It’s no surprise that dropshipping has become a $15 billion industry. Why should merchants go through all the trouble of sourcing and stocking their own inventory when they can simply connect with a third party and let them handle order fulfillment and shipping on their behalf?
Of course, the reality of dropshipping for e-commerce is much more nuanced. Running a successful dropshipping business involves much more than simply sitting back and watching payments flow into your bank account as orders go out.
If you’re considering dropshipping as an e-commerce merchant, you’ll want to take a closer look at how dropshipping works, as well as the pros and cons of this business model.
How Does Dropshipping Work?
In a traditional e-commerce model, merchants buy and store their own inventory. Then, when purchases are made, the retailer removes the items from their inventory and ships them to the customer.
How dropshipping works is that retailers don’t stock their own inventory. Instead, merchants partner with dropshipping sites like AliExpress or Shopify apps, which provide all of the information retailers need to list dropshipped products for sale on their website. Then, when orders for these products are placed, the retailers’ dropshipping partners — not the retailers themselves — are responsible for delivering orders directly to customers.
There are some obvious benefits to this model, but there are cons to consider as well. Let’s take a closer look:
Pros of E-commerce Dropshipping
Low Barrier to Entry
One of the undeniable benefits of using a dropshipping model is the low barrier to entry when starting a new e-commerce business. Traditional retailers that hold their own inventory need to invest upfront to stock their shelves — even though there’s no guarantee when they’ll be able to sell it or how much they’ll be able to sell it for.
Alternatively, with a dropshipping model, e-commerce sellers can fill their websites with available products without incurring the costs associated with buying, storing, and shipping inventory. Not only does this lower the barrier to entry for would-be retailers, but it also frees up capital that can be used in other areas, such as marketing and advertising.
No Inventory Management Responsibilities
Making the effort to find a workable dropshipping model can be worthwhile for retailers, given the lower inventory management responsibilities.
As noted above, dropshipping for e-commerce reduces the costs associated with holding physical inventory. But the benefits are more than financial. Compared to traditional retailers, dropshippers don’t have to:
- Invest time or resources into figuring out where to best locate physical warehouses or distribution centers (DCs)
- Identify partners or hire staff to manage these physical locations
- Properly manage inventory, including providing pest control and environmental protection services
- Rotate inventory to ensure the oldest items are sold first
- Take responsibility for returned items and either restock or dispose of them
No Shipping Responsibilities
Many retailers turn to dropshipping as a way to avoid what they see as the hassle of shipping — both the costs associated with shipping fees and the time required to package and send orders.
But before you factor this advantage too heavily into your decision, it’s worth evaluating creating shipping labels with Shippo, which can drastically simplify shipping logistics. Not only can Shippo lower your shipping fees by as much as 89%, but it can also help you stay organized, schedule pickups, and even automate certain parts of the shipping process.
Cons of Dropshipping for E-commerce
High Levels of Competition
Of course, low barriers to entry mean that competition can be fierce for dropshippers. The number of partners offering dropshipping services is limited. As a result, retailers often wind up competing against each other to sell the same products. This can make it difficult for merchants to create a competitive advantage or avoid negative pricing pressure.
Smaller Degree of Control
Although the reduction in inventory management responsibilities may sound appealing, flip the popular saying “with great power comes great responsibility,” and you’ll find it’s equally true that, with great responsibility, comes great power.
When retailers stock their own physical inventory, they have a much greater degree of control over everything from the amount of stock they carry to how and when it’s shipped to customers. In a dropshipping arrangement, much of this control is shifted to third parties — and the results aren’t always in your customers’ best interests.
For example, when you rely on e-commerce dropshipping, you may not be able to control:
- How long it will take for your orders to be fulfilled
- When your packages will be delivered, especially if they’re shipping from overseas
- What type of packaging your items will be shipped in
- How well protected your items will be in transit
- How many packages your customers will receive for each order
- The quality of the packaging experience they’ll enjoy
For merchants selling to price-sensitive customers, losing control of these factors may be an acceptable trade-off. But for others, the risk of brand reputation damage due to a poor customer experience may not be worth it.
Smaller Profit Margins
Finally, even without bringing shipping costs into the equation, keep in mind that profit margins tend to be lower in an e-commerce dropshipping model than in traditional e-commerce. That’s because dropshipping partners have to cover the costs associated with their labor — and that usually comes in the form of slightly higher rates than what retailers can access buying their own inventory directly from wholesalers.
The increase in competition coming from other retailers selling the exact same products as you often means that the only way to differentiate your business is by lowering your prices. This can translate into lower margins in the hope of increasing sales.
Traditional retailers may also be able to access volume discounts by buying in bulk, rather than placing individual dropshipping orders on a piecemeal basis, as they come in.
Is Dropshipping Right for Me?
As you can see, there are no hard-and-fast rules about whether dropshipping is the right choice for any given business. Take the time to evaluate each of these pros and cons relative to your unique needs before making the decision on whether or not to pursue dropshipping.
That said, if you’re thinking of dropshipping for e-commerce specifically to reduce your shipping responsibilities, start by assessing the impact a partner like Shippo could have on your shipping processes. With rates discounted up to 89% off retail pricing, powerful automation features, and strong partnerships with leading technology providers, Shippo makes it easy to handle shipping internally so that you can avoid the high competition, low margins, and lack of control that can go along with dropshipping.
Sign up for a free Shippo account today to access deep discounted rates from the nation’s top carriers as well as compare and generate shipping labels from 85+ carriers.
Is Dropshipping Legal?
Yes, dropshipping is a legal form of order fulfillment. However, it’s always a good idea to ensure any contracts you sign with dropshipping partners represent your business’s best interests.
Can I Sell Overseas With Dropshipping?
Yes, you can sell outside of the US as a dropshipper, though the specific countries you can sell to will depend on your dropshipping partner’s delivery capabilities.
Is Dropshipping Profitable?
Dropshipping can be profitable, though some reports put the average dropshipping profit margin between 10-20%. Finding ways to differentiate your offerings, increase your sales volume, negotiate discounts, or access exclusive partnerships can help make this business model more profitable.
How Do I Choose A Dropshipper?
First, decide what customer needs your business will fulfill. Once you know what you want to sell, look for partners that are reputable, reliable, and offer pricing and terms that will allow you to operate profitably.