Dropshipping, the newest craze?

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dropshipping-the-newest-craze

Dropshipping webshop with one simple click

Starting a webshop is a no-brainer business opportunity for many people. The relatively low barrier to entry is a big plus too. With the help of rental webshop engines, it only takes a few clicks to start our own webshop. At the same time, significant innovations have also taken place in the field of webshop logistics in the last couple of years, which have lowered the barrier to entry even more. In the beginning, all logistics was managed in-house. Then the system has gradually undergone transformation. Today, there are fulfillment services that have made life a great deal easier for these webshops.

The current craze the whole world became obsessed with in the 2010s is so-called dropshipping. As usual, in Hungary this trend started making a buzz with the usual delay we are already used to, nevertheless, it will most probably shake up our e-commerce too in the 2020s.

But what the heck is dropshipping? In this article you will not only get the answer to this question, but you will also find out about the advantages and drawbacks of it. Plus, you’ll get tips on what to be aware of if you’d like to operate your own dropshipping webshop. And of course, we will also get to the bottom of who should start a business like this one.

The meaning of dropshipping

Dropshipping is a business model that allows people to operate webshops without having their own inventory, having to set up and operate a warehouse, or even having to deal with the delivery of the products. In practical terms, the entire webshop logistics is outsourced and done by others. And here comes the drumroll: storage, packaging and delivering orders are done by another player in the game, the dropshipping partner. 

Let’s just take a closer look at what this exactly means for the buyer, from the point of view of the product. How is an order through dropshipping different from one done through a traditional webshop?

The process of ordering through a traditional webshop:

  1. The buyer places the order in the webshop. 
  2. The webshop prepares the order from its own inventory and in its own warehouse.
  3. The webshop prepares the invoice for the order.
  4. The webshop packages and prepares the order for delivery. 
  5. The webshop is responsible for getting the order delivered to the buyer.

The process of ordering through a dropshipping webshop: 

  1. The buyer places the order in the webshop. 
  2. The webshop manually or automatically transfers the order details (items ordered, buyer information) to the dropshipping partner.
  3. The dropshipping partner prepares the invoice for the order.
  4. The dropshipping partner packages and prepares the order for delivery.
  5. The dropshipping partner takes the responsibility of the webshop to get the order directly delivered to the buyer. 
meaning-of-dropshipping

The main appeal of the idea of dropshipping is that you don’t need significant capital to store inventory or operate a warehouse.

As a webshop, you practically have no physical interaction with the product during the entire service process. You have nothing more to do regarding order fulfillment than to automatically or manually transfer the order details to the dropshipping partner.

Profit and actors in the dropshipping model

So the question of profit inevitably pops up: where does the profit come from? The profit is created between the price set by the webshop and dropshipping. The dropshipping price is what you as the webshop pay for the product when buying it from the dropshipping partner. 

Let’s just stop here for a moment and look at who a dropshipping partner can be: 

  • Manufacturer: Just like the name indicates, it’s the one who manufactures the product. Not every manufacturer offers necessarily the option of dropshipping, but regarding profit, it is clearly an advantage for the webshop if the manufacturer itself is the dropshipping partner. In this case, the profit can be much larger because there is no intermediary actor who adds its own profit margin to the manufacturing price.
  • Wholesaler: the one who purchases one type of good from the manufacturer in large quantities, and then sells to websites through dropshipping. In this case, the profit margin of the wholesaler is added to the manufacturing price and finally, this is the price the webshop can add its own profit to.
  • Aggregator: By nature, they are a wholesaler, but they don’t only purchase one type of product in large quantities, but different products by different manufacturers. Therefore, they are able to offer a wide range of products for sale through dropshipping. The webshop profit is added to the manufacturing price, plus the aggregator profit – just like we saw with the wholesaler version. However, with aggregators you can be exempted from dealing with different delivery charges, and the transfer of orders can be simplified as well, since there is no need to send the orders to several locations.

You can get your hands on a larger profit through dropshipping if – instead of signing with a dropshipping wholesaler- you work directly with the manufacturer. This means you remove a link from the chain. In terms of profit, there is no significant difference, regardless of whether your dropshipping partner is a wholesaler or an aggregator, therefore in the following, for simplicity’s sake, we’ll just refer to them as wholesalers.

By this point, the question of how we can make money through dropshipping has become clear. But what other advantages are there to this model?

The advantages of dropshipping

  • Low capital requirement: the costliest step when starting a webshop is buying the stock. This can amount to 60-80% of all initial costs. The dropshipping model basically eliminates this capital requirement from the system. The barrier to entry becomes much lower compared to the one of an online shop working with traditional webshop logistics.
  • Small risk factor: since you don’t need to keep your capital tied up in your stock, the business’ risk factor decreases significantly. If there is low demand, you don’t have to worry that you’ll get stuck with your inventory.
  • Simple processes: order fulfillment is basically completely taken out of your hands, meaning that preparation, packaging, invoicing and delivery is handled by someone else. This reduces your workload by a ton. In addition, if the transfer of customer orders can be automated, this is one more thing you don’t need to be involved with on a daily basis and instead, you should focus more on marketing.
  • Fast installation: starting a webshop becomes extremely simple. As soon as you have the dropshipping partner, with a webshop engine (e.g. Shopify, Shoprenter, WooCommerce) you are only a few steps away from taking off.
  • Low fixed costs: a sizeable part of the fixed costs is operating a warehouse. In case of a shortage of stock, you are not obliged to operate such facilities at an exorbitant monthly cost. What remains a fixed cost is the operation of the website, but this is insignificant compared to warehouse operational costs.   
  • There are no geographical barriers: you can operate the webshop from basically anywhere in the world. If you fancy, you can easily manage your dropshipping webshop while sipping your favorite cocktail at a beach bar. A laptop and the internet are all you need.
  • Wide product range: you can find a dropshipping partner for practically any kind of product. Find the product in demand and surely, you’ll find a manufacturer or wholesaler who will do the dropshipping.
  • Easily scalable: with an increasing number of orders, you will eventually face the issue of needing a larger warehouse, packaging- and delivery capacity etc. Dropshipping simplifies your life once again since you don’t need to deal with these issues. Your job is merely to accumulate the largest number of orders. Financing and managing the increase of capacity is the job of your dropshipping partner.
  • Lower risk of damage: The products don’t need to be moved from one warehouse to the other for no particular reason, since they can be delivered to the buyer directly from the warehouse of the manufacturer. Even if the order is delivered not from the manufacturer, but from the warehouse of the wholesaler, the product will be moved less, therefore the risk of getting damaged in the process is also lower.

Despite the many advantages, there are of course drawbacks to drophsipping as well, when comparing it to traditional webshops.

dropshipping-advantages

The drawbacks of dropshipping

  • Low profit: as I wrote earlier, the profit comes from the difference between the retail (webshop) and the dropshipping price. This profit, however, is much lower than if you’d buy the product directly from the manufacturer and added your own profit to the purchase price. This also means that this is the revenue to cover your whole operation with.

  • High level of competition: dropshipping sustains the barrier to entry at such low levels that the newly arriving players can quickly create a high level of competition for you. Along with the low profit, this also means that before embarking on creating such a webshop, you must have a careful plan on how you’ll differentiate yourself. It’s a good idea to think out-of-the box and not rely solely on traditional paid ads. Another solution is to find a real niche market without significant competition. 
  • Little control: since a big part of the activities are done for you, you’re control over the processes is close to zero. Building your brand can be very tough when you’re not able to influence the shopping experience. And the factors determining shopping experience often lie in the small details.
  • Full responsibility:  typically, an average buyer has no idea they are shopping from a dropshipping webshop. The dropshipping partner makes sure the product is delivered to the buyer with the name and logo of the webshop on the packaging, along with the invoice indicating the name of the webshop. This is why, if there is any problem during the order fulfillment process (e.g. delayed – or non – precise delivery), the webshop must deal with it. You are the face of the company, so it is imperative that you choose your dropshipping partner very carefully.
  • Different backgrounds in order fulfillment service: When you are selling your products through a dropshipping model you can easily find yourself working with several dropshipping partners. You can be tempted to offer many different kinds of products on your website since you don’t need to have an inventory and you think it’s a surefire way to easily increase sales volume. Sure, but on the flip side, your products may be arriving to the buyers from different sources. Therefore, the products in the same order may be packaged separately or arrive at different times.
  • Real-time inventory information: since you are not the one overseeing the inventory, the lack of real-time inventory information can pose serious difficulties. It is very embarrassing when the fact that the selected product is not on stock and takes a long time to get or manufacture turns out only after the order has been placed. As the webshop owner, you must be prepared to deal with such situations. You can prevent this situation from happening only by having the real-time inventory information. 
  • Long delivery time: when you order products from a foreign dropshipping partner you may risk facing a very long delivery time and an unhappy customer. If you want to reduce delivery time, the delivery cost rises tremendously and financially it is not worth it anymore. 

Besides looking at the advantages and drawbacks, let’s also take a look at who this model may especially appeal to.

Who is dropshipping for?

  • A newby at e-commerce: it can be really attractive for people who’d like to get insight into e-commerce without taking a huge risk. For those, who’d like to dabble with the online world. Since there is no need for significant capital and the risks are low, this is a perfect model for experimentation. You can learn the ins-and-outs of online sales by operating through dropshipping. You can focus on marketing and directing business flow before putting real capital on the line. But be aware of the fact that this is certainly not a fast and large-yielding business model.  

  • Expanding operating webshops: it is also a great business opportunity for already operating webshops that have stock, but would like to complement their repertory with other products. In the spirit of avoiding risks, however, they don’t want to invest any capital into this experimentation. The dropshipping system can be a perfect solution for them. 

Don’t get into dropshipping if…

  • You’re hoping to build a brand: Dropshipping and brand-building are hardly compatible. The simple reason for this is that the owner of the webshop has no control over the products and the order fulfillment process. To build a brand, you need to pay attention to nuances only possible if you are in control. Without being able to oversee and affect the process, you cannot have the required influence over the shopping experience to build a brand.

  • You’re hoping for a quick and big profit: The dropshipping model is not a cash-cow opportunity. Usually, the profit margin is quite small, unless your dropshipping partner is directly the manufacturer. Generally speaking, you can count on a 10-20% profit stemming from the difference between the webshop and dropshop price. However, you need to cover your charges, so expect only a few – percent profit at the end. This is the price you pay for not having the responsibility of dealing with a large part of the process. 

  • You must compete with the manufacturer: The manufacturer may sell through not only dropshipping, but operate through its own webshop too. This obviously entails that your webshop is in a disadvanted position from the get-go, since it must compete with the manufacturer’s price. It’s hard to come out as winner from a situation like this. Your only chance is if you think out-of-the-box and find sales channels where the manufacturer is not present. 

A good product for dropshipping

If, based on the above, you have made up your mind and decided dropshipping is your thing, your next task is to figure out what kind of product you will sell in this framework. 

We’ll give you a few clues about which products may hit it off with dropshipping: 

  • Price: if your product is at the lower end of the retail (webshop) price range, you must sell it in larger quantities to gain a larger total profit. You can reap the same profit with lower sales if you’re dealing with a more expensive product. Both can work but a with a different approach and marketing strategy. You are the one who needs to decide which appeals to you more and perhaps more in line with your sales hopes and expectations.
  • Size and weight: the easier to transport a product, the better and cheaper it is. This is why it’s worth choosing smaller and lighter products.
  • Cross-selling opportunities: just as in the case of traditional e-commerce, exploiting the potential in cross-selling is equally beneficial in the case of dropselling. Think about what else could attract customers besides the products you have set your views on, and stick them into your supply. You can sway your customers towards cross-selling with pricing too. You offer the primary product with a smaller margin and you make up for the lost profit on auxiliary products.
  • Repurchase potential: the more products you have that need to be repurchased from time to time, the more you are able to guarantee continuous sales. In this case, you can even develop a subscription model.
  • Potential for change: you must constantly adapt to continuously changing and renewing products. A new brochure needs to be written for the product datasheet, new photos, videos must be made etc. This will cost you money and time. Therefore, try to avoid these types of products.

The following categories of products were most popular on an international scale in terms of dropshipping sales:

  • Mobile phone accessories
  • Jewellery 
  • Sporting equipment
  • Products for babies 
  • Cosmetics
  • Personalized mobile phone- cases, t-shorts, mugs 

Once you have the type of product you would like to sell, you have nothing left to do than to find the perfect dropshipping partner. Google will be a great tool in doing this. By running a simple Google search, you’ll find the actors you can work with. There are also pages with a collection of international suppliers and products, so all you’ll have to do is browse through them:

Tips, before getting started

  • Above all, do market research: for a strong foundation do market research on potential products, partners and customers. Since a very low margin is to be expected, you must be aware of exactly what you are dealing with when you start your own webshop. 

  • Don’t forget about the legal and tax regulations: one of the pitfalls of international dropshipping may be understanding the complex and intricate legal and tax regulations. A lawyer or an accountant can come handy when it comes to understanding the formalities of customs and accounting. Even before getting started, it may be advisable to sit down with an expert and get a clear understanding of what your endeavor entails in terms of the regulations you’ll need to comply with. 

  • Choose the right partner: we’ve already mentioned the lack of control you have over the processes, therefore it is essential that you work with a reliable and trustworthy dropshipping partner. Practically speaking, they will be the ones representing you in front of your customers. They are the ones who embody your company. It’s worth taking a look at what services they can provide you, the webshop:

    • Availability of customer service 
    • Agreed delivery time
    • Warehouse capacity
    • Possibility for integration 
    • Product prices
    • Product portfolio
    • Access to real-time inventory information

     

  • Think about cash on delivery management: there is a large body of research that underline the importance of cash on delivery preference regarding the payment habits of domestic online customers. Even though online commerce has been prominent for many years, most people still feel most comfortable paying for the product once they have it in their hands. This is particularly problematic concerning the dropshipping model in view of the fact that there is absolutely no cash-on-delivery payment option with most foreign partners. You either go along with not being able to reach this group of customers, or you find a domestic dropshipping partner who offers cash on delivery.
  • Lay out a detailed plan: once you know that you’ll go for it and choose the product you will be selling, create an action plan on how to reach as many people as possible. What marketing tools are you going to use? How much can you spend on marketing? Your budget will be relatively tight due to the very low profit you’ll be working with. It is crucial that you use your limited resources for marketing in the most efficient way.
  • Keep an eye on the trends: in a well-working dropshipping system you can change the supply of your webshop with a few clicks. It is therefore super important for you to keep up with the trends. Which products are popular with customers and which are the ones they have little or no interest in? Always try to follow the current trends.
  • Stand out from the crowd: the more people get involved in the dropshipping market, the harder it will be to produce large volumes. Think out-of-the-box and operate your webshop in that spirit. The key to success is to stick out from the crowd. You want people to talk about you, so go the extra mile to make your customers happy by giving your customers:
    • Prettier and more precise photos of the products
    • More precise and more detailed product descriptions 
    • Special care
    • Educational, introductory videos

Dropshipping opportunities in Hungary

As we mentioned already in the introduction, dropshipping has conquered the international market in the 2010s, gaining popularity primarily in the United States and China. It emerged in Hungary with a usual delay of a couple of years and it is likely to reach its height in the 2020s

Did you know? Webshippy launched its Dropshippy service in December 2019. Dropshippy provides a safe environment for Webshippy customers to get started with the dropshipping business opportunity. With merely a few clicks you can become a dropshipping supplier or dropshipping webshop. You can browse in the dropshipping catalogue to your heart’s content, and without too much effort you can reach more customers and increase your turnover.

This is a rather new opportunity on the Hungarian market, and in view of the international trends, success is guaranteed. It will become harder and harder to reach high profit as the market gets more saturated. So, if you are considering launching your dropshipping activity, you had better take action quickly. If you want to take the smallest risk possible, you should choose your dropshipping partner on the home market instead of the well-known international giants. 

 

Kitti Papp-Karakas

Kitti Papp-Karakas

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