Dropshipping: Pros and cons of the controversial business model

Dropshipping: Pros and cons of the controversial business model

Sissy Scheible
Sissy Scheible
published on September 20, 2023   

Dropshipping - The most important points in brief:

  • Dropshipping is also known as "Streckengeschäft" in German-speaking countries.

  • With dropshipping, online retailers often no longer keep any or hardly any of their own products in stock, but have them shipped directly to their customers by wholesalers or manufacturers.

  • When selling goods via dropshipping, there is no need for an own warehouse, which saves immense costs.

  • With dropshipping, companies largely relinquish control over shipping and the quality of the products to the dropshipping provider.

The Chinese online platform TEMU shows the way: Entering online retail with an extensive range of products without the need for their own warehouses. How this new e-commerce giant does it is no secret: They utilize the e-commerce business model “Dropshipping.”

What is Dropshipping?

Dropshipping, also known as “Streckengeschäft” in the German-speaking region, is a form of e-commerce where online retailers often do not maintain their own inventory or stock of products. Instead, they have these products shipped directly to their customers from wholesalers or manufacturers. Dropshipping is a suitable option for both online retailers and brick-and-mortar stores to expand their product offerings without much effort or even to completely revamp their inventory, thus providing their customers with a significantly wider selection.

How Does Dropshipping Work?

The retailer or online seller showcases the products in their store or online shop and promotes them. Customers place orders for the products with the retailer. These orders are then forwarded directly to the dropshipping partner. The entire process of product delivery is outsourced to the dropshipping partner. Depending on the specific dropshipping partner and model, return services for customers may also be handled. Often, the retailer provides their logo and return address to ensure that customers are unaware that the goods were not shipped directly by the retailer. In case of any issues, in such cases, customers would contact the retailer directly rather than the dropshipping partner.

Advantages and Disadvantages of Dropshipping

Completely relinquishing control of product shipping may initially cause discomfort for many. Does it lead to too much loss of control? Do you risk losing proximity to your customers? However, these valid concerns are balanced by clear advantages.

Advantages of Dropshipping

Lower Costs

By not having to store your products, you avoid incurring storage costs, whether for renting or purchasing a warehouse or hiring warehouse staff. Additionally, you don’t need to purchase products in advance. This means you don’t require a high initial capital for storing products that might, in the worst case, remain unsold.

Low Entry Barriers

If you’re just starting your trade or e-commerce business, the entry barriers are lower when you have a dropshipping partner. Besides reduced costs, you also don’t need to worry much about packaging, shipping, handling returns, incoming shipments, managing inventory, and the like. This allows you to focus entirely on building your shop and marketing.

High Scalability

Because dropshipping eliminates the need for your own storage space and, consequently, your own inventory, you can expand your product range at will and even operate on an international scale. Most of the time, you can easily handle spikes in orders. There are hardly any limits to the growth of your trade or online shop. You can often set your profit margins, even though some providers may establish minimum prices. There are essentially no upper limits except for your customers’ price sensitivity.

Extensive Product Range

While new businesses or online shops typically start with a relatively limited range of products and gradually expand, dropshipping enables you to launch your shop with a vast selection right from the beginning. You can also start small and then expand your product range as desired. However, it’s essential to maintain an overview of your inventory and avoid offering subpar products solely to expand your selection.

Disadvantages of Dropshipping

Low Margins

Since you should keep prices attractive to encourage customers to make purchases, profit margins in dropshipping are often quite slim. If you offer your products at a high price, customers are likely to find them cheaper in another dropshipping store and may prefer to shop there. However, if you successfully establish a popular brand through skillful branding, you may have the confidence to charge slightly more for your products.

Difficulty in Calculating Shipping Costs

When you collaborate with multiple dropshipping providers, products are shipped by various providers, each with potentially different shipping costs. Consequently, it becomes challenging to provide fixed shipping costs to customers. Additionally, customers may incur additional shipping costs if they order multiple products from different dropshipping providers. To avoid upsetting your customers, it is advisable not to pass on the exact shipping costs to customers in such cases, even if it results in even lower profit margins.

Limited Control

When you opt for dropshipping, you have little to no physical contact with the products you offer beyond sample inspections. You cannot conduct regular quality checks unless you receive periodic samples. You also have no insight into inventory levels unless your dropshipping partner provides you with access, such as through an app. Similarly, you cannot influence delivery times, packaging, shipping methods, or delivery durations. Any delivery errors, whether damaged goods, late or incorrect deliveries, and the like, fall on your shoulders without you having direct control over these aspects. Consequently, you cede a significant portion of control over your own business to the dropshipping partner. Choosing an untrustworthy dropshipping partner can significantly harm your company’s reputation.

Challenging Return Handling

Dropshipping partners often do not offer a return handling service. In the case of complaints, customers will directly contact the retailer, who typically bears responsibility. Depending on the product, the return rate can be quite high, and your effort in managing these returns becomes substantial. You not only have to refund customers but also need to resolve each product’s return with the respective dropshipping partner.

In which areas can you use Dropshipping?

From fashion to electronics, jewelry, and even furniture: Dropshipping can be utilized in any industry. It is not limited solely to online retail. Brick-and-mortar retailers can also make use of it by showcasing demonstration models in their stores, such as refrigerators or washing machines, and then ordering them for customers through a Dropshipping partner. Dropshipping is particularly well-suited for niche products or seasonal items.

What should you consider when choosing a Dropshipping provider?

Depending on the products you intend to offer, there are, of course, various Dropshipping providers available. Some offer extensive catalogs with products in nearly all categories, while others specialize in specific or a few product categories.

To ensure the success of your shop, it’s important not to simply choose the provider that offers you the highest margin. There are other, more critical criteria to consider:

Synchronization of Inventories

Since you certainly don’t want to offer products that are not available, it’s important to ensure that your Dropshipping provider offers synchronization that swiftly and regularly matches incoming orders with inventory. This way, it can promptly alert you if a product is no longer in stock.

Price Synchronization

Often in Dropshipping, providers increase purchase prices unnoticed. If profit margins are already calculated to be slim, this can lead to unnoticed losses. Therefore, it’s crucial to select a provider that transmits price updates immediately and without delay.

Current Shipping Status

Since most online shops provide customers with the ability to track the shipping status of their orders, your customers will naturally expect this from you as well. However, with Dropshipping, since you’re entrusting the entire shipping process to others, it’s important to find a Dropshipping provider who accurately and automatically transmits shipping status updates to end customers and keeps them consistently updated. Ideally, end customers should be provided with a tracking number to monitor their shipments.

Realistic Delivery Times:

To provide your customers with realistic delivery times, it’s essential that your Dropshipping provider is based in Germany or at least has warehouses there. If products need to be shipped from a distant location or go through customs, your customers may have to wait for their deliveries for weeks.

If you still want to offer products from a Chinese or another foreign provider, you should be transparent with your customers about the longer delivery times. If you offer products from different providers with varying delivery times, it’s advisable to provide more generous delivery time estimates to avoid customer frustration if their orders take longer than expected.

Neutral Packaging and Documents

Many online shops that use Dropshipping prefer that customers do not realize that the products are not directly shipped by the shop itself. If this is the case for your shop, you should look for a Dropshipping provider that uses neutral packaging and accompanying documents or, ideally, incorporates your corporate design for this purpose.

Four Steps to Choose the Best Dropshipping Providers for Your Business

  1. Research: Take the time to conduct thorough research on all the Dropshipping providers that are suitable for your industry. The provider should always be a good fit for your product. Additionally, the provider should meet the criteria mentioned above, such as inventory synchronization and good delivery times. Also, ask yourself: Is the provider trustworthy? What shipping service do they use? How is product quality ensured?
  2. Seek Customer Feedback: Once you’ve selected one or more Dropshipping providers, you should contact them and request contact information for some customers who have already worked with the respective provider. Additionally, there are various online platforms where you can view feedback and reviews about each provider.
  3. Request Samples: When you have a few providers on your shortlist, you should request product samples from them to assess the quality of the products before selling them to your customers.
  4. Review Their Operations: After you’ve chosen a Dropshipping provider, it’s important to review their operations. This will help you achieve the shortest possible delivery times.

Is Dropshipping Suitable for Your Business?

If you are still unsure whether you should sell your products through traditional shipping or via dropshipping, consider the following questions:

Do You Want to Sell Products with Your Own Branding?

Developing your own brand can lead to high brand recognition and reduced price pressure. It can also contribute to customer loyalty. However, the scope for product customization and branding is very limited in dropshipping. Both the quality of the products and the uniqueness of your brand could suffer as a result.

How Much Control Do You Want to Relinquish?

When collaborating with a dropshipping provider, you have no control over the quality of your products, as well as the shipping and packaging. If you highly value consistent product quality and the safe delivery of your items, you should carefully consider whether you still want to work with a dropshipping provider.

What Delivery Times Do You Desire for Your Products?

Customers in the online retail industry typically expect fast shipping. 84% of all customers consider fast delivery to be an essential part of their shopping experience. Prolonged delivery times can significantly damage your company’s image. If you still choose to work with a dropshipping provider, make sure that they can guarantee fast delivery times.

Is Dropshipping Worth It?

Dropshipping is a business method with clear advantages and disadvantages. It is particularly suitable for beginners and businesses looking to expand their product offerings. It differs from traditional retail due to its low startup costs and flexibility, but it also comes with challenges related to profit margins and control. Choosing the right supplier and implementing a smart business strategy are crucial for success in dropshipping.

Whether dropshipping is worthwhile for your company ultimately depends on your business model, goals, and sales strategy.