Dropshipping is a reliable business
Dropshipping: the 3 most important success factors
Selling online with no warehouse, no shipping, no equity? Yes, that works - withDropshipping. The business model is popular with both newcomers to online retailing and established retailers.
No wonder, since the e-commerce market is highly competitive and a wide range is a basic requirement for success. This is exactly where the problems begin, because the necessary investment in goods, storage space and logistics personnel increases the entrepreneurial risk and often leads to economic problems, especially with rapid scaling. Dropshipping offers herea smart logistics alternative.
What is dropshipping? Explained in 100 words.
Even if the hype term “dropshipping” suggests an innovative trend from the USA: Under the somewhat more boring name “drop shipping”, dropshipping has already proven itself in retail for decades, for example for furniture and spare parts for cars.
Because the principle is simple: you offer products in your shop without having them in stock yourself. Only when your customer orders a product do you order it from the dropshipping wholesaler, who takes care of shipping directly to the customer: from picking and packaging to any customs procedures.
The process of dropshipping
Strictly speaking, dropshipping is therefore not a groundbreaking new business model, but a very common logistics variant. The rules remain the same as in classic drop shipping: the shop provider purchases from the wholesaler at the agreed conditions and pays for the logistical processing and direct shipping.
The shop provider is left with the profit margin between the sales price in the shop and the conditions negotiated with the wholesaler - a significantly lower margin than in traditional retail. In return, however, the shop provider saves the costs of having its own warehouse and the expense of packaging and shipping.
Benefits of dropshipping
- No capital commitment in the warehouse
- No manpower for packaging and shipping
- Rapid build-up of a large range of products
- Fast range extensions or range adjustments
- Rapid growth - also internationally - without additional investments
Risks of dropshipping
For all its advantages, however, dropshipping is not the easy way to make quick money. Therefore, "dropshippers" should definitely deal with the risk potential in order not to experience any nasty surprises:
- More demanding cost calculation due to significantly lower margins
- More complex inventory management: Information on the availability of goods in your own online shop must be reliably compared with the inventory of the dropshipping partner, so that there is a high level of dependency on the process quality of the wholesaler
- Difficult cross-selling: shopping baskets that concern different wholesalers add up the shipping costs without the shop provider being able to pass them on to the customer
- Loss of control over the quality of shipping: no impact on packing and delivery times
- The shop provider remains the customer's contact for returns and warranty claims
The 3 most important success factors in dropshipping
1. Range strategy
There is also fierce competition in the dropshipping segment - and the profit margin is lower compared to a classic online shop. The choice of products therefore plays a major role in success. Successful dropshippers are also "trend scouts" and ideally always one step ahead of the market:
- ChooseNiche products with few shop competitors and remain agile with changes in the demand situation
- Don't just think of short-term B2C hypes such as the dropshipping bestseller “Fidget Spinner”, but also keep the attractiveB2B segment on your product radar.
- At large and bulky productsthe margins are often better. Reason: The goods do not have to be transported from the wholesaler to the shop and then from the shop to the customer, as is the case with traditional shipping, only one shipping process is required. Since the shipping costs are particularly high for large goods, this cost advantage can be used as a competitive advantage in pricing.
- Avoid products with a highReturn rate!Returns are particularly problematic for dropshipping shops because the wholesaler - who is often located abroad - has to be involved and usually additional costs are incurred. The typical return rate should therefore be an important criterion when selecting a product. In addition, the range should be regularly checked for return rates and adjusted at short notice.
2. Selection of dropshipping partners
As a dropshipper, you need to be able to rely on the performance, reliability and service of your wholesalers in many ways:
- The quality must match the sample products supplied
- Deliveries must reach the customer on time
- Goods must arrive carefully packaged and undamaged
- The wholesaler should offer a return policy
- The wholesaler's technical infrastructure must harmonize with your IT - and meet your real-time synchronization requirements
Find out here what is important when choosing your dropshipping partner.
3. Automation of the processes
In order to be able to operate profitably in dropshipping, the online shops are dependent on largely automated workflows and the greatest possible up-to-date information. The technology behind the shop should therefore be given great attention when setting up the shop:
- The availability of the products must be synchronized between the online shop and the wholesaler at the shortest possible intervals - if possible in real time
- Automated price updates ensure that unnoticed price increases by the wholesaler do not become a cost trap
- The shipping status should also be automatically synchronized between the wholesaler and the online shop
- Providing a tracking number and providing information to the customer is mandatory
- The merchandise management system of the online shop should enable returns processing (e.g. creation of return labels), even if the logistical processing remains with the dropshipping wholesaler
Dropshipping has tons of benefits. Nevertheless, the same skills are required for long-term success as in traditional retail: the right “nose” for trendy products, well-founded calculations, negotiating skills and a high degree of organization as well as excellent, IT-supported processes.
In many cases, it makes sense to invest in your own warehouse in the medium term and use dropshipping primarily to expand the range, for example for seasonal products, testing new product categories or for products that your warehouse is not designed to ship.
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