The traditional method of selling and commerce involves buying a large amount of stock from wholesalers and manufacturers, which is kept in warehouses and sold in stores. A customer comes in to store, select the product and buys it.
With the rise of eCommerce and subsequent reduction in shipping times, streamlined fulfillment and hassle-free payment solutions, a new model arose named as dropshipping. Dropshipping is a fulfillment method where a seller doesn’t keep the stock of products it sells. Instead, when a product is sold, the seller purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product. All this is possible because of ease of carrying out transactions online and a fully track-able shipment solution.
So, the conceptual difference between drop shipping and the traditional retail model is that the selling merchant doesn’t stock or own inventory. Instead, the merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders.
Such a model has many benefits attached to it as well as few of the limitations which are covered below:
To begin the dropshipping business, only investment is acquiring the eCommerce store to sell online. However, a seller needs to get the word out about his store to attract the buyers, but this advertising cost can be even further optimized if a dropshipper uses existing platforms like Amazon or eBay to sell online as they already have large user base which helps in cutting the advertising and development costs of creating an eCommerce store from scratch.
No inventory is required to be procured and in turn there are also no storage and warehousing costs.
A dropshipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.
Dropshipping has been around for couple of years now and as a whole it has matured much. When business is small the limitations do not effect much but as it grows than this limitations start to effect the sales, nonetheless few of the disadvantages and limitations of dropshipping model are laid out below:
Since anyone can start the drop shipping business so there is a lot of competition which drives the prices down leaving very low profit margins for the sellers. Competition as such cannot be controlled however smart sellers tend to avoid the competition through market research while sourcing the products and as a result introducing new products which do not have competition.
To be prime eligible amazon sellers need to have maximum 2 days of order-to-ship duration and should offer high speed shipments. eBay also is in process of introducing guaranteed delivery and fast shipments programs. Dropshipper face serious limitations while scaling up owing to inherent long shipment times of dropshipping model.
Even the best dropshipping suppliers make mistakes fulfilling orders – mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business’s reputation.
Some suppliers raise their prices after getting an seller dependent on them. Further a change in price by supplier can make whole model un-profitable and as a result forcing the seller to go for new products. Furthermore there are no guarantees that supplier will not discontinue the product after you have spent marketing budget.