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We live in a time when it’s easier than ever to set up a fully working shop, albeit a virtual ecommerce one. 

One of the things that makes it so easy is the fact that, unlike in the past, you don’t actually need to own or store any stock in order to start selling to customers. 

How is that possible? One of the most popular ways is through dropshipping. 

What is dropshipping?

Here's a picture of an actual ship being dropped. This is not what dropshipping is.

dropshipping

It's really just a fancy word for outsourcing the inventory and shipping side of your ecommerce business.

Rather than going down the traditional route of ordering in stock, keeping it in your warehouse (or sitting room perhaps, if you’re a fresh startup) and then posting it out when orders come in, you can fulfil orders directly through the wholesaler or manufacturer.

So when orders come in you simply transfer them to the dropshipping partner who then handles all of the fiddly delivery logistics. 

Simple. No warehouse. No inventory woes. No logistical headaches when it comes to getting products out to your customers on time.

Example of a dropshipping partner

Perhaps the most high-profile example of a dropshipping partner is Amazon and its ‘Fulfilment’ service (FBA).

Amazon will store sellers’ inventory, pick it, pack it and ship it across the EU as and when orders are made via the Amazon site. 

Edit: Amazon's FBA qualifies as a third-party logistics (or order fulfilment) provider rather than a dropshipping partner because you still have to buy the stock up front, whereas with dropshipping you only purchase stock once the sale has gone through. 

I can feel a dropshipping vs. order fulfilment post coming on... 

The benefits

More time for other tasks

The most obvious benefit in using dropshipping is, as with all forms of outsourcing, an increased ability to focus time and effort on other areas. 

By letting somebody else take care of inventory and shipping issues, you can spend more time on areas such as sales, marketing, PR, recruitment – all the things that are so crucial to success in the early days of a startup and beyond. 

Less startup capital required

When you’re thinking of starting your first business, unless you’re one of the lucky few it’s highly likely that a lack of capital is going to be one of the biggest barriers.

And the fact you’re new to the game means you’re unlikely to get much credit from manufacturers or wholesalers.

But because it removes the need to buy stock up-front, dropshipping enables people with relatively low startup funds to deck out an ecommerce site with products.

Easier to try new things

Trying out new products in a traditional ecommerce format is relatively risky. You’ll likely need to purchase a large quantity of something, so if it doesn’t sell you’re stuck with the leftover stock. 

But with dropshipping there is no need to order in bulk as you’re going direct to the source. So it’s easier to test the water with new products with relatively little financial risk.  

The drawbacks

Less control

Last year I did a Q&A with the founders of Postboxed.

One of the reasons they gave for keeping and managing their own inventory was that they wanted full control over the packaging and posting.

Postboxed


This is particularly important for gifting sites like theirs, but whatever your business, from a general customer experience point of view it pays to have as much control as possible over your products: how they’re packaged, delivered, and so on. 

Tight profit margins

Nothing in business comes without a catch. Of course there is a cost involved when using a dropshipping service. 

Not only that but the nature of dropshipping means you are selling other people’s products, meaning it is very difficult to compete on price, particularly with the likes of Amazon, Argos et al. 

Which leads me to my next point...

Lots of competition

I mentioned in my intro that it’s easier than ever to set up a shop and start selling. But paradoxically this means it’s also more difficult than ever to make a success of it because there’s so much competition.

Because almost anyone with access to Google can set up a website and start churning out 'quality content' these days, you are going to be up against lots of other people who have access to the same products and are probably selling them at very similar prices. 

It is therefore vital that you differentiate yourself in some way if you’re going to make a success of your dropshipping business.

This could be through clever marketing or a unique range of products, but either way it’s going to be a struggle. 

What’s your experience?

Have you successfully used dropshipping in your ecommerce business? Had any particularly good or bad experiences with it?

Let me know what your views are in the comments below.

Jack Simpson

Published 14 January, 2016 by Jack Simpson

Jack Simpson is a Writer at Econsultancy. You can follow him on Twitter or connect via LinkedIn.

252 more posts from this author

Comments (6)

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Pete Austin

Pete Austin, CTO at Fresh Relevance

I'm a huge fan of outsourcing all non-core business functions, which is almost essential if you want to bootstrap a business without £millions of capital, and I strongly recommend that readers give dropshipping a try.

But there's one thing I don't follow. When you say: "But with dropshipping there is no need to order in bulk as you’re going direct to the source. So it’s easier to test the water with new products with relatively little financial risk."

I've found the opposite. For example suppose you're setting up an online B2C coffee business [something I researched last year].

If you're trialling a business from home, you can temporarily meet the initial orders by just buying from local shops and repacking what they sell in your kitchen before sending it to customers. Then you outsource the lines where there's sufficient demand.

Don't see how that works if you're going to a fulfilment house at the "test the water" stage. Especially as if you try to buy coffee direct from the source, they ask how many shipping containers you want, with payment up front.

Please could you clarify?

6 months ago

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Andy Geldman, Founder at Web Retailer

There's a difference between dropshipping and third-party logistics (3PL). Amazon FBA is not a dropshipping service, its a 3PL service.

With dropshipping, you are buying the product from the supplier after you receive the order from your customer, as well as getting them to ship out the order.

With 3PL the products are bought and owned by you, and you are outsourcing warehousing, order processing and shipping - of your own stock - to a third-party supplier.

6 months ago

Jack Simpson

Jack Simpson, Writer at Econsultancy, Centaur Marketing

@Pete - If you can purchase the products you need from local shops and still make good margins, as in the example you mentioned, then great. But if not then the chances are you're going to need to go to a manufacturer or wholesaler.

The point I was (perhaps clumsily) trying to make was: because you only send orders to the supplier after you've made a sale, there is no risk of ending up with a pile of stock in your warehouse (or kitchen/lounge/etc!) you can't sell. If nobody buys the new product you can simply take it off the site again and all you've lost is a bit of time.

@Andy - You are correct. Thank you for the clarification. I will add a note in for our readers.

6 months ago

Pete Austin

Pete Austin, CTO at Fresh Relevance

@Jack Simpson You miss the point. When you're starting a new business, you never expect to make a profit immediately, so you can afford to deliberately lose money for a while. It doesn't matter if you buy expensive and sell cheap. What you must do is to quickly test the market - see what sells and at what price.

Most business ideas don't work, so you try to reject these as quickly and cheaply as possible and move on. (For example we rejected B2C coffee because we kept finding more and more great companies already doing it.)

Only when you've found a potential winner do you try to negotiate the deals to source and sell product at a profit, and preferably with others doing almost all of the work. Which IMHO is the point at which outsourcing fulfilment is a great idea. I'm just not sure it makes sense to start with dropshipping before you test the market.

6 months ago

Jack Simpson

Jack Simpson, Writer at Econsultancy, Centaur Marketing

@Pete - You're not wrong, but I fear we're talking about slightly different things here. in this article I was thinking more of an existing ecommerce site that already operates a dropshipping model.

In this instance, because you don't have to purchase stock up front it's easy to trial out new products on your site. You only place an order with the supplier/dropshipper after the sale so there's no up-front financial risk.

Say you already had a coffee dropshipping site (if such a thing exists) up and running, for instance, and you wanted to try out a new type of bean, you could put it on your site, promote it, but if it didn't sell you could take it down again without having bought any stock. It's a relatively risk/cost-free way to test the water.

6 months ago

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James O'brian, Marketing at BigBuy

Hello everyone!
I’d like to share with you the following web page from BigBuy, considered to be the leading European B2B e-marketplace in the original gift sector. It explains in detail everything relating to dropshipping and the B2B wholesale business: http://www.bigbuy.eu/en/dropshipping.html. This information is a helpful addition to what’s discussed in the article and all the answers that Jack Simpson is giving in response to all of your questions.
Regards.

5 months ago

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