Dropshipping is becoming increasingly popular in e-commerce and offers retailers the theoretical opportunity to get into the mail-order business, sell their items or expand their business without large investments in warehousing and logistics.
Does this really work in practice? Is dropshipping the quick way to make money? What exactly is behind the business model?
Table of Contents
1. What is dropshipping?
2. What types of dropshipping are there?
3. What does dropshipping cost?
4. Advantages and disadvantages of dropshipping
5. Your successful entry into dropshipping!
6. Conclusion
1. What is dropshipping?
Basically drop shipping, sometimes also called fulfillment or direct delivery, is not a novelty. In Germany, the model has been known for decades under the term "drop shipping". The principle is simple: customer orders are received by a dealer but are not sent directly to the customer by the manufacturer or wholesaler. The dealer saves the areas of warehousing and logistics completely. One link in the supply chain is therefore skipped.
Customer: Ordered from a seller and receives goods from the dropshipping provider. He never learns about the dropshipping model because he only processes his order through the shop.
Seller: Offers his products (for example via an online shop), "orders" for customers from dropshipping retailers with direct delivery to customers.
Dropshipping provider: Packs the ordered products for the customer and sends them. The packaging is kept in the seller's branding.
best dropshipping tools
The dropshipping process roughly outlined:
A customer orders a console game in an online shop. The online retailer receives the order and forwards it to a wholesaler for logistical execution. This, in turn, carries out the delivery on behalf of the dealer. He often does not appear to the customer. Rather, he has the feeling of receiving all services from a single source - that is, from the dealer. With regard to the depth of the service, there are various forms, which we will examine in more detail.
2. What types of dropshipping are there?
Dropshipping exists in different forms, whereby a fundamental distinction must be made between fulfillment from a wholesale and consignment warehouse. The term “commission business” is also brought into play, but this is wrong. Here, an online retailer sells goods on a third-party account and receives a commission. This has nothing to do with dropshipping. You only have to be able to distinguish between two dropshipping variants:
2.1 Variant 1: Fulfillment via wholesale warehouse
With this variant, the online retailer potentially uses the entire range of the wholesaler. However, this only applies if there are sufficient stocks. If the dealer has products in his online shop that is no longer available in the wholesaler's warehouse, the order can no longer be carried out. With this model, the dealer bears both his purchase costs and shipping to the customer.
2.2 Variant 2: Fulfillment via consignment warehouse
The term "consignment warehouse" traditionally means that a wholesaler sets up a warehouse on the premises or in the vicinity of his customer, whereby ownership of the goods only passes to the customer when the item is removed from the warehouse. This is a bit different with dropshipping. Here, a wholesaler sets up a separate storage area for the online retailer in his central warehouse. The dealer benefits from a secure supply of goods because the stocks are kept exclusively for him and therefore no third party has access to them. However, this is often associated with additional costs or certain purchase obligations.
3. What does dropshipping cost?
Dropshipping is naturally associated with costs for online retailers. Worth mentioning in particular
Shipping fees
handling fees
Minimum order charges
The shipping fees area is relatively transparent. Only standard shipping costs are estimated here. Usually, wholesalers use special conditions of the parcel service, which results in favorable conditions.
Handling fees, sometimes also called “pick-and-pack fees”, are mostly due per item. They cover the costs of picking and packing individual shipments.
You may also be faced with surcharges for very small quantities. This is a fairly widespread practice among wholesalers who use it to protect themselves from small orders. This minimum turnover is not unusual.
4. Advantages and disadvantages of dropshipping
In e-commerce circles, dropshipping is seen by many participants as an opportunity to get into online trading in a short time without investment and special knowledge. There is a belief that “everyone” can build a passive income through fulfillment. However, this is by no means the case! Just because a certain shipping method is used does not mean that the further challenges of a trading company are eliminated and therefore no know-how is necessary.
If we compare dropshipping and classic shipping directly, it becomes clear what advantages and disadvantages exist:
4.1
What are the advantages of dropshipping?As the previous section shows, dropshipping has several advantages:
First of all, there is no need to buy and store expensive goods, which saves your capital.
✔ In addition, you save storage space and warehouse personnel.
✔ You also have no effort in logistics.
✔ In addition, there is no risk of sitting on warehouse staff.
✔ It is also advantageous that you can set the profit margin yourself in many cases. Although some dropshipping providers set minimum prices, there is theoretically no limit, except for the price sensitivity of your customers.
✔ Another plus point is the good scalability. You can expand your range with dropshipping in a short time, act internationally and usually also cover order peaks without any problems.
4.2 What are the disadvantages of dropshipping?
Where there are advantages, there are naturally also disadvantages. For various reasons, it is not always sensible to set up an online business purely on the basis of dropshipping. To summarize, dropshipping is particularly advantageous in terms of investment needs and scalability . There are, however, some disadvantages, which should be mentioned primarily:
✘ low margins
low level of customer orientation
Verlust Loss of control over your own products
5. Your successful entry into dropshipping!
After all the theory, you ask yourself whether dropshipping would be a suitable model for your company, your online shop? Here you get valuable tips so that nothing stands in the way of your success! If you would like to start dropshipping, you will find yourself faced with a variety of different offers, business models and service providers. Unfortunately, there are also many black sheep in this area. But don't panic! Use the tips below to avoid or solve all of these problems.
5.1 How to find the best dropshipping service provider
Reputable partners are usually not exclusively specialized in dropshipping. Rather, they are renowned wholesalers who have expanded their portfolio to include this service.
So only choose partners who have many years of experience. Using a commercial register extract, you can track online for free when the company was founded and how long it has been in business.
Also limit yourself to corporations if possible, as these are usually more robust than partnerships or even sole proprietorships.
Tip: We also recommend fulfillment service providers whose headquarters and shipping center are in Germany. If this is not the case, you, as the "distributor", will automatically become an importer, which can be extremely time-consuming and subject to legal uncertainties, for example in product liability.
5.2 Identify the suitable partner step by step
Do you already have contact with a wholesaler? Then ask there first whether a dropshipping service is possible before you go to the competition and possibly annoy your partner. Wholesalers often offer a dropshipping option without actively promoting it. If this is not the case, you should go through the following steps to find a suitable provider:
Internet research
Use of supplier search engines
Consider dropshipping marketplaces
Visit "offline events"
1. Research on the Internet
Use the search engine to find dropshipping wholesalers. The challenge now is to distinguish reputable wholesalers from dubious providers. An important characteristic of seriousness is that the wholesaler sells only to resellers, not to end-users. Such wholesalers demand, most likely, a proof that you are a business is running.
Another factor is the payment model. One-off or monthly fees are not a sign of serious partners. Also, note the general tips from the previous section:
select experienced partner,
Headquarters and warehouse in Germany,
robust company form
2. Use of supplier directories
In addition to general Internet research, special supplier directories also provide interesting insights such as:
the yellow pages
Alibaba
euro Pages
However, you have to search specifically for your product or product area. The search term “dropshipping” will not provide any useful results. Then judge the providers again according to the aforementioned pattern.
3. Consider dropshipping marketplaces
Another business model is dropshipping marketplaces such as eBay and Amazon. On these B2B platforms, products are usually offered directly for purchase or for inclusion in the online retailer's portfolio. Wholesalers usually pay a transaction fee here, while as a retailer you don't have to pay for the basic version. However, there are also models in which monthly fees are due for dealer access with an extended range of functions. Some examples of reputable dropshipping platforms are
Zentrada
Shopware Connect
the so-called dropshipping marketplace
Tip: As an alternative to starting your own online shop, you can also do dropshipping via Amazon or eBay. So you can sell your products, earn money and eventually open your own webshop with this money. In the long run, it is less worthwhile to only sell on Amazon and eBay due to the accruing commission. However, it is a good opportunity for beginners to get started.
4. Visit "offline events"
Even in times of e-commerce, the establishment of networks in “real life” should not be underestimated. Visit a trade fair, for example. Here are all the key contacts in the industry directly on-site and you can find out specifically what the status of dropshipping is with the individual providers.
5.3 Synchronization of stocks
The main problem in dropshipping is incorrect stocks. The aim must, therefore, be that inventory data is transmitted to your shop system as soon as possible. The optimum is real-time synchronization so that your customers always have absolutely reliable information. On the other hand, if your shop incorrectly indicates that an item is available and the customer still receives no delivery, the trust is wasted.
This means that you should only work with partners who can synchronize data at short intervals or in real-time. If you already know that your supplier only updates the data at larger intervals, you should at least include a sufficient buffer of time.
Tip: On the other hand, if you have your own warehouse, you can store the most requested dropshipping items in small numbers yourself and thus prevent a delivery bottleneck. In practice, however, this will only be possible with a manageable range.
5.4 Price synchronization becomes a cost trap
Another problem in dropshipping that many retailers can sing a song about is the unnoticed increase in purchase prices. If this happens with already low margins, you will quickly find yourself in the lost zone. So here too, price updates should be sent as soon as possible.
55 Send shipping status correctly to end customers
If the goods were shipped by the wholesaler, the end customer must receive a shipping notification from your online shop and the shipping status must be updated. The wholesaler must, therefore, send shipping notification. If this is done exclusively by email, you will reach this limit with this manual procedure from a certain sales size. Tip: You should therefore always ensure that automated processing of shipping messages is given. It is practical if a unique tracking number is used in the process.
5.6 Adherence to delivery dates: Provide reliable times
You should specify realistic delivery times in your shop - even and especially if the delivery times of your stock goods and the dropshipping items differ. If experience shows that your supplier's delivery times fluctuate, choose a more generous time.
Tip: If the delivery times are always too long, you should consider changing the service provider in order not to jeopardize customer satisfaction.
5.7 Use neutral packaging and documents
Ideally, your customer will not notice that they are receiving the goods from a fulfillment service provider. However, this only works if the entire packaging and all accompanying documents are either neutral or even designed in your corporate design. It is best to make your own material available to the fulfillment service provider. Tip: If it is not possible to encloseth the invoice, you can also send it together with the shipping confirmation by email.
5.8 Make the return and complaint process customer-friendly
Returns regularly raise questions for online retailers:
❓ Where should the customer return to?
❓ Who is responsible for handling?
For simple returns, the dealer is usually the first point of contact. In the event of a defect or defect, it depends on what your service agreement with the supplier looks like. Affected goods then either go back to the supplier or must be sent directly to the manufacturer. In any case, make sure that the return address is clearly noted on your shipping documents.
Tip: Good drop shipping service providers offer reasonable rules for handling returns. That means: You should also be able to return articles.
5.9 Keep an eye on customer satisfaction
The problem is that due to the lack of control, there can always be cases that have a negative impact on customer satisfaction. The online retailer has to react to this in goodwill so as not to spoil buyers forever and to avoid a negative reputation. With naturally low margins, the financial situation quickly becomes thin. Tip: Always include the costs of pre-financing, returns and goodwill in your prices. Don't start with minimal margins just to get your first sales.
5.10 Classic shipping vs. Dropshipping
As you saw in the table above, each of the business models is associated with opportunities and risks. Accordingly, you have to analyze exactly which approach fits the current and future orientation of your online shop better. Of course, the existing capital plays a role here. However, you should still check whether it is not more economical to invest in storage and logistics.
Tip: Amix of both variants also conceivable and even recommendable. Here you can, for example, send your core range or your "fast movers" yourself, and handle unimportant products via dropshipping.
6. Conclusion
The art of dropshipping consists of finding a suitable partner and automating all processes as much as possible. If it is possible to ensure that the data is up-to-date and delivery is reliable, dropshipping is an interesting model with which online retailers can expand their articles, their range and earn good money.
However, dropshipping is neither easy nor inexpensive. On this basis, contrary to the promises of many providers, it is hardly possible to realize a solid e-commerce business model without a capital cover and initial investments.
Smooth processes can be realized in particular if an ERP system is used in the background that supports third-party business and enables shop systems to be connected via intelligent interfaces.
