Dropshipping is a method of retailing in which you don’t maintain your own stock. Instead, you pass your customers’ orders to a wholesale supplier or distributor that stocks its own inventory. The supplier posts the goods directly to the buyer using the shipment details you collect when the customer makes their purchase. 

The dropshipping retail model has its advantages, including lower capital investment, speed to market and scalability, but it’s not without its challenges. In this article, we’ll look at the pros and cons of dropshipping, plus four top tips on how to make it work for you. 

How dropshipping works

In the standard retail model, you choose which products you’d like to sell, then buy and store them before orders come in. You’re responsible for packaging and shipping the goods post-purchase as well as handling returns. 

In dropshipping, the distribution model is different. Your customer-facing store sells products that are held by a supplier elsewhere, often in another country, who handles the whole shipping process on your behalf. 

Here’s how the dropshipping process works in terms of finances:

1. Based on your product description and marketing, a customer places an order for an item that you don’t hold in stock. They pay you the retail price.
2. You keep the profit (the difference between the retail and wholesale price).
3. You forward the order to your supplier and pay them the wholesale price.
4. Your supplier ships the order directly to the customer. 

The advantages of dropshipping

Dropshipping wouldn’t exist if it didn’t have certain advantages over the traditional distribution model. Here are five features that make it appealing. 

Lower capital investment

Most notably, dropshipping allows you to avoid spending large amounts on stock upfront. You’re therefore free to focus on sourcing products and bringing them to market before you’ve even made a sale. 

Fewer barriers to entry

Other obstacles that you’d traditionally face aren’t present in dropshipping. You don’t need to manage a warehouse, pack and ship orders, track inventory and stock levels, or handle returns.

Run the business from anywhere

Without the need for a warehouse or return address, you’re free to run the customer-facing end of your business from anywhere there’s an internet connection. All that matters is that you can effectively communicate with customers and suppliers. 

Scalability

In traditional retail businesses, the more orders you get, the more work is required to fulfil them. In dropshipping, the extra work – at least in terms of production, packaging and shipping – is handled by your supplier. This makes it easier to avoid bottlenecks and grow your operation.

Testability

Traditionally, trialling new products is tough because you have to invest in the stock upfront. With dropshipping, you can swap products in and out of your store at will. This makes it easier to test new ideas on your target market.

Drawbacks of dropshipping

If dropshipping has so many advantages, why isn’t everyone doing it? Well, a lot of companies are, and that’s one of the main drawbacks. 

Competition

In theory, anyone with an online store and a supplier can enter the dropshipping business. This is in stark contrast to the traditional retail model, which requires initial capital investment, premises, a warehouse and many other moving parts to facilitate order fulfilment. As a result, many niches are highly saturated by companies offering identical products sourced from the same suppliers. 

Low margins

With dropshipping, wholesale prices can be constrained by your relatively small volume of orders at any one time. Combined with high competition, this can make profit margins tight. You could face a margin between 10% and 30%, but it will depend on your industry, product(s), marketing costs, supplier and customer location, and other factors.

Long delivery times

A natural byproduct of the way the dropshipping process works is that shipping times are much longer than if you held stock in the same country as where your customers live. A product drop-shipped from China to the UK could take 20-40 days to reach the customer, which is in stark contrast to next-day Prime delivery.

Issues with suppliers

While keeping packaging and shipment out of your hands can be a great thing, when there’s an issue with an order, it can be the opposite. As the customers’ point of contact, it’s your responsibility to explain what went wrong and how you’ll fix it. 

It’s harder to build your brand

By its nature, dropshipping typically means selling other people’s products. As such, finding opportunities to put your company’s stamp on the product can be challenging, which can make building your brand harder. 

Three tips on making dropshipping work for you

Succeeding in dropshipping means capitalising on the advantages the retail model offers while finding creative strategies to avoid its inherent downsides. Here are three tips for making dropshipping work for you.

• Choose your products carefully. There’s no point dropshipping products that are already available to your target customers via Amazon’s 1-Day delivery. The best products are unusual or unique, not offered by too many other sellers and therefore worth the wait. 
• Be clear on what the customer should expect. Many people don’t mind long wait times, providing that they love the product and know how long they’ll have to wait when they make the order. Be clear on shipping times and check how long they are before choosing which countries you sell to. One way to speed up delivery is to use a fulfilment company. In brief, this involves buying goods from a supplier, then sending them to another company in your customers’ country (e.g. the UK) that holds the stock and sends it out when you receive orders. 
• Put marketing first. If the low margins of dropshipping mean you can’t compete on price, focus instead on providing superior product education to customers. Show them how great your goods are through photos, videos and reviews and get them excited enough to make an impulse purchase on that basis. The best dropshippers are the best marketers. 

Dropshipping lowers the upfront working capital you need to start your business, but your outgoings and incomings might not always be in sync. While you wait to receive payment from your customers, you might need to place orders with your suppliers or a slew of returns could put the brakes on your cashflow. 

American Express^® Business Cards give you a payment period on purchases of up to 54 days¹ with no pre-set spending limit, giving you greater control over your cashflow. Find out more about our range of business cards and how they can help you manage your finances. 

1. The maximum payment period on purchases is 54 calendar days on Business Gold & Platinum Charge Cards and 42 calendar days on the Business Basic Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
2. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.