Is Dropshipping a good fit for your business?
Whether you’re a hustling e-commerce entrepreneur that’s just starting out, or you’re a bustling business that’s consistently turning over six figures, you’re always looking for the next avenue in your e-commerce strategy.
You’ve likely heard of dropshipping at some point in time, but what is it exactly?
In this article we’ll discuss what dropshipping is, how it differs from traditional e-commerce, and whether or not it’s right for your business.
What is dropshipping?
Dropshipping is a method of order fulfilment where, instead of stocking a physical product yourself, you’re essentially acting as the middleman between the producer and the customer.
How dropshipping works
Say you set up an online store selling novelty socks. Traditionally you would source all the different designs and colours of socks yourself. You’d buy them in bulk, and have them delivered to a storage space. From here, you would take orders from your customers, then pack and post the orders yourself.
With dropshipping, the process is truncated. Instead, you set up your online store and then source a supplier that sells the socks you want. Your customer then buys the socks from your site, you pass the sale on to the supplier, and they pack and ship the product to the customer on your behalf.
Dropshipping is effectively a hands-off process for connecting customers with products, that eliminates the need for you to deal with storage and fulfilment.
Before you get started, you're going to need a business account. Click here to read our guide on how to open a business bank account in Australia.
What are the advantages of dropshipping?
It’s easy to get started
As a dropshipper, you don’t need an office or warehouse to get up and running. All you need is an online store from which to sell your products and a connection to a business that supplies your stock, and you’re ready to go.
You don’t need to outlay a lot of capital for stock
You’re not putting money down to gather the materials to make your products. In fact, there’s absolutely no labour on your part. You can get started with limited funds, with the only costs being for the online portion of your business. You don’t need to spend piles of money buying stock that you’re only 70% sure will sell, meaning less risk, and a lower barrier to getting started.
It’s easy to manage
You’re not dealing with storage and fulfilment yourself, so all you need to manage is running your shop, and your suppliers.
It’s endlessly flexible
You can pivot to selling different products as quickly as you can find the supplier. You’re in control of your business, so you set the prices, choose your products, and fine-tune your sales strategies as you go.
What are the disadvantages of dropshipping?
Low product margins
When it comes to dropshipping, most of the money you earn goes directly back to the supplier. All you’re earning is a small percentage off the top. So to make money in dropshipping, it’s all about choosing the right product and the right supplier. And you’re got to be wary: margins for some products are quite low, so you’ll need to sell a high volume in order to make it worth it. This can be particularly risky when selling in competitive product niches.
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Increasing your margins is where Airwallex can help out dropshipping businesses. When you open an account with Airwallex, you’ll never pay any banking fees—ever. With competitive FX rates (up to 90% cheaper than the big banks), and the ability to bank in 11 different currencies, you’ll be able to save money you’d otherwise spend on foreign transfer and exchange costs. And these cost-saving methods, while seemingly obvious, help to reduce what little overheads you have and go a long way to increasing your profit margins.
It’s a more complex shipping process
As you’re not the one shipping your products, you can’t control what happens during the shipping process. You’re effectively at the mercy of your supplier. They may have a number of different shipping solutions they use, which means shipping prices and times vary considerably depending on the product and location. Selling different products from a range of suppliers means that a single customer order can be made through multiple warehouses, so your customer receives each product at different times.
There’s a marked loss of control
Dropshipping means that you only control one portion of the pipeline. If anything goes wrong on the supply side, this can be difficult to manage on your end. So you have to have faith in your suppliers.
But no matter how much you trust them, things can still go wrong. You don’t have oversight of your warehouse, so you can’t be 100% sure exactly what’s in stock. And whether it’s shipping the wrong item, an item getting damaged in transit, or the product never showing up at all, these errors are out of your hands. Building a good relationship with your suppliers and keeping your lines of communication open is critical to mitigating any supplier errors.
Is dropshipping the right avenue for your business?
We’ll be honest: we can’t definitively answer this for you. Because whether or not dropshipping is right for your business depends on what you want to achieve.
It’s ideal for starting out
You’ve got low initial overheads, so all you really need is an online storefront and the right supplier. Then it’s all about how you market your products, where, and to whom.
So if you’re looking to pivot, launch with a low budget, and have identified a good niche and some good suppliers, then dropshipping is a good choice.
It can be a proving ground for established businesses
For businesses with the capital to invest in custom products and purchase in advance, dropshipping allows you to improve their margins, supply chain, and brand experience.
One of the huge benefits of dropshipping is that it can almost be run like a side hustle. For your established business, you can set up lines of dropship products as a way to test the market, to offer new products, and as an extra source of revenue. Then, if it proves profitable, you can bring these products in-house, and reap the rewards of the groundwork already done for you.
Emerging businesses can benefit from dropshipping, too
Dropshipping is a good starting point for emerging businesses aiming to grow into the traditional e-commerce model when they have the capital.
Think of it like your business’ training wheels. You’re learning the ropes of e-commerce, learning what works and what doesn’t, and building a client base. You’re understanding how to market, how to position your business, and using dropshipping as a vehicle to achieve this.
Our final thoughts
With its low barrier to entry, and endless flexibility, dropshipping is a fantastic way to enter the market.
But remember—it’s competitive. Low margins, loss of control, and being at the whim of your supplier are all things you need to factor into your decision to dive into the world of dropshipping.