Now that you’ve got the question “what is dropshipping?” covered, let’s go over the benefits and downsides of owning a dropshipping business.
It’s important to have transparency when it comes to your options. That way, you have the complete picture and can decide if you want to build a dropshipping business.
Benefits of Starting A Dropshipping Business
Benefit 1: Being Location Independent
The first benefit and probably the one that’s most important to you with dropshipping is being location independent.
“In the last few years I’ve lived in Vietnam, South America, and Thailand. With a dropshipping business, you really can live and work from wherever you want” – Anton Kraly, Founder & CEO of the website DropshipLifestyle
Dropshipping allows a level of location independence that not many other business models do.
Benefit 2: No Inventory Costs
Another benefit is that there are no inventory costs. So when you’re starting out with dropshipping, you aren’t laying out any of your money for inventory.
The truth is that, when you’re a traditional retailer, inventory is your biggest expense. You need to physically have the products to sell.
But with dropshipping, you don’t. All you need is approvals from suppliers to have products. You only pay for items after you sell them, plus there are no warehouse costs.
Now in this article, we mentioned how many e-Sellers started in e-Commerce by importing. So when they first started, they actually had these inventory and warehouse costs. They were spending tons of money every month to store their products.
But if you use the dropshipping business model, you’re not paying for these expenses, someone else is. All of your suppliers have their own warehouses and they’re paying to store these items. So it’s another cost that isn’t on your shoulders, something you don’t have to worry about when starting out.
Benefit 3: No Handling Returns
Another benefit to dropshipping is not having to handle returns.
To be clear, if your customer wants to return an item, you’ll still have to forward the return slip from your supplier to your customer.
But these items are not coming to you. If you own a dropshipping business, you won’t have returned products showing up at your house.
They’re going to be shipped back to your supplier, and then based on the policy of that supplier, you’ll get a refund or they’ll ship the customer a replacement item.
One thing that could be drawn from this is that you should find suppliers with low return rates. So ideally, you won’t even have to deal with emails about returns.
Benefit 4: Gather Data While Getting Paid
This next benefit of dropshipping is gathering data while you’re getting paid.
Let’s say that you want to build a brand in the chandelier niche; you want to sell your own lighting fixtures or chandeliers. Also, let’s assume that you also want to be an importer and build your own product line. We’ll also say that you even have the money to invest in it right now.
Well, before you throw money at an import business, have products manufactured, and start trying to sell them… we’d still recommend that you start a dropshipping business in that niche first.
As you’re dropshipping, you’ll be learning what sells. You’ll be able to find out what your customer wants and building resources that you can use for your own product line, etc.. all of this while making money. Basically, you’re testing out the market while making a profit.
You’ll learn what types of products sell best, what price point you make the most with, and which features customers of your niche want most.
Then, after you’re successful in that niche, you can use all that data to launch your own brand with an importing business.
Benefit 5: Easily Scalable
Another huge benefit of a dropshipping business is how easy it is to scale.
For instance, if you are making $100,000 a year in sales from just one dropshipping store, it’s very easy to build more stores with similar results. And the best part is that you can do this over and over again.
We always recommend starting with one dropshipping store, so that you really learn the process, go through it and master it. But after you do it one time, it’s very easy to do it over and over again.
Benefit 6: You’re Building A Sellable Asset
The next amazing benefit of building a dropshipping business is that you’re building a real asset.
Now when you first starting out this business, you may not realize it, but dropshipping stores are very valuable to a lot of people.
There are a lot of buyers out there that are looking for profitable e-Commerce stores, especially dropshipping stores. Because basically, these buyers could just plug themselves into your business and be making money the next day. All without having to take over your inventory or take over a warehouse.
Here’s an example of what a dropshipping business will sell for:
So let’s say at the low end, you build a dropshipping business that’s giving you $1,000 a month in profit. That’s an amount that pretty much everyone could wrap their heads around – it’s very reasonable and attainable. That store could be worth as high as $20,000.
So that is what we mean here when we say dropshipping is one of the best ways to make money online – it’s in large part because you’re building a real asset.
One great resource for selling your dropshipping business is Empire Flippers. It’s a marketplace to buy and sell dropshipping stores in all price ranges, from a couple thousand to millions.
Here are some dropshipping stores for sale on Empire Flippers. You can see for yourself that having a dropshipping business is a huge asset.
The Disadvantages of Drop Shipping
Now let’s talk about some of the downsides of owning a dropshipping business when compared to owning your own brand.
Disadvantage 1: Smaller Profit Margins
First off, there are smaller margins.
Because you’re selling someone else’s products, profits are going to be less than if you created your own products.
If you go to China and have your products manufactured, you can negotiate better deals for the product price. That’s because you’re doing a lot more work and taking on a lot more of the responsibility. But your profit margins will be higher.
So with dropshipping, there are usually smaller profit margins than with having your own brands. On average, 20% profit margins should be aimed for with your dropshipping stores.
Disadvantage 2: No Inventory Control
Another thing that’s not so great about dropshipping, and in our opinion is probably the biggest downside, is that you have no control over inventory.
Let’s say you have one supplier whose product sells well on your website. You’re making great money with them. Well, what happens if that supplier runs out of stock? What if your reliable dropshipping supplier suddenly sells out of those items?
Your customers are still going to want to order from you, but you won’t be able to fulfill these orders. You’re going to lose potential money in that situation. All because you have no control over the inventory, or because maybe your suppliers aren’t so great about managing inventory and keeping every item in stock.
This is something that great suppliers know how to deal with. Regardless, it’s probably something you’ll run into at least a few times if you decide to build your own dropshipping business.
You’ll run into suppliers who don’t have great inventory management and who do run out of stock and that will lead to lost sales.
Disadvantage 3: Increased Risk of Competition
The last thing that one could really think of as a negative with dropshipping is the increased risk of competition.
If you create your own brand to sell online (let’s go back to that chandelier niche) and you make ‘Anton Chandeliers’, no one else can go out and create ‘Anton Chandeliers’ because that’s your company and your brand.
When we’re dropshipping, we’re selling other people’s brands that are looking for retailers. And other competitors will likely come across the same supplier and become retailers as well.
So it’s competitive, but if it wasn’t competitive, it would mean there wasn’t money to be made. It would mean there isn’t a market for that niche and it’s probably a bad niche to enter.
Those are my benefits and downsides when it comes to dropshipping. But even with the drawbacks, we always recommend building a dropshipping business.
It’s a great way to build a location independent business, for little money, with the potential of huge returns, and that could become a major asset.