Is dropshipping really the business model I should start my self-employment with?
In this article I would like to talk to you about dropshipping and its suitability as a business model. I would like to share with you my own insights and the learnings that I could draw from several dropshipping stores.
For all those who are not familiar with the term dropshipping, here is a short explanation:
Dropshipping is basically about selling goods via e.g. a webshop, which you don’t have in stock. If an order is received in the webshop, it is forwarded to the supplier, who fulfills the order on our behalf. Strictly speaking, he takes care of the packaging as well as the shipping. However, the customer himself does not notice much of this. As soon as the package arrives, it looks as if we have shipped it.
What are the advantages of dropshipping from my point of view?
- No storage costs
Probably one of the biggest advantages to the dropshipping business model. We don’t need goods in stock to fulfill an order. Not having to pay for inventory (items we would normally have to buy before we can sell them) and storage costs (for storing the items) allows us to have some advantage. Such as the next item:
- Larger marketing budget
Due to the nature of the dropshipping business model, we have much more budget available for marketing the products.
- No cumbersome import operations
Believe me when I say that importing is probably more complex than designing a conversion-oriented webshop. Especially if you source your goods from China, for example, and here the language barriers lead to a very laborious process. A process that does not always go well. For example, we had the problem several times (before we entered the dropshipping business model) that goods were not delivered as initially agreed with the supplier. This concerns for example the variants, the quantity or in the worst case even the product itself (completely wrong product). But also the general process of importing a product from China to Europe or the United States is not a simple matter.
From my point of view, the four previously mentioned points are the main advantages of the dropshipping business model.
Now to the disadvantages:
- Shipping time
Probably the biggest negative point about this business model. Once an order has been triggered via the web store (the customer has purchased a product), it is forwarded to the supplier. The supplier usually needs a few days to prepare the items requested in the order for shipping. Only after this preparation phase do the items go to shipping. Here it plays a very large role, which dispatch service provider one selects. Some are definitely faster than others. However, one should not ignore the cost issue for faster shipping.
Our general shipping times have always been between two and four weeks. Now imagine having to wait up to four weeks for a non-customized product to arrive at your door. In this day and age of Prime, next-day delivery and whatever else they’re called, that’s an incredible hurdle. How do you justify up to four weeks of delivery time? That was the question we had to ask ourselves. Well, there would be two approaches:
Approach #1:
The product is a lot cheaper than the competition. We played around a lot with the selling prices of our product and we came to the realization that the discount would have to be so extreme (at over 40% of the normal selling price of the same item from the competition) that this discounting would eat up the entire margin. Something that, of course, cannot be approved of from a business point of view. And even if this discounting is carried out, it still doesn’t mean that customers want to accept the four-week delivery time. So it’s a tricky situation…
Approach #2:
Especially with standard products, like something like a razor or an electric toothbrush, you have a hard time with that delivery time. So we decided to offer something that somewhat justifies the high delivery time: Customized products. An approach where the customer can order his razor with his own name, for example. A service, however, that costs more and is not necessarily easy to implement — both technically and organizationally.
So, as we can see, there really isn’t an acceptable solution to this problem.
- Margins
Yes, margins are, as we all know, probably the most important thing in physical e-commerce. If the margins are not right, the business case is already over in most cases.
In the dropshipping universe, suppliers pay for this service very well — to the detriment of the entrepreneur. Because this means at the same time, especially if you compare it with the self-fulfillment option, that this reduces the margin not insignificantly.
- Branding
Very often, dropshipping providers (suppliers who take over the fulfillment for us) only take over the fulfillment part. An own branding on the order is offered only in very rare cases. It is also clear somewhere. Imagine if you had to brand every single order as a supplier. Each order can be different. An effort that is definitely not justified for the supplier from an economic point of view.
Let’s contrast the advantages with the disadvantages at this point and draw my conclusion:
So we know that the barriers to entry are relatively low, since we don’t need inventory up front. For every order that comes in, fulfillment is handled by one of our suppliers. We also know that this leaves more budget and, above all, more time for marketing. That’s great to hear, of course, because without marketing there are no customers.
On the other hand, in the course of executing this business model, one is confronted with the high delivery times, the sometimes low margins and the lack of branding.
We have followed both approaches over the past few years and have come to the conclusion that caution is advised with the dropshipping model, no matter how nice it sounds.
So which business model do we use?
As soon as we have a new product and we don’t know how well it will sell, we start dropshipping. So we accept the disadvantages, but we can generate more sales data because of the increased marketing budget. If we see through this process that a product is selling particularly well, we still have the problem that the shipping times are too high. And it is at this point that our, let’s call it “workaround” comes in. Because at this point we buy the dropshipping products ourselves and can thus almost completely compensate for the disadvantages of dropshipping. At this point, we know that the product sells (because we have previously tested it with the dropshipping approach) and we also know who our customers are. This then helps immensely in creating the right target group.
And here is also the recommendation that it makes more sense to look at the dropshipping business model rather as a short to maximum medium term solution. In the long term, however, it makes more sense to return to the self-fulfillment method.
