Dropshipping is one retail model where the store does not keep the items they sell in stock. Instead, the store orders the item from a third party and the third party ships it directly to the customer. As a result, the seller does not need to directly contact the product.

The biggest difference between dropshipping and standard retail is that the seller does not have a warehouse or own a product line. Instead, it purchases items as needed from a third party—usually a wholesaler or manufacturer—to fulfill orders.

Advantages and disadvantages of dropshipping

Dropshipping is a great business model for aspiring entrepreneurs because it's easier to implement than Private Label or other models we covered in  Four E-commerce Formats  with a personal experience from the founder of Penguin-team. With drop shipping, you can quickly test various business ideas with limited risk, allowing you to select and sell in-demand products more efficiently. On the other hand, dropshipping still has its limitations and disadvantages that we encounter from time to time in the development of our projects.

Dropshipping Pros

Here are a few reasons why dropshipping is such a popular model.

1. You need less capital to start . A store that works with dropshippers can be launched with a minimal budget to start. Traditionally, retailers have to purchase huge volumes of goods for assortment capital purchases. Direct delivery from the supplier to the recipient eliminates the warehouse and allows you not to spend money on the initial purchase, storage, maintenance, and so on.

Plus, since you don't intend to build and maintain a permanent warehouse, building a store with this business model is less risky.

Dropshipping is great because you don't invest in inventory or risk an asset freeze. Sold - got his commission - that's it. The main thing is to find your suppliers with whom you will have contact.

— Julia Kucheryavaya, owner of TOUCH brand

1. Easy to get started . Despite the fact that you actually do not have the goods on hand, and you also need to spend time supervising orders / shipments from third parties, dropshipping is easier to manage than your own warehouse. You don't have to worry about managing or paying for your warehouse, packing and shipping your orders, inventory tracking and inventory, processing returns and inbound deliveries, and keeping inventory in stock.

2. Low overhead . Because you don't have to deal with assortment purchasing or warehouse management, your overheads will be lower than with your own brand or bulk buying from other brands. In fact, a dropshipping store is such a home-based business that most often it is enough to run a laptop, a phone, and a home sofa. The minimum expenses for direct work also work into the hands of novice businessmen who do not invest capital, but try their hand at the first business. Of course, as the business grows, these costs are likely to rise (for example, for salaries of employees). But they will still be low compared to traditional retail stores.

3. Wide selection of items for sale . Because you don't have to pre-purchase the products you sell, you can offer a range of popular products to your potential buyers. If the suppliers have the product, you can put it up for sale in your online store at no additional cost. This eliminates the risk of purchasing perishable goods (which may not sell) or generally expensive goods to manufacture that require a large investment at the start. Literally any product already manufactured but stored in someone else's warehouse can be used for dropshipping stores.

4. Dropshipping allows you to test products.  This is a useful method both for launching a new store and for business owners who want to test customer interest in additional categories or products. The main advantage of dropshipping is, again, the ability to exhibit and sell products WITHOUT purchasing a large batch for storage.

Cons of dropshipping

All the benefits we have mentioned make dropshipping a very attractive model for those who are starting out in e-Commerce or looking to expand their product range with other products. But each barrel of honey has its own fly in the ointment.

1. Low profitability . Low margins are the biggest disadvantage of working in the highly competitive dropshipping niche.

2. High competition . Because getting started is easy and overhead is minimal, many competing stores open stores and sell items at rock bottom prices in an attempt to increase revenue. These sellers typically have poor quality sites and poor (if any) customer service, but that won't stop customers from comparing their prices to yours. And if you use  Google le Shopping  for lead generation, this is extremely important, because it is the price in the Shopping ad that the client pays attention to in the first place.

3. More complex inventory . When you control a warehouse, it's relatively easy to keep track of what's in stock and what's out of stock. But when you receive goods from several foreign warehouses, the availability of goods changes daily. Luckily, there are several apps these days that allow you to sync with vendors.

4. Dependence on the supplier in delivery and other issues . Dropshipping is a model where the product is produced and shipped by other people, and you are responsible for it. Therefore, any mistake or delay of the supplier first of all affects your reputation in the eyes of the audience.

One of the brightest problems is when suppliers claim not the quality of the goods that was in reality. The fabric material indicates linen, but in fact linen is only 30% in the composition. And yet another supplier traded in original toys, but in fact sent Chinese replicas to customers. As a result, our reputation suffered.

The most striking situation was when the customers were confused and sent the wrong parcels. The manufacturers complained that the error occurred at the post office, but due to the fact that the parcels were returned at the expense of the manufacturers + small compensation gifts, both of these clients became our regulars and have been with us for a year now.

— Katerina Palamarchuk, co-owner of the Zabaganka store

Limited branding options . Unlike private label products, dropshipping does not give you complete control over the product itself. Dropshipping is usually designed and labeled by the supplier.

Dropshipping SWOT Analysis

Supply chain

The supply chain is the path a product takes from idea to production and finally into the hands of the customer.

The three most important players that make up the dropshipping supply chain are the manufacturer, wholesaler, and retailer.

Manufacturers.  Manufacturers create the product, and most of them don't sell it directly. Instead, they sell in bulk to wholesalers and retailers. Buying directly from the manufacturer is the cheapest way to purchase items for resale, but most of them have minimum order requirements, which already makes the dropshipping model unfeasible.

Wholesalers.  Wholesalers buy goods in bulk from manufacturers, put a markup on them, and then sell them to retailers for resale. Their minimum order quantity, if any, is usually much lower than that of the manufacturer. Wholesalers may work with dozens, if not hundreds, of manufacturers in their industry, so a good supplier can stock your store for the rest of the ages.

Retailers. A retailer is anyone who sells goods directly to a customer at their own markup. If you run a dropshipping business, you are a retailer.