer Service Difficulties. As a dropshipping store owner, you have little control over quality assurance and shipping procedures. Additionally, many dropship businesses sell cheaply-made goods from overseas which may be lower in quality. This results in dropshipping stores generally having higher return rates and customer complaints than more established online brands. As you scale, customer service becomes more challenging, and you might have to outsource your customer service work or hire an employee.
  5. Easier Said Than Done. Dropshipping gets a bit of a negative reputation because it’s often marketed as an easy way to make money online because of the business model’s simplicity. However, it’s important to note that turning a profit with dropshipping is difficult. Realistically, it’s not uncommon to have several unsuccessful attempts before finding a winning product. If you’re serious about dropshipping, you should be willing to invest capital to test several products and stores until you find one with potential.

Types of Dropshipping

Dropshipping is a business model, not a specific type of store. However, there are several types of businesses that commonly rely on dropshipping for fulfillment.

1. Shopify Dropshipping

Starting a dropshipping store with Shopify is one of the most popular options for beginners and experienced e-commerce veterans alike. While there are numerous Shopify alternatives, Shopify has several features that compliment dropshipping, such as:

  • Affordable Hosting. You can start a Shopify dropshipping business for just $29 per month.
  • Built for E-Commerce. Shopify supports a large volume of online transactions, processes payments securely, and tracks shipping and customer details.
  • Theme Flexibility. Shopify has dozens of free themes that are customizable, making it easy to design a storefront to fit your vision. You can also create custom Shopify themes or hire someone to design a storefront if you want specific features.
  • Useful Plugins. Like WordPress, Shopify has a host of free plugins that can improve your storefront and marketing efforts. With just a few plugins, you can set up email marketing, coupon codes for customers, and a loyalty program to award repeat buyers. Ultimately, these additions help store owners provide a better customer experience and optimize their conversion rate, which boosts revenue.

Shopify also has plugins that help simplify dropshipping. For example, once you create your store, you can use plugins like Oberlo to import products from AliExpress to your store. Oberlo imports product images and descriptions, and gives you full control over pricing when adding products to your store.

If you have zero e-commerce experience, Shopify is the most beginner-friendly option. Between affordable monthly pricing, comprehensive free themes, and plugins that help drive sales, it’s not surprising Shopify is such a popular e-commerce solution.

2. Print On Demand

Print on demand, known as POD, is another dropshipping model that’s ideal if you prefer designing your own products rather than depending on overseas suppliers.

POD suppliers let you upload your own designs to existing product templates to sell on your store. Like dropshipping other merchandise, when you generate a sale, your POD supplier manufactures and ships the merchandise to your customer. This provides greater creative control, although you’re confined to selling products that the POD manufacturer supports.

Thankfully, popular POD suppliers like Printify and Printful have a diverse product line, with popular products including:

  • Coffee mugs and tumblers
  • T-shirts and hoodies
  • Canvas prints
  • Stickers
  • Hats
  • Keychains
  • Backpacks

You also have options for where you sell your POD merchandise. Shopify is still a viable platform for sellers. Etsy is also a common choice because of how popular POD products like prints and shirts are on their marketplace.

Additionally, you can simplify the process further by selling on a POD marketplace. Websites like Redbubble and Society6 are popular marketplaces where artists upload their designs to various products and earn a commission for every sale.

Selling on a POD marketplace means you don’t have to deal with website hosting, customer service, and monthly fees. However, you likely earn less per sale than setting up your own POD website on a third-party platform like Etsy or Shopify.

3. Business Extension

Another type of dropshipping is business extension. Although this form of dropshipping is less popular than sourcing your own products, it’s a potentially lucrative arrangement if you find the right businesses to partner with.

Business extension dropshipping involves working with brick-and-mortar retailers to sell products online on their behalf. You share a percentage of online sales as compensation, and it’s ultimately a win-win scenario for both parties.

Typically, this type of dropshipping is more complicated than Shopify dropshipping or POD because you need to build relationships with business owners. Additionally, if the business you partner with has never sold online, you probably need to create a website, take product photos, and do the heavy lifting to start building an online presence. You also need to understand their production and logistics capabilities to ensure your online sales don’t exceed their fulfilment capabilities.

However, if you partner with a business that has high-quality products and is open to sharing revenue in exchange for driving online sales, business extension has more long-term potential than selling a handful of cheap overseas products. In reality, business extension dropshipping is an effort in business development. If you can transform a successful retail presence into a business that also sells online, there’s no reason why this type of dropshipping can’t be successful.


Amazon FBA vs. Dropshipping

Many online sellers are increasingly using Amazon to drive sales. In fact, more than 50% of goods sold on Amazon come from third-party sellers. Plus, many of these businesses rely on Fulfillment by Amazon, or Amazon FBA, to operate.

Amazon FBA businesses are similar to dropshipping because you aren’t responsible for fulfilling orders to your Amazon customers. With Amazon FBA, you package and ship your inventory to Amazon warehouses. Amazon then ships orders to customers on your behalf. In exchange, Amazon charges several fees, including an inventory storage fee and a fulfillment fee.

Like dropshipping, FBA’s advantage is that you don’t have to worry as much about logistics. Instead of constantly dealing with shipping, you can focus on sourcing products and scaling sales. Plus, Amazon has a higher level of recognition and trust than any Shopify dropshipping store you make. When you factor in incentives for shopping like Amazon Prime and the sheer size of the marketplace, it makes sense why many sellers rely on this e-commerce giant instead of their own dropshipping stores.

However, a drawback of Amazon FBA is upfront cost. You have to buy inventory you want to sell on Amazon, making it more expensive than only paying for products you sell through a dropshipping arrangement. Furthermore, if your inventory sells slowly, you pay long-term storage fees or product removal fees to Amazon to clear their warehouses.

Ultimately, this makes Amazon FBA ideal for side hustles like retail arbitrage where you buy inventory for reselling. In contrast, if you have a small budget, dropshipping is a safer option.


Considerations

If you’re on the fence about starting a dropshipping business, there are several other considerations to keep in mind before investing in your store.

1. Earning Guarantees

Most side gigs have a stable relationship between the time you work and how much you earn. For example, gigs like delivering groceries for Shipt and driving for ridesharing apps pay an hourly amount for your efforts. In other words, you can start one of these side hustles and be confident that you’ll make money.

In contrast, starting a dropshipping business has no guarantees. You don’t generate revenue unless you sell products, meaning dozens or hundreds of hours can go unpaid if your products don’t sell well.

2. High Failure Rate

Dropshipping is mistakenly thought of as a fast way to make money online. The reality is, approximately 90% of dropshipping businesses fail.

There’s no single reason for store failure. In fact, a lack of sales could indicate multiple problems, including:

  • Setting prices too high
  • Selecting products that are behind current trends or products that simply don’t sell well online
  • Clunky website design that scares away customers
  • Unclear shipping policies or long shipping times that discourage customers from ordering
  • Poor customer support
  • Refusing to spend money on marketing

Additionally, many dropshipping owners lack the patience to grow their store. Creating a robust dropshipping business takes time, and failure is part of the process. If you need money quickly, this isn’t the right side hustle.

3. Lack of Brand Building

Most dropshipping businesses sell cheap goods from overseas. If you use POD, your designs are the only differentiating factor between your store and anyone using that same manufacturer. Similarly, while the business extension model helps grow a business, that business isn’t yours.

If you want to be a successful entrepreneur or build your own personal brand, the entire dropshipping model might be a poor fit. For many, dropshipping focuses on finding trending products and just turning a profit. The goal isn’t to develop a long-term business or your own brand of products because the products you sell are generally lower-quality goods from overseas.

If your goal is to grow a business you’re passionate about, turning a hobby into a business is a better approach. If you only care about generating revenue and don’t care about the products you sell, dropshipping is worth trying.

4. You Need to Advertise

When dropshipping wasn’t so competitive, paying for advertising wasn’t a requirement. In fact, you could grow an Instagram account to promote your store just by posting content or use other social media platforms like Pinterest to attract customers.

Social media still works. Creating an Instagram and Facebook page is, at the very least, a free way to promote your store and to potentially generate sales. However, organic social media reach is in decline because of how crowded platforms like Facebook and Instagram are.

For dropshippers, this means paid advertising has become the lifeblood of a successful store. In order to test products and drive visitors to your store, you have to invest in paid advertising. Most dropshipping stores rely on Facebook to advertise their products, and it’s a good idea to stick with a single platform while you’re in the testing phase to avoid overwhelming yourself.

Typically, an advertising campaign for a dropshipping store involves:

  • Adding a product to your store that you believe will sell well.
  • Creating a Facebook ad for that product. Many stores use photographs from the supplier to create their ads, although you can also buy the product you’re selling and take your own product photos.
  • Targeting a Facebook audience that enjoys your product. For example, if you sell coffee mugs, you can target a Facebook audience of people that like coffee pages.
  • Setting a budget for your ad campaign. Facebook has low minimum spending requirements that range between $1 to $5 per audience you target depending on the type of campaign you run. However, you need to reach enough people to decide if your product sells well or not. How much data you need to make this decision is up to you, but expect to spend at least $20 per product you test or even $75 or more per test.

Dropshippers can go through the testing process dozens of times before a product turns a profit and is able to scale by funneling money back into advertising. This means you should be willing to spend a few hundred dollars in test ads and accept that many products fail.

Advertising is often when dropshipping stores fail or give up because of a lack of knowledge. Thankfully, you can learn how to advertise on Facebook for free by completing the Facebook for Business courses. The Essential Guide to Advertising with Facebook Ads Manager course is particularly useful for anyone getting into dropshipping.


Final Word

There are many misconceptions about dropshipping that might make it a daunting side hustle to take on. Additionally, many dropshipping courses market the model as being a way to get rich quickly and are basically work-from-home scams that promise unrealistic results.

The reality is that dropshipping is a powerful business model. It removes the need for upfront inventory expenses, simplifies logistics, and lets complete beginners dabble in e-commerce without much risk.

However, a strong business model doesn’t mean dropshipping is easy. In fact, most stores fail. If you start your own store, you need to commit to investing in paid advertising for product testing and accept that profitability might take an investment of hundreds or thousands of dollars to reach.

Considering this difficulty, if you need money quickly, making money in the gig economy is a better option. If you want to learn e-commerce skills and are willing to invest time and resources into growing an online store, give dropshipping a try. This side hustle isn’t for the faint of heart, but that doesn’t mean it’s impossible to make money with dropshipping.

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