What is dropshipping? What you need to know

Some online store owners prefer to create, store, and ship their products themselves. However, for others, that process just isn’t viable or realistic.

That’s where dropshipping comes in. This order fulfillment method can alleviate logistical issues, minimize overhead expenses, and streamline the shipping process, in addition to providing many other benefits.

So what is dropshipping, exactly? Read on to learn how dropshipping works, what the benefits and drawbacks are, and which best practices can help your business succeed.

What is dropshipping?

Dropshipping is an order-fulfillment method used in e-commerce. Using this approach, an online store owner doesn’t need to create, store, or ship any of the products they sell through their e-commerce business.

Instead, the store owner works with a third party — who may be a wholesaler, manufacturer, or other type of supplier — to purchase inventory as needed to fulfill orders. That third party also takes care of shipping the product directly to the customer.

“Dropshipping is a great option for businesses that want to get started with e-commerce quickly and with minimal investment,” says Anand K.C., head of marketing for Cloom Tech, a wire harness and cable assemblies manufacturer.

From a customer perspective, there’s no way to readily identify whether a store ships products themselves or dropships through a third party. Often, customers are unaware of which fulfillment method a store uses. As long as they receive their products in a timely way, the distinction is irrelevant.

What are the pros and cons of dropshipping?

There are many reasons to choose dropshipping as your order fulfillment method. The biggest advantage is that it requires less upfront capital, as the online store owner doesn’t need to purchase any products from the supplier until a customer makes a purchase. These types of businesses also tend to have low overhead because there are no costs for warehousing or shipping and handling.

As a result, businesses that use the dropshipping model tend to be easier to start. Many people run them from a home office, and they can easily scale the business by introducing additional products. Similarly, it’s easier to test certain products in the market through the dropshipping method.

However, dropshipping isn’t without its faults. Often, third-party suppliers sell the same products to multiple stores, so it can be hard for your business to differentiate itself from competitors. If there are supplier issues — such as running out of a product or faulty manufacturing — this can also be detrimental to your online store. In addition, margins can be low in the dropshipping model, which could make it more challenging to reach your profit goals.

“Because dropshipped products are often shipped directly from the manufacturer or supplier, it can sometimes take longer for the customer to receive their order,” says K.C. “This can be frustrating for customers who are used to receiving their orders quickly and may result in them taking their business elsewhere. And because dropshippers typically don’t carry inventory themselves, they may not always be able to offer the same level of customer service that a traditional retailer would be able to provide.”

K.C. adds another thing to keep in mind: “Also be aware that dropshipping can be a bit risky — there is always the potential that your supplier could go out of business or stop carrying the products you sell, which would leave you without any inventory.”

What are some best practices to follow for dropshipping?

  • Do your research. Always work with a trusted supplier you’ve vetted carefully. They’re your partner in business, so it’s important to be sure they share your values when it comes to customer service and quality. “Not all suppliers are created equal,” says K.C.
  • Keep a close eye on inventory levels. While you don’t have to store the products, it’s important to check on inventory levels for the products you’re selling through your store so you’re always prepared. Some online stores work with multiple suppliers for the same products so they always have backup.

If a product does go out of stock, upgrade your customers to a better product at no cost to them.

  • Understand that mistakes happen. With the dropshipping model, things are going to get messy. Suppliers may mix up orders, shipping may be delayed, and items may be out of stock. It happens, and you have very little control over those aspects.

However, what you do have control over is how you handle it. Be sure to make it up to customers by apologizing, offering a discount, and sending them a gift. Work with the supplier to tighten up processes to minimize these issues.

  • Keep an eye on the competition. “Know what they’re selling, what their prices are, and how they’re marketing their products,” says K.C. “This will give you a good idea of what’s working in the market and where there may be opportunities for you to differentiate your business.”
  • Figure out your return policy. Returns with dropshipping aren’t always straightforward because there’s a third party involved. Make sure you understand the supplier’s return processes and communicate effectively with your customers so they know how they can process the return on their end. Be clear on who fronts the cost for return shipping.
  • Excel at customer support. Your customers may not know you’re dropshipping (or even what dropshipping is). If they have any issues, don’t direct them to the third party. Handle their queries yourself via phone, email, or chat so they can associate your online store with excellent customer service.

A final word of advice from K.C.: “Don’t skimp on quality. Even though you don’t have to carry inventory, it’s important to source good quality products from reliable suppliers. This will help ensure customer satisfaction and reduce returns.”

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