What is Drop Shipping? The Pros and Cons of this Ecommerce Model

Wondering whether drop shipping is the right business model for you?

 

While there are many benefits to this ecommerce model, you should also be aware of the tradeoffs that come with it. To help break things down, we’re sharing the pros and cons of drop shipping, as well as what you need to know about this retail business model.  

 

What is Drop Shipping?

 

Drop shipping is an ecommerce model that does not require you to own or physically stock a product.  Here’s how it works:

 

  1. You find a product from a supplier that you want to sell.
  2. You list it on your website at a price you set.
  3. Customer pays you the retail price for the product and you make a profit.
  4. You place the order with your supplier at wholesale price.
  5. Have the product shipped to your customer.

Pretty simple, isn’t it? Not necessarily!

 

Pros and Cons of Dropshipping

 

As easy as it sounds, drop shipping is far from a get-rich-quick scheme. There are a few obstacles and drawbacks in the day-to-day management of this model that you’ll need to overcome before your business is running like a well-oiled machine. 

 

Let’s take a deeper look at the pros and cons of drop shipping to help you make up your mind: 

 

The pros

 

1. No Warehousing Costs

Many entrepreneurs do not have the resources to invest in warehousing. Not to mention the challenges of managing an inventory! You need to deal with revenue losses, stockouts, damages, etc. that quickly escalate the costs.

With drop shipping, however, you only need to focus on marketing, leaving manufacturing and warehousing to your supplier(s).

2. Low Startup Costs 

With drop shipping, there’s less risk of piling up debt, especially as a new business. You only need to budget for website design and branding. But you save both time and money since you don’t need to develop a product, stock it, employ staff, or even take out a lease.  

 

3. Less Risk

Using market and competitor research, you can analyze the demand and performance of a product in a target region.  If the sales are not up to the mark, all you need to do is choose a different product to sell, thereby lowering the risk of loss. 

 

4. Ability to Scale-up

In a drop shipping business model, you can scale up rather quickly by just buying more products from the supplier.  You can also leverage market trends and seasonal surges to scale up your business. Learn how to set up an online store for drop shipping here

 

The cons

 

1. Dependency on Suppliers

Since you’re in direct contact with the customer, you have to face their complaints and dissatisfaction. This becomes a problem when you have no control over the quality and packaging of the product. Choose the supplier wisely. 

 

2. Relatively Low Margins

Due to the lack of bulk pricing in a drop shipping business model, you will likely pay a lot more than previously anticipated for each item. This impacts your profit margin. To stay afloat, you must sell more to earn more. 

 

3. Less Authority

You have no authority over your supplier’s inventory. So, when they run out of stock, you do too! Besides, you have no control over product quality and packaging. At the risk of repeating ourselves, ensure you’re partnering with reputable, reliable suppliers! 

4. Highly Competitive

Low overhead is why many budding entrepreneurs find drop shipping a lucrative business. Not surprisingly, this space has become quite competitive. You’ll need to find a niche market with lower competition in order to see larger profit margins. 

 

 

Dropshipping FAQs

 

Still eager to learn more? Here we’re sharing the answers to some of the most common queries surrounding drop shipping ecommerce models:

 

1. Is dropshipping legal in Canada?

The answer is yes. That said, make sure the products that you choose can be sold in Canada legally. You can find more information through the Canada Border Services Agency.

 

2. How to secure a supplier for drop shipping?

Wondering how to ensure that the supplier that you’re choosing is a good fit? Refer to this checklist as part of your supplier vetting process:

  • What is their damaged or returned products policy?
  • Do they offer customer support?
  • What is the order fulfillment time from sale to delivery?
  • Do they have a fraud protection policy?
  • Are there authentic online reviews available? 

 

3. Can you drop ship on Amazon?

Yes, with two exceptions:

  • You cannot use another seller’s information on invoices or packing slips
  • Ship the product directly to the customer

 

4. What products are good for drop shipping? 

If you’re skeptical about product ideas, this list might help:

  • Marketing merchandise (pens, mugs, bags, and shirts with your logo)
  • Motivational bookmarks
  • Funny coffee mugs
  • Novelty t-shirts
  • Inexpensive jewelry
  • Health and personal care items
  • Home décor
  • Office products
  • Tools and home improvement items
  • Cellphone accessories
  • Car accessories
  • Kitchen and grocery items

5. Is drop shipping profitable? 

Drop shipping is a low-risk business model that does not need huge running costs to function. With the right approach, dropshipping can be turned into a profitable business.

 

6. How to start up a dropshipping business?

Listed below are the basic steps on how to get into the drop shipping business:

  1. Choose a niche.
  2. Perform market and competitor research.
  3. Secure a supplier.
  4. Create an ecommerce store.
  5. Build a customer acquisition plan.
  6. Analyze your results and optimize your website.

 

As with any new business venture, the more you know, the greater your chances of success. To learn more about the drop shipping ecommerce model and how you can integrate it into your own business, check out the options below

Looking to learn more about dropshipping?

Talk to a trusted business advisor today

Book a consultation