Online retail is an ever-changing industry. In addition to being extremely competitive, retail entails a lot of tedious work to maintain the high level of product quality that you want your customers to enjoy. Fortunately, today’s business landscape offers a myriad of opportunities for buyers to source new products. Regardless of the product sourcing strategy you choose, it should ultimately lead you to find great products at reasonable prices.
If you’re working towards being a successful online retailer, one of the best product sourcing methods for you is dropshipping. In this article, we will discuss everything there is to know about dropshipping and compare it to the traditional method of owning your inventory.
What is dropshipping?
Dropshipping is a fulfillment method where businesses, like retailers, are not required to keep the products that it sells in-house. Similar to inventory consignment, this type of product sourcing method allows businesses to list products that they want to sell without having to manage the inventory themselves.
Instead of purchasing inventory from a third-party supplier and then storing them in a storage facility, businesses can use dropshipping to sell products and pay their suppliers only after a customer confirms a purchase. Let’s take a closer look at how dropshipping works.
How does dropshipping work?
Perhaps the main thing that differentiates dropshipping from other inventory sourcing models is that it eliminates the need to implement costly inventory management measures. A dropshipping arrangement usually involves three main parties, you (the business), a third-party supplier, and a customer. The process can be summed up like this:
- A customer purchases an item from your website
- The order is automatically forwarded to your supplier
- Once the order has been received, your supplier takes care of the logistics and ships the product directly to your customer under your brand
What is the difference between dropshipping and owning your own inventory?
Obviously, the biggest difference between dropshipping and owning your inventory is inventory costs. With dropshipping, you don’t have to think about all the costs associated with holding inventory such as holding costs, labor costs, as well as those associated with machinery and equipment. If you’re deciding which sourcing method to use for your business, here are a few things to consider:
- What kind of products are you planning to sell?
- At the end of the day, your sourcing method depends on the type of products that you are planning to sell. If you’re going to sell products with custom specifications that require the utmost attention to detail, carrying your own inventory might be the best option for you.
- How much capital do you have?
- It’s no secret that owning and storing your products requires a hefty amount of capital. With dropshipping, there is virtually no inventory to hold. It also reduces the amount of capital that a new business needs before opening up.
Pro tip: Whether you’re choosing dropshipping, owning your stock, or consignment inventory, you need the necessary capital to hit the ground running. If you need an alternative financing option to fund your business venture, create a business account today at kickfurther.com.
Kickfurther is the world’s first online inventory financing platform that enables companies to access funds that they are unable to acquire through traditional sources. We connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules, allowing your brand to scale quickly without impeding your ability to maintain inventory or financial flexibility. Here’s how it works:
- Kickfurther pays your manufacturer in advance to produce inventory.
- Once sales periods have been established, businesses will only pay back what they owe only after they start selling their inventory.
- At the end of each sales period, businesses are required to submit sales reports to Kickfurther.
- Businesses only pay for what they have sold during a specific sales period.
What are the pros and cons of dropshipping?
Like other types of sourcing methods, dropshipping presents a myriad of pros and cons for various businesses. If you’re seriously considering starting a dropshipping business, here’s a quick look at some of its advantages and disadvantages.
- Easy setup process – Most notably, dropshipping allows just about anyone to establish an online business due to its lower capital investment and easy setup process. As a business owner, you won’t have to go through the painstaking task of finding a warehouse and employing staff to manage your products.
- Inexpensive to start – Inventory is the lifeblood of all product-oriented businesses. However, it’s also the most expensive to procure and manage. When it comes to dropshipping, businesses do not need upfront inventory costs by only paying for the inventory that they have actually sold.
- No warehousing costs – As previously mentioned, dropshipping enables businesses to meet customer demand without the burden of managing inventory and warehouse costs.
- Improved cash flow – Since your cash isn’t tied up with all the costs associated with inventory, you can now focus on building your brand and expanding your customer base. After all, wouldn’t it be better to focus on scaling and growing your business without worrying about things like inventory levels and logistics?
- Highly competitive – Due to the many benefits that dropshipping provides, it can’t be helped that more and more businesses are implementing the dropshipping model. This has resulted in a crowded industry – making it an increasingly competitive niche.
- Low-profit margins – Since you’re competing with more businesses, chances are that you could face relatively low margins depending on the type of product that you’re selling as well as the industry that you’re in.
- Logistics depend on your supplier’s capabilities – While keeping inventory management processes out of your hands can be a good thing, the tradeoff is that you are highly reliant on your supplier’s logistical capabilities. In the event that your supplier makes a mistake, customer complaints will be directed to your brand and not to your supplier.
- Product quality can be difficult to monitor – Put simply, you don’t have control over your supply chain when using the dropshipping method. To avoid these issues, you may have to implement a clear communication method that lets your suppliers know whenever there’s an issue with a particular product.
Conclusion: Which option is right for your business?
There is no definitive way to choose a sourcing method for your business. While it’s true that dropshipping can be a lucrative undertaking, business owners would still need to weigh different factors before taking the plunge.
Similar to other business models, dropshipping presents a host of challenges that business owners have to be ready for. It is incredibly important that those seriously considering dropshipping as their main sourcing method need to conduct an ample amount of research to make sure that their order fulfillment method works well with their business model. Remember, every business is different, there is no all-encompassing sourcing method out there that will always keep you ahead of the competition.