Dropshipping Guide: Understanding the Zero Inventory Supply Chain
June 18, 2019
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In a world dominated by large retailers like Amazon, online merchants have to get creative if they hope to keep up. The highly competitive atmosphere has given rise to some truly innovative strategies and tactics.
One of the most popular ecommerce methods that online merchants have praised is dropshipping. It first gained traction in the rise of eBay, but what is dropshipping and is it always a viable option? Below we take an in-depth look at dropshipping.
What is dropshipping?
Dropshipping is a method of order fulfillment in which the merchant doesn’t stock or ship the products it sells, but rather has the manufacturer control the entire ecommerce supply chain. When a customer places an order, the manufacturer (or a wholesaler) ships the item directly from their warehouse to the buyer, so the merchant never handles inventory.
In other words, the merchant or dropshipper handles marketing and sales for their store, and the dropshipping supplier handles all logistics.
Sounds great, right? It can be for some. But in many cases there are more modern order fulfillment options than dropshipping that help meet consumer expectations and increase control of an ecommerce business, without needing to hold inventory or pack boxes yourself while reducing inventory carrying costs.
What people get wrong about the dropshipping model
Many people think that running a dropshipping business is the best way to maximize profit margins in the ecommerce landscape, since the startup cost is relatively low. They believe that dropshipping is the ecommerce equivalent of a magic bullet — a strategy that will help you make thousands of dollars in profit without needing to put any money into your online business.
The harsh truth is that no such magic bullet exists. While it’s true that dropshipping will significantly cut down your startup costs, the lower margin you’ll make with each sale can cancel things out.
Another misconception is that dropshipping is a good way to waive liability in the event that a product is delivered late or defective. In reality, the customer will always place blame on the merchant as opposed to the supplier. By relying on a supplier, you may even be increasing your risks, since they could do sloppy work while all fingers point at you.
Since the majority of dropship suppliers are located overseas, international shipping can be a huge pain and expense, causing long delays from when a customer places an order to when it’s delivered. This causes further strain on your reputation and customer relationships.
Pros and cons of dropshipping and other fulfillment methods
Dropshipping and working with a 3PL are two methods that utilize a third-party to fulfill orders as opposed to self-fulfillment, where the merchant stores inventory and fulfills orders themselves. However, there are many differences between the two terms.
Asking “How does dropshipping work?” often yields an oversimplified answer that can seem like the be-all, end-all for someone new to ecommerce fulfillment. While dropshipping lets you take a hands-off approach to running an online business, it’s not always the right option.
Some people find a lot of success with dropshipping, but those that build their business model solely on the premise of dropshipping can sacrifice the chance of building a long-term brand centered on the customer experience.
When dropshipping is the sole foundation of your online business, you give up quality control, rely on the supplier to fulfill orders, cut into your profit margin, and have a long, uncompetitive delivery time.
“When we first got started, we were dropshipping. It was nice because we had no money tied up in inventory, but we also had no quality control. With no control over the customer experience and very poor shipping times, we quickly realized dropshipping was not a long-term solution. It was good for proving out an early concept, but we had to move to a professional fulfillment company.”
Gerard Ecker, Founder & CEO of Ocean & Co.
A third-party logistics (3PL) company provides fulfillment services including warehousing, picking inventory, packing boxes, and shipping orders. A merchant’s inventory can be shipped from the manufacturer to the 3PL, so it’s near the customer in advance of it being ordered. It never requires the merchant to handle inventory themselves but takes a more customer-centric approach to outsourcing fulfillment.
A 3PL can be located near the merchant’s end customers to reduce shipping zones, transit times, and shipping costs. Many merchants will distribute their inventory across the 3PL’s network of fulfillment centers to keep product in different regions where customers reside. A speedier delivery can lead to fewer abandoned carts, a higher average order value, and more repeat purchases.
3PLs also use integrated technology to automate shipping and fulfillment from the merchant’s online stores, in addition to better inventory turnover, actionable analytics, improved demand forecasting, ease of scalability, greater transparency and visibility into operations, and a partner that will be there through growth.
With a 3PL, the merchant has control over their logistics and can better optimize the supply chain, brand, and customer experience, while still having the time to focus on growing the ecommerce business (unlike tasks such as shipping and handling).
From offering 2-day shipping to using custom branded packaging, 3PLs can help direct-to-consumer brands provide the experience their customers have come to expect. 3PLs are also fulfillment experts, whereas manufacturers specialize in creating products using raw materials. Thus, dropshipping provides far fewer fulfillment services and shipping options than working with a 3PL.
Pros of dropshipping: 4 advantages
Dropshipping may not be a premium shipping or fulfillment option like using a 3PL, but there are plenty of dropshippers who have found success using this business model. Here are a few of the benefits of running a dropshipping company.
1. Low starting costs
One of the main appeals of dropshipping to first-time entrepreneurs on a tight budget is that the initial startup cost is low, since you don’t have to pay for the stock. Instead, you just focus on making sales.
2. Minimal overhead
Dropshipping can also reduce overhead — a key component to the survival of some startups — since you won’t need to invest in a warehouse, storage locker, or fill your house with inventory to launch new products.
3. No inventory to hold
4. Very little effort required
Dropshipping not only eliminates the need for an inventory storage system, but also the need to monitor each sale as it comes in to pack boxes and run to the post office. This makes for greater flexibility in everything from working a full-time job to the ability to take vacations or simply get away. As long as you have a good supplier, which can be a huge pain point for ecommerce businesses, you can get a good system down.
Cons of dropshipping: 6 disadvantages
While the benefits of dropshipping make it seem like a very appealing retail fulfillment method for ecommerce businesses, here are the downsides of running a dropship business that must not be overlooked.
1. Minimal profit margins
Those who rely solely on dropshipping in their ecommerce endeavors won’t be able to sell premium products or build a strong brand. Dropshippers typically sell products that are cheap to manufacture but can get away with high markups. However, given how competitive the ecommerce landscape has become, most shoppers are searching for the lowest priced product.
Unlike a wholesale price that is low-cost because it’s sold in bulk, a dropshipper has to sell individual units while keeping costs low. Thus, the time it takes to earn the same profit will be longer and require a higher volume of orders.
Dropshipping suppliers will cost a lot more than typical manufacturers because they take on the logistics costs such as inventory storage, shipping insurance, and shipping costs, further reducing the dropshipper’s profit margin.
2. Low barriers to entry
The top advantage of dropshipping is also its biggest weakness. Having low startup costs that make it easy for anyone in the world to run a dropshipping business means you’ll be facing competition on a massive scale. There are already countless dropshippers out there, so you’ll have to hustle hard just to stay afloat.
3. Supply chain (out of) control
Having no control over the retail supply chain means you’re out of luck if any delays sprout up. You’ll also lack the ability to oversee quality control or track where manufacturers are sourcing materials. With dropshipping, delivery timelines can be difficult to estimate, order tracking lacking, and inventory forecasting difficult.
4. Supplier problems become your problems
When you partner with a supplier, you rely on them to stay on top of production lead times and inventory management. If they fail, they’re going to drag you down with them. For instance, if they were to go out of stock without realizing it, then deliveries could be delayed for quite some time.
If that happens, do you think your customers will blame some overseas manufacturer they don’t know is in the picture, or the online merchant they purchased from? Similarly, if your supplier cuts corners during production, the poor quality of the products will reflect on your business as opposed to the manufacturer.
5. Inefficient shipping
If you partner with multiple suppliers, then shipping can become rather inefficient. Imagine a situation where your customer orders three products, and each is from a different supplier.
You’d have to cover the cost of shipping from three separate suppliers while only being able to charge the customer for one shipment.
Once again, this cuts deeper into your profit margins. Additionally, shipping from overseas can bring in challenges with high shipping costs, delivery delays, poor trackability, and tariffs and taxes that are unique to each country.
6. Fulfillment errors that go unsupported
Fulfillment errors are one of the biggest threats to your dropshipping business. Picture the following scenario: A customer places a large order and the payment clears. You find out a week later that the supplier was unable to fulfill the order because its size exceeded the available stock.
Because you’re unable to keep an eye of exact inventory counts and you don’t have a member of your team on the manufacturer’s floor, it’s on you to remedy this issue with the customer. Dropshipping provides little if any customer support, unlike a 3PL where you may get a dedicated account manager, on-site team members, and several methods of contacting support.
Is the dropshipping model worth it?
At this point, you may be rethinking how viable dropshipping is, and wondering if it’s even worth it.
Horror stories such as this one are a reminder to proceed with caution. In this case, the author was a dropshipper who spent nine months working on his dropshipping business before losing all the money he earned due to the supplier using copyrighted images. Because he was the one within reach of local jurisdiction, all the blame fell on him and the lawsuit killed his business.
Overall, dropshipping does have its benefits, but it’s only viable in certain situations and requires a lot of research and due diligence since you’re depending on others for the most important aspects of an online business.
3PL for fulfillment
If you don’t want to deal with inventory and fulfillment, but want to meet customer expectations around affordable and timely deliveries, maintain quality, grow your brand, and have the ability to scale your business, a 3PL is your best bet.
How to move from dropshipping to ShipBob
If you want to increase the lifespan of your business, move product over to the US, and reduce transit times for your customer orders, allowing you to increase sales and scalability, ShipBob is here to help.
To do this, you’re going to need an Employer Identification Number (EIN) in order to sell and distribute in the US. This process is much easier than you may think.
United States law requires businesses to have an EIN to ship merchandise into the US. At ShipBob, we partner with MyUSACorporation.com, a resource that will help you incorporate your business in the US.
We can also put you in touch with our top freight partners to get quotes for moving inventory over to us, provide ballpark of estimated shipping timeframes, and offer additional support for you to get started. ShipBob is the logistics expert in the US and we have a ton of leading partners in the space who can also help you hit the ground running.
Dropshipping is very different than using a 3PL, and the unique situations and/or stages a business is in may call for different methods of fulfillment. If you’re ready to start reducing your transit times and provide a best-in-class customer experience, then check out ShipBob. Request a pricing quote below.
Here are answers to a few common questions people have about dropshipping.
1. Is dropshipping legal?
The general answer is yes, but there are some caveats that you should be aware of.
The first thing that you should consider is your location. While dropshipping itself is legal in all countries, you should take a close look at the local regulations including tax policies and prohibited items. A product that’s legal in one country may be illegal to ship to another. When in doubt, research the local regulations and understand the implications of international fulfillment.
Furthermore, if a supplier sends faulty products that cause harm to your end customer, then you may be liable for compensatory and even punitive damages. Seeing as the supplier is beyond the reach of your local jurisdiction, you’ll be the only one held accountable.
If you stick to reliable suppliers and comply with local regulations, then your dropshipping enterprise should be legally viable.
2. What if a supplier scams me?
There’s always the potential issue of a supplier running out on you. Seeing as many people who start a dropshipping business are inexperienced in ecommerce and product sourcing, this makes them prime targets.
Keep a lookout for red flags when sourcing a supplier. These include suppliers that ask for subscription fees or request large upfront payments. Slow responses could also be a red flag.
3. Is dropshipping profitable?
It’s rather difficult to turn a substantial profit if you’re relying on dropshipping alone.
You’d have to move a lot of products just to make it somewhat worth your while. With so many options out there that are more lucrative, even at low volumes, you should carefully ponder whether you want to take the dropshipping path.
When you factor in marketing costs and your time investment, it’s very possible to lose money in a dropshipping business. Online merchants who keep fulfillment in-house or use a 3PL can see better margins and drive more revenue.
4. How much money do I need to start a dropshipping business?
You could technically start a dropship business with $0. However, that doesn’t mean you should.
The first thing you’ll pay for is fees to the dropshipping store. For example, a Shopify subscription will run you a minimum of $29 per month — a fee that could quickly add up if it takes a while for sales to consistently roll in. You’ll also have to shell out another $14 per year for the domain.
Beyond that, you’ll spend a lot of money running ads if you want to turn a decent profit. If the ads don’t resonate with your target customer, then you could end up spending a huge chunk of change without seeing any return on your investment.
Tread lightly, as most people starting a dropshipping business often spend upwards of $1,000 in the first three months on ads alone. A large portion of these online merchants don’t generate enough sales to cover the marketing costs.
You’ll also want to buy at least one unit of each product you’re selling to verify its quality. You don’t need to do this, but you could end up facing lawsuits if the products you sell cause harm to buyers, so testing them out yourself is advised.
Overall, you’ll save a bit of money since you won’t have to pay for storage costs or inventory stocking. But it’s clear that dropshipping is by no means a zero-capital, get-rich-quick business model.
Learn more about outsourcing fulfillment! Download the free e-guide, “How to Choose a 3PL for Your Ecommerce Business” and learn more about how a 3PL can help your company scale and get tips for choosing a fulfillment partner.
|Costs||Low starting costs||Minimal profit margins|
|Investment/Experience||Minimal overhead||Low barriers to enter|
|Inventory control||No inventory to hold||Supply chain (out of) control|
|Suppliers||Very little effort required||Supplier problems become your problems|
|Shipping||Shipping can be outsourced, added costs||Inefficient shipping|
|Fulfillment||Fulfillment outsourced, but not reliable||Fulfillment errors that go unsupported|