Understanding the different business models and service offerings can help in figuring out which type of business model and services are applicable for you. In this blog, we look at Dropshipping, to explain what it is, what its advantages and disadvantages are, also why it’s a good choice.
So, what is dropshipping? Dropshipping involves the process of order fulfilment for an ecommerce business that is outsourced to a third party. This includes processes such as sourcing, procurement, and shipping. This is most often outsourced to the supplier, where either the manufacturer of the products or third-party supplier will handle operations of production, warehousing and storage, shipping and final delivery too. The dropshipping business model allows you to reduce overheads as well as operational costs too. When writing up dropshipping agreements with your manufacturer or third-party supplier, you can also include additional services such as marketing and customer service operations.
The way dropshipping works is that the supplier/manufacturer is paid for order fulfilment of your orders, whereby the list of services provided by them is dependent on the mutual agreement made between the you and the other party. However, often, the process of dropshipping is as follows.
- Supplier or manufacturer is tasked to source or produce the product
- Agreement is made with the third-party supplier/manufacturer
- Inventory is maintained with the dropshipping supplier
- You handle the setup of the ecommerce website
- Customers place orders
- The payment is processed
- The order is processed and forwarded to the dropshipping party
- The dropshipping party processes the order and prepares for shipping
- The droshipping party fulfil orders by delivering it to the customer
There are several key players in the dropshipping business model, from the likes of the seller of record, the manufacturers, and the wholesalers. There are advantages and disadvantages of maintaining a business model such dropshipping, as follows.
|Reduced Overhead Costs||High Competition|
|Low Startup Costs||Uncertain Product Quality|
|Multi-Channel Sales Options||Difficult branding and differentiating|
|Flexible Operating Locations||Aggressive competition harming profit margins|
|Easy scalability||Undefined fulfilment processes|
|Limitation of range of offers|
For some businesses, the advantages make it a viable option regardless of the disadvantages, especially if you are a startup allowing you to grow your business. What are your thoughts on dropshipping?