Updated: Nov 27
Author: Renaldo Arapi
Date of Publication: 27/02/2023
One of the sales models that has developed the most with the advent of the internet is dropshipping. This model of sales existed even before the diffusion of the online network. Numerous and remarkable factors have been able to come to life and develop, thanks to the advent of internet. This exponential growth in conjunction with the increasing number of internet access has brought to prominence a new type of business such as e-commerce.
Find your supplier: Amazon
Amazon dropshipping requires everyone to sign up as a seller on Amazon’s website. You have the option to subscribe to an individual plan for $0.99 deducted from each unit sold, or a professional plan with a fixed annual cost of $39.99, with no additional costs on sales. Amazon’s dropshipping fees vary by product type but are typically in the 10%-15% range. For those working with relatively low profit margins, this may not be feasible.
How does Dropshipping really work?
It is a sales methodology that allows the owner of e-commerce to sell products on his website without owning them. Thanks to the collaboration with suppliers that allow interested companies to sell their products online, a mechanism is set up that starts from the customer buying on the e-commerce website. Whereupon the website itself processes the order received by the supplier with the necessary data to send the product to the end customer. In this way, the activity of the e-commerce website is mainly an intermediary activity between the end customer and the supplier. This model allows you to run a business without having a warehouse, which would cause difficulties in management due to the stock and valuation of the products.
Dropshipping: two logistic solutions
Like everything in the digital world, dropshipping doesn't follow standard and rigid models. In fact, there are some variables followed by two logistic solutions:
Triangulation, where the supplier delivers directly to the end customer. This is undoubtedly the most popular model of dropshipping.
Groupage, the logistics solution in which the supplier sends the product to the e-commerce retailer instead of to the final consumer. In this case, e-commerce receives orders from different suppliers in its warehouse. To avoid sending different packages to the end customer or because he wants to have more control over the goods.
Pros and cons of dropshipping
What are the pros and cons of dropshipping? Let's start by telling you about the advantages of dropshipping. The most relevant pros of planned and structured dropshipping are:
It allows you to have a liquid business, i.e. with lower costs, especially without the fixed costs associated with logistics (warehouses, employees, packaging, etc.) and without goods stored in warehouses.
A potentially unlimited catalogue due to the characteristic of selling products that you do not have in stock. By integrating with the supplier's warehouse on their own website you have the opportunity to focus on the most important part, selling.
A very short time to market, i.e. a reduced time needed to start selling compared to ecommerce with stock. What are the cons of dropshipping?
The disadvantages of unplanned, unresearched and unstructured dropshipping, on the other hand, can be divided into two categories: marketing cons and process cons. The cons of dropshipping from a marketing perspective are:
Shared suppliers with other retailers, especially if the supplier is online.
Non-differentiating catalogue, especially if dealing with an online supplier.
Non-competitive prices, because the distributor buys the individual product and not a batch.
High competition due to the resale of the same product in many e-commerces. Low profit margins or with a tendency to decrease over time due to increased competition.
Sensitive data shared, by necessity, with the supplier who might use it for remarketing or retargeting.
Marketplaces with unstructured and well-integrated dropshipping models with the supplier can be risky to manage. Your account could be closed at the first missed delivery.
The cons of dropshipping from a process perspective, however, are:
The management of returns and stock, which can be problematic, especially if the supplier's system cannot be integrated and has to be done manually on its portal.
Multi-orders to multi-supplier, i.e. orders containing products distributed by different suppliers. A customer who orders five products and receives three parcels has to wait three times for the courier: a customer experience that ends less than optimally.
Control of the product and its derivatives. A lack of control over product, shipping, packaging, the inclusion of discount codes and everything about 'product marketing'.
The possible need to digitise the supplier catalogue if not yet digitised. This is a con that runs parallel with the risk of having a digitised but low quality catalogue: descriptions not in view of SEO, low quality photos, etc.
The risk that a supplier, seeing your business grow, may decide to build on it by opening its own e-commerce.