Dropshipping Business Model Explained
Dropshipping is an extremely exciting and inspiring business model, with its enormous potential for rapid growth, and it’s shockingly low upfront costs. In fact, you’ll often see videos of youtubers claiming to start a dropshipping business with 150$ or less, or sometimes even for “free” or “from scratch.”
While these are some pretty out-there claims, they’re not actually that far off the truth! Additionally, with dropshipping you never actually hold physical inventory yourself, aside from maybe a test product or two, so there is very little risk of getting saddled with inventory you can’t move, like with traditional e-commerce or Amazon FBA. So what exactly is the dropshipping business model?
At its core, dropshipping is when someone buys a product, a company, who is usually the manufacturer, ships them the product, and you get a cut of the profit for marketing that product, which can sometimes be very substantial.
Essentially, you’re providing value by branding and marketing a product.The business model is basically in between the Amazon FBA and the Amazon Affiliates program, wherein you have to find your own suppliers, but you don’t have to maintain your own inventory.
So let’s go over the Dropshipping business model, starting with pros and cons, the model’s potential and limits, some growth strategies dropshipping websites are using in 2021, and finally, where to learn more, or get started.
Dropshipping Pros and Cons
So why dropshipping? Let’s go over some of the pros and cons of the dropshipping business model:
The Pros of Dropshipping-
- Growth Potential- Unlike any other business, you can explore new products very easily, because you don’t have to take a chance on inventory that might not sell very well. You simply find a supplier, usually on aliexpress, alibaba, or a similar site, and list it on your own, with your own branding. In this way, if you have an established audience already, you can easily test new offerings on that audience.
- No Inventory Required- You do not need any inventory to get started in dropshipping. Because of this, you can get started very quickly, because the startup time is effectively just how long it takes to build your website. Additionally, because you’re not holding inventory, you don’t have to take time packaging and shipping yourself, and can focus solely on maintaining the website and marketing campaigns.
- Low Barrier to Entry- Another pro to this model is an extremely low barrier to entry. As opposed to traditional, brick and mortar stores or even programs like the previously mentioned Amazon FBA or traditional e-commerce, dropshipping requires very little financial and time investment to develop, source, or manufacture products. Consequently, as mentioned before, you can also save on storage and other inventory-related costs. And unless you hire a virtual assistant, there’s also no staffing costs!
- Better Cash Flow- A third Major benefit of Dropshipping is an improved cash flow position. For a typical store or e-commerce site, you’d have to first purchase products, wait for them to arrive, and then ship them out again, all the while floating money, and taking on risk. However, with dropshipping, you access funds sometimes as soon as your customers make a purchase, and can then use those funds to fulfill their order within a couple days at most, at least on shopify, which is the most popular dropshipping platform by a long shot.
- Passive Income Stream- Finally, the last huge benefit of dropshipping we’ll talk about is the potential for it to become a passive income stream- it requires upfront work, but then provides cash flow with minimal daily maintenance. You could be at work or asleep, and your dropshipping business would still be earning you money! This is different from Amazon FBA or traditional e-commerce, because order fulfillment can be automated, as opposed to you having to send out products manually.
However, it’s not all sunshine and roses, and we’ll go over the cons of the dropshipping business model next:
The Cons of Dropshipping:
- High Competition- The first major con is extremely high competition. Because it’s so easy to get into, lots of people are trying the exact same thing you are, which can lead to increased competition. This is why it’s more important than ever to find a winning product or niche, and be diligent about your branding. You’ll have to find exceptional ways to stand out when others are selling the exact same product from the exact same suppliers.
- Lack of Control- Another con to dropshipping is a lack of control, in both quality and otherwise. Because inventory never passes through your hands, you can’t check to make sure the condition is okay before it goes on to the customer, putting your store’s reputation at risk if it’s not. Unless you have an established store and a fairly substantial ordering size, you won’t be able to negotiate special deals with your suppliers or use packaging to make your product unique. Again, this removes some of the agency and control you would have had in a traditional e-commerce store.
- Shipping Problems- Another major con to dropshipping is shipping and processing issues. Although there are tools to automate fulfillment, you won’t be able to find bulk discounts that bigger retailers can rely on, because you’re essentially shipping the products one at a time. Your customers may also receive multiple packages for the same order, which can waste time and money for you and your shoppers, especially if you have multiple items in your store. Additionally, like we mentioned before, you’ll have extremely little negotiation power when it comes to shipping.
- Unstable Margins- Dropshipping can become extremely cutthroat, with margins disappearing overnight because someone else came into your product’s market and undercut you and everyone else severely. This also plays into the lack of control we talked about earlier.
However, there’s still lots of potential, and profit to be made with dropshipping in 2021. Let’s talk about that potential.
The Potential Limits of the Dropshipping Business Model
Obviously, as with any business that is technically just buying low and selling high, the ceiling is “technically’ infinite. However, there are some aspects of dropshipping which could limit its potential, which we’ll go over now.
- Low profit Margins- According to bigcommerce.com, the average margin rate for dropshipping products is only 20%. While this may seem great, it’s actually fairly low in comparison to big-name retailers, or even bulk shipping e-commerce stores. Naturally, this limits expansion because you still have to pay for advertising and website upkeep ,and means that even if you do big sales numbers, your actual profit after shipping and advertising could be tiny. Also, you’ll have to keep reducing margins on even very profitable products as other retailers and dropshippers enter the market, and start to undercut you. Otherwise, you’ll just lose business entirely.
- Bad Suppliers- Another issue which limits growth potential is the lack of control over suppliers. If there is one bad delay or problem with a supplier during a large batch of orders, your store could get so much bad feedback that it’s done for, not to mention the problems your facebook ad account may face.
- Branding Difficulty- A third potential limiting issue is the difficulty of building a solid brand. Because you can’t put a logo on the end product, most customers will forget about the brand in favor of the actual physical item’s brand. Although this makes sense, it still makes it difficult to build a dropshipping brand in 2021, especially with a one-product store.
So now that we’ve gone over some of the potential issues with dropshipping, lets go over some growth strategies that are actually working for the dropshipping business model in 2021.
Dropshipping Growth Strategies
While there are tons of different ways to develop your business, some are better for dropshipping than others:
- Market Research- The first growth strategy we’ll go over is a time-honored one: Market Research. When you do manage to find a product that seems to be working well, use that opportunity to pivot to a new product, try out new marketing campaigns, or test a new niche entirely. The number one problem for all e-commerce, but especially dropshipping, is stagnation, because if you’re not growing and looking for the next big thing, then your competitors will eventually dry up your niche and you’ll be forced out of the market entirely.
- Backup Suppliers- A second strategy important for long-term growth in dropshipping is to have backup suppliers. Rather than relying on just one supplier that may cause you problems if they have problems or change their fee structure unexpectedly, try to find a product with more than one reliable supplier. This way, not only do you have protection in case your relationship with one goes south, but you also know that they’ll be competing against each other for your and other dropshippers’ business.
- Pass off Inventory Costs- Finally, the last growth strategy for dropshipping in 2021 we’ll talk about is dropshipping high maintenance products. By not ever having to pay the maintenance, you’re able to pass those savings on to your customers, or have much higher overall margins. It also allows you to more easily complete with larger stores, because although you may have higher shipping costs, you’ll have far lower inventory maintenance.
The Dropshipping Business Model Explained-Viable for 2021?
Overall, the dropshipping business model is still viable in 2021, and don’t let anyone tell you otherwise! However, like all business models, it still has it’s pros and cons, and its limits and growth strategies.
Hopefully this was valuable information, and if you’d like to learn more about e-commerce and dropshipping, sign up for our newsletter below!