HoR Story Part 5: Pros and Cons of Dropshipping

Having an internet store that uses a drop shipper is an attractive sales model because:

  • You never have to physically send out anything yourself.
  • Zero inventory.
  • Once you get an order, you send it off and you’re done.
  • Extremely low overhead compared to a traditional business.
  • You can run it from anywhere with an internet connection.

Sounds pretty good huh? Well for the most part it is, but there are also some inherent problems with running this type of dropshipping business:

  • Your margins are relatively small. Usually between 20% and 40%.
  • You must compete with larger suppliers who are well established. Nowadays a lot of larger wholesalers are selling to individuals instead of just distributors, this is big competition.
  • You may not always have a phone line connected. If it’s just you, it’s hard to always pickup the phone like a big business does.
  • As search engines and comparision sites flourish, it’s easier than ever to find your same product from multiple vendors.
  • People ordering larger quantities of items will want deep discounts you cannot always provide.

If this was five years ago I’d tell you a dropshipping model is GREAT, and it still sometimes is….however the largest threat to this model is the wholesalers.

Previously these people would import products by the shipment container full, keep them in a huge warehouse on pallets and only sell to volume buyers. The distributors who buy the pallet amounts would then keep stuff in their warehouses and send out to individual consumers. Then after that comes the dropshippers, think of them more like middle men. As the level of technology and sophistication of these large distributors increases, they now have systems in place where individual consumers can buy small quantities of products at near wholesale prices.

As technology improves it allows these larger vendors to sell to individuals, it also allows the individual consumers to find these distributors through internet search results. So as time goes on, the middle men will slowly have more competition pressures.

SO HOW TO OVERCOME THIS?

Many of the larger distributors focus on a specific niche of products (Party suppliers, cell phones, toys etc), so they only have so much to offer. Distributors keep smaller quantities on hand of products, but can carry many items from various wholesalers. So distributors (and consequently drop shippers) offer their unique selection of products, customer service and unique store shopping experiences.

Next >>> Part 6: How It All Works
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The House Of Rave .com Story
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Part 1: The Beginning
Part 2: Finding Something to Sell
Part 3: Finding A Drop Shipper
Part 4: Getting A Site Setup
Part 5: Pros and Cons of Drop Shipping
Part 6: How It All Works
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    Blog posted on: December 15, 2007

    7 comments on “HoR Story Part 5: Pros and Cons of Dropshipping

    1. Christine

      Thanks for this post! I’m venturing into the world of ecommerce in the first quarter of 2008 and very interested in learning everything I can from your experiences!

      Reply
    2. Anonymous

      Neville – very interesting blog post.

      I have some comments.

      First of all, you mention that margins are very low. True.
      However, as you also mention, workload to maintain these businesses is low. Unlike a traditional shop, a properly set up online drop shipping commerce will only need a few hours of work time per week to be maintained (say 4 hours per week ;-).

      This allows more than one shop to be opened and maintained at the same time, possibly selling different products to different markets (which means diversification).

      Second, drop shipping can still have certain advantages over direct selling by distributors.

      Distributors get their products in large quantities (ie, lower wholesale prices) from a small range of wholesale suppliers and their product range is limited in quantity/quality. Drop shipping businesses can have larger range of products or a more varied range of products, or both.

      Indeed, the latter can select their suppliers as to expand their product range and match it to the needs and wants of a certain market segment/niche.

      Drop shippers may be slightly more expensive than distributors but provide a better shopping experience to buyers.

      FG

      Reply
    3. Pingback: House Of Rave .com Story Part 1 - Neville's Financial Blog

    4. Pingback: HoR Story Part 2 : Finding Something To Sell - Neville's Financial Blog

    5. Pingback: HoR Story Part 3: Finding a Dropshipper - Neville's Financial Blog

    6. Pingback: HoR Story Part 4: Getting A Site Setup - Neville's Financial Blog

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