E-Commerce

Dropshipping as an e-commerce business model

Fatih-Kağan Taşkoparan

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As a retailer, you can't sell goods that you don't have in stock - can you? Yes, you can. That's exactly what dropshipping is all about. Find out exactly what it is, how the principle works and what you need to bear in mind if you want to use dropshipping as an e-commerce model.

What is dropshipping?

This is how e-commerce usually works: End customers search for products, find them at retailers, order and pay for them, whereupon the retailers collect the products from the warehouse, pack and ship them.

Dropshipping works a little differently: end customers still order goods from retailers, but they don't have the goods in stock themselves. Instead, they forward the order to manufacturers and wholesalers. From there, the ordered goods are shipped directly to the end customer.

As an online retailer, you act as an intermediary between the end customer and the wholesaler or product manufacturer in dropshipping.

This puts you in a position to offer a wide range of products that you might not be able to stock yourself. Wholesalers and producers, in turn, benefit from the fact that your online store provides a virtual shop window and a (preferably attractive) channel for orders.

An important point here is that you only have to pay for the product once your customer has ordered it from you and paid the purchase price. The difference between the purchase price and the final price that you charge for the product is your margin, so you keep the profit from this transaction.

Dropshipping can also be described as an e-commerce fulfillment method because you as a retailer are not directly responsible for the overall movement of the products. As a dropshipper, you bypass the classic steps of e-commerce to a certain extent. You are no longer responsible for shipping and the entire logistics process.

In Germany, dropshipping is also known as drop shipping. The model has been practiced in the B2B logistics sector for some time. With the advent of digitalization, the term dropshipping has become increasingly popular.

What do you need for dropshipping?

The first thing to consider when selling via dropshipping is suitable products. For example, you can specialize in niche products. Studies on consumer trends and analyses of trending products online will help you with your research.

Once you have identified products that would be ideal for dropshipping in your e-commerce, you need reliable suppliers. Research manufacturers and contact them to find out whether and under what conditions they will enter into a dropshipping partnership with you.

Alternatively, you can look for suppliers on dropshipping marketplaces. They contain databases where you can find all the information you need, from merchandise to manufacturers and suppliers. However, it is not uncommon for you to have to pay fees to join such e-commerce dropshipping platforms.

Last but not least, you should take care of targeted online marketing - after all, everything depends on your website generating traffic and customers placing orders with you.

These are the advantages of dropshipping

Low start-up capital

You generally don't need a lot of start-up capital for your dropshipping e-commerce business model. At the very least, there are no costs for storage, shipping, corresponding personnel or other logistical planning - however, you will need to make an effort to ensure effective marketing. The risks associated with getting into dropshipping are therefore significantly lower compared to traditional e-commerce, as you don't have to order large quantities in advance or manage stock.

Product variety

As a dropshipping online retailer, you can build up a large product portfolio as you are able to display goods from all over the world in your virtual shop window without having to keep them in stock yourself. This portfolio can also be varied. If you recognize trends and react quickly, your store can grow rapidly in this way.

No goods risk

As a dropshipping online retailer, you do not have your own goods in stock, so there is no risk for you. You also don't have to worry about so-called slow-moving items, as you only have access to the wholesaler's inventory as an intermediary.

Disadvantages of dropshipping

Little influence on customer satisfaction

Even if you have the best online store in the world, you will face problems through no fault of your own if parcels do not arrive at your customers' homes or are carelessly packaged, or if goods are defective or damaged. You are completely dependent on the reliability and cooperation of your trading partners. Essential aspects of e-commerce are therefore beyond your control with dropshipping. A conscientious selection of your suppliers and a competent customer service are therefore crucial.

Lots of competition and low margins

Other retailers are also discovering dropshipping in e-commerce. You should therefore keep in mind that many operators may offer the same products as you - and possibly at a lower price. This can make it difficult to differentiate yourself and stand out from the competition. In addition, you can only calculate with low margins, as most of the money from each sale goes to the supplier, manufacturer or wholesaler.

No own branding

Branding or your own product brand should not be underestimated in e-commerce. As an online retailer, you can usually anchor your store in your customers' minds in various ways, such as with goodies, eye-catching packaging or advertising material in the shipping package. This recognition value does not apply to dropshipping, as you are not shipping goods yourself. This makes it all the more important that your store offers distinctive incentives that motivate your customers to return. Your dropshipping business model will only survive with regular traffic to your website and strong customer loyalty.

Conclusion

Dropshipping is an attractive business model as it eliminates some of the risks of e-commerce. Nevertheless, it's not all that easy for dropshippers to beat the competition. Margins are low depending on the product, price competition is fierce and the reliability of your suppliers is a factor that you cannot directly influence. A good dropshipping business requires a lot of research, planning, a feel for needs and trends and good marketing. Whether you already run a store with your own warehouse or are completely new to e-commerce: It is advisable to start dropshipping with a few selected goods first.

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