Dropshipping offers a streamlined approach to online sales and potentially healthy profits for business owners who can sidestep common challenges.

what is dropshipping

The popularity of e-commerce is hard to ignore, with over 27 million Canadians — 75 per cent of the population — using it in 2022. Business owners are paying attention, and many are opting to open online stores to reach customers.

Dropshipping can be an appealing business model for those who want to explore a more streamlined approach to e-commerce, offering benefits to businesses starting out and looking to expand.

Ideally, dropshipping offers a channel to fulfill customer orders in a seamless, low-cost way. Understanding this avenue of selling could open new revenue streams for your business, but it’s wise to dig into the pros and cons before jumping in.

What is dropshipping?

Dropshipping positions you (the seller) between the supplier and the end customer. With this structure, you don’t need to purchase large quantities of products and pay for the space to house them. Instead, you facilitate sales through an online store.

Your role is to create and manage the online store so that the products are advertised and attractive to potential customers. As orders come in, the original supplier fulfills them and handles shipping.

How does dropshipping differ from traditional retail sales?

Traditional retail involves purchasing inventory, typically at a wholesale price, and storing it until you can sell it to your customers at a higher price than you paid.

The difference between what you paid for your inventory and what you sell it for feels like profit in traditional retail, but it’s not that simple. You also need to pay expenses — like staffing, marketing and inventory storage — from the money you’ve made through sales.

Dropshipping allows you to remove storage from your business costs. In many cases, especially where the profit margins are tight, these savings can significantly impact your company’s profitability.

Benefits of dropshipping for business owners

There are solid reasons to try dropshipping, especially if it helps you overcome barriers to getting your business off the ground or expanding your market share.

Here are five significant benefits of dropshipping:

1.     Low startup costs

Starting a business may feel like it comes with a slew of setup costs, with investments required to create a company brand, purchase inventory and market your products. Startup costs can be a barrier to launching a business or exploring new markets.

Eliminating the upfront costs of inventory with dropshipping can help you start or expand your business at a low cost, keeping your cash for other expenses.

2.     Reduced risk

Retailers already manage risk in many areas of their business. You need to order products well ahead of seasonal sales, forecast how much product you might need and invest in the inventory to have it ready to sell when your customers are clamouring for it.

However, timing these investments can be tricky. If you order too much, you may pay to store it for too long and eventually sell it at a loss. Order too little, and you risk lost sales. Dropshipping can help even out your risk exposure by opening sales channels without big upfront investments.

3.     No inventory management

Managing an ongoing inventory of merchandise can be a headache for more reasons than just cost. When you manage the inventory yourself, you need ways to track what you have, how much you have sold and when products are sold out. If you don’t have the time or availability to do so, you may need to oversee staff that handle it.

Online sales require real-time inventory management to ensure customers aren’t ordering items that have sold out. With dropshipping, you can sidestep the complexity of managing inventory and the urgency built into fulfilling orders as they come in.

4.     Time savings

Small business owners juggle multiple responsibilities, often with lean or non-existent teams. When exploring a new market or product fit, you may need to rely on your time and efforts to handle your online business. You’ll need to market, answer customer queries and research your customers’ needs.

Dropshipping can streamline your operations. You won’t lose hours managing inventory, packing orders and shipping products. Instead, you can invest your time in the more critical areas of your business.

5.     Scalability

Growing your business means adding to your product catalogue and trying to reach new customer audiences, but scaling these measures can feel overwhelming.

A better approach is to test new products, try new ways of advertising, target new audiences and then reap the benefits when your sales take off. Dropshipping can help you increase the range of products you sell and the size of your potential customer base without adding significantly to your costs.

Potential pitfalls of dropshipping

There’s no magic formula for making the dropshipping model work for you, however. The same benefits that appeal to you will attract other sellers, so you’ll need to research your market, sift through opportunities and assess their potential.

Here are challenges to watch for when exploring a dropshipping model for your online business:

  • Fierce competition

Some markets may be too crowded for you to find footing, and some competitors may be willing to sell at very low prices to keep newcomers out of their category.

  • Underwhelming product quality

With little control over the final product, you may be just as dismayed as your customers to realize that an item you sell is poorly made or doesn’t match the online description. Inconsistency in how items look or function can result in unhappy customers and poor reviews, reducing your ability to sell to new customers.

  • Shipping headaches

The typical flow of products being ordered online with the click of a button and shipped by suppliers may be straightforward, but that doesn’t prevent delays, supply chain issues and hassles with returns or exchanges. When problems arise, they may be tricky to sort out with multiple suppliers in varying locations.

  • Profitability vs. volume

You’ll likely need to be strategic about your pricing to sell a significant volume of dropshipping merchandise. Your potential profit can take a nosedive when competition drives down prices. There may be a point at which even the low-cost benefits of dropshipping simply can’t make up for how much you’d have to sell to make it worth your time.

Dropshipping can benefit your business greatly if you are able to navigate the benefits and drawbacks to find a balance. This streamlined approach to selling online could help you reduce costs and grow your business, but you’ll need to keep a close eye on vulnerabilities to make sure it boosts your profitability in the long run.

You may need expert help to guide you as you explore a dropshipping model for your business. Book a consultation with a Postmedia expert to learn more.