Dropshipping is a type of e-commerce business model where an online store sells products to consumers, but the wholesaler delivers the goods directly to the address, i.e., the end consumer.
Drop delivery is a simple business model that requires e-shop owners to work closely with their distributors, ensuring a flawless supply chain. This partnership between retailers and distributors makes dropshipping different from other business models. E-commerce does not have to buy products in advance and store them.
Is dropshipping an easy profit? #
As opposed to common belief, dropshipping is not a get-rich-quick scheme. It appears like easy money – the company markets other people’s items and takes their cut – however, it’s not that easy with all the drawbacks, barriers, and day-to-day administration. If the dropshipping is utilized in the right way, it can still aid in building a successful e-commerce service.
Note: It is much easier for an already established e-commerce business to utilize dropshipping to match existing services than for the new company to start only dropshipping from the ground.
5 facts about dropshipping #
Dropshipping has certainly been a popular topic in recent years. That is why there is a lot of conflicting information about this type of business model. Here are the top 5 facts about dropshipping to consider before establishing one.
Low-profit margins #
Most of the money goes to the distributor for every sale, and the profit of an e-commerce dropshipping company is generally skimmed off the top. The average profit margin for dropshipping ranges between 15% – 20%. However, the margin can vary significantly depending on the niches chosen for dropshipping and the average price of goods on the market.
Dropshipping has a low customer lifetime value #
ECommerce dropshipping is one of the online sales models which usually has a very low customer lifetime value. This important metric provides higher earnings since it means you are taking care of your existing customers. But with dropshipping, it is not easy, so the CLV value usually stays low. This happens for a lot of reasons but let’s name a few:
- No loyalty programs. Low margins are usually the reason for this. It is very difficult to create a loyalty program if you are not owning your products and inventory
- Delivery issues. Since the items get shipped directly by the manufacturer, and usually at a great distance, you can’t control this aspect. So the time of delivery, packaging, and packet loss all have a negative impact on customers staying loyal to your shop
- Product quality issues. Having the manufacturer in direct contact with the end customer, you as a merchant can’t do quality checks on the product sold. Having a strong connection and working with a handful of attested manufacturers can decrease this risk. But you can never completely remove it, and thus you risk the customer churn because of product quality, returns issues, breakage in packaging and shipping, and other issues.
Extremely affordable #
Starting a dropshipping business does not require large investments, which reduces barriers to market entry. However, it also means a lot of competition. In essence, the larger the company, the more it can reduce its margins to ensure the lowest costs. At the same time, smaller companies need to lower their revenues to stay competitive with their prices.
No control over the supply chain #
In a typical e-commerce business, if customers complain about item quality, shipping speed, or return policies, management can attend to the issues independently. In dropshipping, an e-commerce company is basically at the mercy of the provider – yet they are the one who still has to talk to the unsatisfied customer straightly. On top of that, there’s likewise a delay in interaction as the dropshipper goes back-and-forth between the customer and the vendor.
Every e-commerce dropshipping business inevitably had problems with suppliers from time to time. However, no e-commerce company should blame its dropshipper for a mistake, simply because the customers do not even know there is a dropshipper – they think they are buying directly from the company.
Instead, the brand must accept the problem, apologize, and inform the customer what it will do to solve it. There are 2 common options for a brand to resolve this:
- Compensation to the customer. Depending on the error level, the company may offer a refund of the shipping fee or upgrade if the customer needs a new item to ship.
- The supplier pays for the mistake. Although the company takes responsibility for the mistake, it does not mean that it really has to pay from its budget. Each reputable supplier will pay to correct their own mistakes, including paying shipping costs to return items.
Lawful obligation problems #
Although this isn’t common trouble for dropshippers, it deserves discussion. Some distributors aren’t as legitimate as they assert, and the company does not constantly know where the product comes from. A lot more misleading is when distributors illegally utilize a trademarked logo design or another intellectual property, causing legal problems for both distributor and dropshipper. This possible problem can be remedied with a solid Dropshipping Agreement Contract, but not every dropshipping startup knows that.
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