“Dropshipping” is the word that you may see a lot in many ecommerce business blogs. So do you really understand what is this, how it works and how to success in dropshipping? In this article, we will cover all these three questions. Let’s dive right into it now!
What is Dropshipping?
Dropshipping is a type of business model which enables a company to operate without stocking inventory. These businesses do not have warehouses to store their products, or even do not have to ship their products to their customers themselves. So how they run their businesses? When they sell a product, they purchase the item from a third party. Then, they have it shipped directly to the customer.
This type of business model is extremely attractive because it eliminates the need for the store owner to have a physical business location such as an office space or warehouse. Instead, they just need a laptop and an internet connection to run a business.
Pros of Dropshipping
It’s Easy to Start
Running a business is much easier when you don’t have to deal with physical products. Just through 3 steps, you can start your business. These 3 steps are finding the supplier, setting up your website and starting selling the good.
In traditional business models, the majority of the costs are related to setting up and running the retail operations, for example purchasing inventory. However, with dropshipping, it eliminates that step, and thus the cost of it is quite low. You also don’t need to spend money buying warehouse/office space and the other smaller yet substantial costs pertaining to it (electricity/phone bills, stationery, etc.) Even you grow, these expenses will likely increase but will still be low when you compare to those of traditional brick-and-mortar businesses.
The Risk of Dropshipping is Significantly Lower
Because the business does not own any physical products when it doesn’t sell products it still doesn’t lose anything. Therefore, there is little to no pressure about having to sell your inventory.
Since there is no office, no warehouse, dropshipping businesses can run from anywhere just with an internet connection.
Wide Selection of Products
There is a drop ship supplier for almost anything that you want to sell. And you don‘t have to pre-purchase the items you sell, so you can offer an array of products to your potential customers. You can rely on a great product or sell some products at once, it’s up to you.
Cons of Dropshipping
Slightly Lower Benefit Margin
Depending on your niche, location or requirements, suppliers and vendors will charge you higher prices for dropshipping products, which will directly minus into your profit margins.
Lower Level of Control
Customer satisfaction is key for any business to succeed. There are many factors to achieve it such as personalized packaging and branding of the shipped products, freebies and notes accompanying the order, etc. Unfortunately, the dropshipping businesses hardly to have the ability to control how their brand is presented during the delivery and fulfillment process as the supplier is the one who ships the products.
If you are selling multiple products then your products will be delivered to your customers through different shippers. If a customer orders multiple products that ship from different suppliers, then the shipping cost of a product is different from each other. Transferring these varying shipping costs to the customer may negatively affect conversion rates, thus, in turn, impact the profit margins.
Highly Competitive Market
Since it is easy to start a dropshipping business, there are more and more retailers in every segment and niche. Unless a retailer is catering to an extremely specific segment or niche, the competition could possibly be detrimental.
For dropshipping business, keeping track of the stock of the supplier is nearly impossible. Because when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory changes on a daily basis. Then it causes miscommunication, which can cause issues such as cancellations and having to place orders on backorder. Even there are ways you can better sync your store’s inventory with your suppliers, these solutions don’t always work seamlessly. Plus, suppliers don’t always support the technology required, so it is difficult for you to manage inventory.
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Focus on the Main Product is Key to Dropshipping
As you can see from the disadvantages of dropshipping businesses above, so many competitors and such low barriers to entry. That makes the drop-shipping market become heavily saturated. So how your business can survive and continue growing? Let’s listen to the story of Scott Hilse, a well-known dropshipping entrepreneur.
Hilse also confirmed that the drop-shipping market has become heavily saturated due to so many competitors and such low barriers to getting started. Especially, there are so many ecommerce platforms such as Shopify developing their own drop-shipping plugins, which makes it merely a matter of clicks to get started.
However, Hilse has found himself an opportunity. Having read the book of Ken Segel, Insanely Simple, he followed the idea of the book and focused on the purest version of the dropshipping model: one product. Then he decided to sell an iPhone case with one straightforward website.
Consider Customer Experience as The First
While Hilse focuses on one single item, his competitors stock hundreds, if not thousands, of similar cases, then he can refine his entire business around the customer experience of selling that one single iPhone case.
To success, Hilse has to find out the product that is special and unique, which you can not easily find in Walmart. Besides, the product also needs to look good on camera so he can create high-quality video ads using influencers that worked a charm on Facebook ads. After choosing for his business the right product, he takes beautiful, professionally shot product imagery and built a simple storefront using Shopify.
Hilse shared that the factor contributing to his early success is the way he optimized the Facebook pixel. Facebook pixel can track users’ engagement on-site, then allow Facebook to retarget them with advertisements. By prioritizing qualified traffic, for example, customers that add the product to the cart but abandon at checkout, he can build very targeted adverts for customers that performed exceptionally well.
After leverage Facebook pixel to segment customers based on engagement, then from these segments, he picked up his potential customers. By doing that, he can re-invest his first profits back into adverts, this time utilizing Facebook’s algorithm.
He not only used this method successfully but also scaled it to month-over-month to where it’s now making thousands per day. In addition, he can replicate this multiple times, which will be a positive signal for other dropshipping entrepreneurs who are looking for the best approach.
Through the story of Hilse, we can see that there is still a wealth of opportunity for dropshipping businesses. And one key for these businesses to succeed is put the customer experience as the number-one priority of their companies.