The world is forever changing through new technology and innovations, and the same applies to the way business owners sell products to customers – from Click and Collect to online food deliveries. Dropshipping is another innovative way that you could sell your wares and keep your inventory to a minimum. But how does dropshipping work and is it worth it?
What is dropshipping?
Dropshipping is a supply chain model for businesses where you don’t have to handle or keep the products you sell in stock. Businesses that implement dropshipping often buy products directly from a third-party (often a manufacturer or wholesaler) then sell the items to their customers. Dropshipping is therefore an alternative to storing your products at your premises.
How does dropshipping work?
If you’re thinking about implementing a dropshipping model but you’re not sure how it works, we’ve summarised how to dropship below in three simple steps.
- Step one. Your customer places an order with you, either online or at your premises.
- Step two. You contact your dropshipping supplier, which could be a manufacturer who creates the product, or a wholesaler who stores it.
- Step three. Your dropshipping partner prepares and ships the product directly to your customer. You are charged a fee by your dropshipping supplier, while you take the payment from your customer.
The benefits of dropshipping
Is dropshipping worth considering as a business model? Here are some of the potential benefits:
Low overheads
If you’re starting a business, with dropshipping you theoretically won’t have to spend so much money in procuring products, as you would only raise the purchase order from your supplier once the customer buys an item. In addition, you could save money on the cost of storage, as you can simply order items as you need them. You may even be able to rent a smaller, cheaper premises if you don’t require an on-site storage facility.
Flexibility
One of the advantages of dropshipping is that you can experiment with new products without having to commit to (potentially expensive) bulk orders that may clog up your inventory. In theory, this means you can offer a wide selection of products at the drop of a hat, which may impress your customers and inspire brand loyalty. With dropshipping, you can also be flexible with your location and if you prefer, simply sell products online without a premises.
Less inventory management
Managing an inventory takes time, from monitoring stock levels to implementing different inventory control formulas. By embracing a dropshipping model, you may be able to spend less time focusing on these issues, and ensure your employees have the capacity to get on with day-to-day tasks.
The disadvantages of dropshipping
We’ve covered the benefits of dropshipping, but what about the drawbacks? Here are some of the potential pitfalls of using dropshipping services:
Unexpected costs
If you use more than one dropshipping supplier, there is the potential that your shipping costs or handling fees may escalate, particularly if these partners are based in different territories. For more insights on working with overseas suppliers, read our guide to importing and exporting in the post-Brexit universe. Also, some businesses that use dropshipping make a lower profit margin than anticipated; in a competitive market, you may be tempted to pass on your dropshipping savings to your customers by selling items for less, but is this sustainable? Read our pricing strategy guide for more inspiration.
Less control
By using a dropshipping supplier, you’re taking a ‘leap of faith’ that they will deliver the items on time, and keep them in good condition. If your customers have a negative experience, there is a chance they will write a bad review of your business, rather than the supplier taking the flak. Are you someone who likes to be in control of every aspect of your business – from social media to bookkeeping? If yes, dropshipping may not give you the sort of control you crave.
Managing relationships
Using a dropshipping service means doing your groundwork to find the right supplier, then taking the time to maintain that relationship. If any errors occur, would you be comfortable picking up the phone and working to fix any snags? Would you need (or be able) to make on-site visits to a depot or warehouse to see how your products are stored? Keeping a beady eye on your dropshipping supplier may take more energy than you think.
Is dropshipping worth it?
A dropshipping business model could be worth it in some circumstances. For example, you may be running a start-up in its early days and want to keep your storage costs down, or you might not have the space to keep a warehouse full of stock. Nimble, fleet-footed businesses that want to test out different products can also benefit from the flexibility of dropshipping. Equally, there is a knack to knowing how to do dropshipping right, and being mindful of issues like unexpected shipping costs may help you manage your cash flow and make dropshipping work for your business.
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Disclaimer
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.