Dropshipping: How to evaluate the sales model?
(Online) trade without your own warehouse – that’s what dropshipping promises.
We will be happy to explain what exactly this means and whether it is worthwhile for all entrepreneurs.
Definition: What is dropshipping?
Dropshipping is a special form of online trading. This is because the retailer does not ship the goods, but leaves this step to the wholesaler with whom he cooperates.
In concrete terms, this means that customers place an order in the online store of the retailer in question. However, the retailer does not have the product in stock. Instead, they pass the order directly on to their retail partner, who then takes care of shipping. The customer is not usually aware that another retailer is involved in the ordering process. This is because the dropshipper, i.e. the wholesaler who handles the shipping, packs the products without its own branding, i.e. in neutral packaging, or uses the packaging material of the online retailer who operates the store.The product is shipped and stocked by the wholesaler, but the customer is not aware of this at any point in the sales process.
Sounds like a clever business idea, but is the model worth it for the retailer?
Dropshipping process
The dropshipping process works like this:
- The customer visits the website of the online store.
- He finds a product he likes and orders it.
- The online retailer forwards the inquiry about the product to his dropshipper, the wholesaler. This does the lion’s share of the work for the online retailer.
- The wholesaler ships the desired product from its warehouse directly to the customer.
For online retailers, dropshipping has the great advantage that they can completely save on warehousing and logistics. In retail, these are still the areas that cause the greatest costs.
The dropshipping model, also known as drop shipping or fulfillment, can therefore be a good opportunity to get into online retailing. Under certain conditions. But more on that later.
The types of dropshipping: wholesale and consignment warehouses.
Generally, dropshipping works as either fulfillment from a wholesale warehouse or consignment warehouse.
We’ll take a closer look at what is meant by the two types in a moment.
One word in advance: you should not confuse dropshipping with the commission business. This is a completely different approach.
In contrast to dropshipping, you hold the goods yourself in a commission business. You take over the sale of the product for the actual owner. If a sale is made, you receive a commission.
Dropshipping from the wholesale warehouse
With dropshipping from the wholesale warehouse, the name says it all. (Online) retailers can offer goods from the wholesaler’s entire warehouse for sale in their store.The offer is limited only by the availability of the products. If the wholesaler no longer has the respective product in stock, it can no longer be ordered from the retailer’s store.
Dropshipping from the consignment warehouse
With this variant of fulfillment, the online retailer has its own area in the wholesaler’s warehouse. With this variant, the online retailer does not have to worry about certain products being unexpectedly sold out.This is because only he is given exclusive access to the products offered in the consignment warehouse. The wholesaler usually pays extra for this preferential treatment. Online retailers must therefore plan for additional costs with this dropshipping variant. On the other hand, they also get greater reliability in terms of delivery of the goods.
What are the costs of dropshipping for merchants
Dropshipping is of course not free of charge
Of course, the online retailer does not get the benefits of dropshipping for free. In addition, it depends on the dropshipper which costs he charges for his service. If you are interested in dropshipping, we recommend that you ask for a detailed breakdown of the individual items beforehand. You will probably have to expect at least the following costs for dropshipping:
Shipping fees: As a rule, the shipping fees are based on the usual market prices. However, it is still conceivable that the dropshipper will charge other costs here. Therefore: Clarify!
Handling fees: The handling fee is also known as the pick-and-pack fee. This already makes it clear what this is all about. The retailer uses these costs to reimburse the work that he or his employees have to do to retrieve the product in question from the warehouse, pack it and ship it.
Surcharge for the purchase of small quantities: Some dropshippers also charge additional fees if the merchant orders only small quantities. However, if the order reaches a minimum sales volume, the surcharge is often waived.
Dropshipping: Don’t be blinded by advantages
Dropshipping sounds like a good idea on the whole. Because with a small effort, you can apparently easily enter the business as an online retailer and initially earn a small side income in addition to the main job. Until you have gathered enough knowledge and made enough contacts to enter the business full-time.
But of course it’s not quite that easy to make money with dropshipping. Although this type of online trade may be quicker to implement because you don’t have to build up your own warehouse, it still remains a trade in certain products. To give you a comprehensive overview of the opportunities and threats of fulfillment, we have collected the pros and cons of dropshipping for you.
Advantages and disadvantages of dropshipping
Advantages
Disadvantages
| Advantages Dropshipping | Disadvantages Dropshipping |
|---|---|
| Investments are initially low, as no warehouse needs to be built up. | The profit margin is often somewhat lower due to the elimination of the margin on purchase prices. |
| Dropshipping eliminates the ongoing costs of warehousing. | Cross-selling is made more difficult because the wholesaler handles shipping. |
| The lack of a warehouse also means that quite little capital is tied up. | Shipping costs may increase if the wholesaler adjusts prices |
| Especially newcomers to online trading can benefit from the large range of goods offered by their supplier with dropshipping. | Online retailers must rely on the dropshipper having the promised products in stock. However, they themselves cannot intervene in this process. |
| Online retailers who rely on dropshipping can respond more quickly to fluctuating demand. | Returns and especially complaints from customers can become a problem. This is because the goods cannot be sent to a warehouse of the online retailer. It goes back to the wholesaler. |
| Customer loyalty measures and service orientation can suffer in the dropshipping model. Online retailers don’t have the leeway to make customers happy as they might like. Those who only have a fairly low profit margin due to dropshipping cannot go far in accommodating their customers. Here, classic retailers may have an advantage. |
Does dropshipping suit me?
So you see: Like most things, dropshipping also has advantages and disadvantages that need to be weighed up against each other.
People who want to try dropshipping as a business model should therefore thoroughly search in advance for a partner that fits their own requirements. In addition, the model has some weaknesses that you should definitely try to address. These include:
Delivery reliability: You have little, if any, influence on the delivery of the goods. However, your customers want a binding commitment.
Returns and complaints: On this point, you should try to establish a good process with your wholesaler. Complaints in particular play a major role in the area of customer satisfaction.
Purchase price: Under certain circumstances, your purchase price may change at short notice. To ensure that the product you purchase through the wholesaler does not become a cost trap, you must work with a functioning system. Goal: Changes in the purchase price must be transmitted promptly to the online store and integrated there.
