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WHAT IS DROPSHIPPING AND HOW DOES IT WORK

Updated: Jun 3, 2020

I get very excited sharing my knowledge about Dropshipping because this is a business model I am currently using for my wellness business.


Dropshipping is a type of business model which enables a company or an individual to run an online business without keeping stock or renting a warehouse to store their products.


Let me explain it in simple terms…You (Retailer) signs an agreement with a product supplier (Supplier/Manufacturer) to package and deliver/ship product directly to your customer every time you make a sale.


I hear you asking yourself, “how do I make a sale?”


The best way to start is to identify and have a discussion with a potential suppliers/manufacturer, negotiate discounts or commission structure, sign an agreement and create an online store (e-Commerce store), upload products, payment options and start marketing your site. Is that simple!



HERE IS HOW THE PROCESS WILL WORK


  • Customer places an order on your website and pays you (Retailer) directly;

  • You (Retailer) take your profit and automatically or manually forwards the order and customer details to the (Supplier/Manufacturer); and

  • Supplier acknowledges your order, packages the product and delivers it directly to your customer showing only your (Retailer) details. Customer should still think they are buying from you (Retailer) directly.


Based on the type of agreement you have signed with a supplier/manufacturer, you can either add mark-up on their prices to make profit or you can pay them a discounted price and the difference will be your profit.


Just like that, the order is complete and you have made your first sale. Now you keep on repeating the same process and adding more products to your online store. Please note that you can list many products from different suppliers/manufacturer as you like on your online store.



But before you get excited and put all your savings into a new Dropshipping business, here is a list of 5 things you should know:


1. LOW PROFIT MARGINS


The fact is, since you don’t have to manage or store your own stock, the overheads are low but so are the returns. This means you have to do a lot of selling just to stay afloat, let alone make a decent profit.

Most of that profit has to cover your marketing, website maintenance and hosting, telephone and data costs. Also take into consideration that your potential customers can still find your supplier/manufacturer when they do a product search on Google unless your supplier’s SEO (Search Engine optimisation) is not great and you rank higher than their store.


2. HIGHLY COMPETITIVE


Because very little capital is required to start a Dropshipping business, this means a lot of competition.

Remember you don’t have an exclusive deal with your suppliers/manufacturers and this means any number of competitors could be selling your exact same product, and if you’re just starting out, your competitors with years of experience have the resources you don’t and can suffocate you with lower prices.


3. NO CONTROL OVER SUPPLY-CHAIN


In a normal e-Commerce business, if a customer complains about product quality, courier speed or return policy, you can address the problems yourself but not in the Dropshipping business. In Dropshipping, you are just reassuring the customer about something that’s out of their control.


You are more or less at the mercy of your supplier/manufacturer but you’re the one who still has to talk to your customer directly. If issues are not addressed in a speedily manner and the unhappy customer becomes vocal about it on social media platforms, those bad reviews could end your business before it even starts.


4. LEGAL LIABILITY ISSUES


Some suppliers/manufacturers are not as legitimate as they claim and you don’t always know where the product comes from or if the quality they promised is great. Even more deceptive is when suppliers/manufacturers illegally use a trademarked logo or another company’s intellectual property, which happens more than average. Whatever illegal activities your suppliers/manufacturers are up to, as their vendor you’re automatically implicated unless you have an agreement that addresses this issue. This is something you will want to keep in mind when choosing suppliers/manufacturers.


5. DIFFICULT TO BUILD A BRAND


Ghostwriters like me, yes I ghostwrite for few travel agencies in and around Cape Town too - you should understand that the credit for your work goes to someone else. If the quality of a product you are selling is great, your customers are going to focus mostly on the product’s brand and forget about the shopping experience entirely.



But surely there can’t be only bad things about Dropshipping right?

Yes, you are correct and here’s is a list of 6 benefits of Dropshipping business model:


1. SIMPLE TO SET UP - There are 3 essential steps you need to take, find the supplier/manufacturer, set-up your e-commerce website (or get an expert to set-up one for you) and start marketing it. There are different types of digital marketing tools you can use to help you market your e-commerce website.


2. YOU CAN OPERATE FROM ANYWHERE - No shop, no warehouse and no employees (or you can have one or two assistants). As long as you have a laptop, cellphone and internet connection, you are good to go.


3. LOW SET-UP COSTS - Costs for most of traditional businesses include rental for shop/office space, electricity, stationery, shop branding, purchasing of stock, business insurance, etc. Dropshipping business eliminates most if not all those costs, all you have to pay for is the associated costs of running your e-Commerce website (Hosting, Theme, Apps, etc.).


4. LOWER RISK - If the business doesn’t sell products you still don’t lose anything, so there is little to no pressure about having to sell your inventory.


5. YOU CAN SELL PRODUCTS FROM DIFFERENT SUPPLIERS/MANUFACTURERS - You can specialise in one product or multiple products from different suppliers/manufactures, it’s up to you. Just find your niche and there is bound to be a supplier that caters to it.


6. REDUCED LOSSES ON DAMAGED GOODS - Since the delivery of products goes directly from the supplier/manufacturer to the customer, there are fewer delivery steps involved which drastically reduces the risk of damaged items while moving from one physical space to another.



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