CEO of TAG, a San Diego-based logistics fulfillment company and Forbes Business Council member.
With the advent of the first online social network in 1997, Andrew Weinreich created the Six Degrees platform allowing users to connect with real-world contacts and even with others they did not know. It was the first of many copycats until LinkedIn, Facebook and Instagram led to the gargantuan social media world. Social media has created a world consuming adults and children—influencing trends and fashion, all the while building an easy startup business opportunity behind the scenes for those hungry for additional income.
Coupling individuals' needs with the changes in their purchasing habits has made internet shopping the new normal. Social media eliminated meeting people face to face in brick-and-mortar stores, fairs, shows and MLM home-based sales parties. Thus, online e-commerce stores using marketing on affordable social media are fulfilling entrepreneurs' desires to make more money and easing their economic fears.
This alluring new wave of e-commerce offers seemingly effortless passive income.
The promises from these third-party suppliers and fulfillment houses appeal range from providing automation from the order to the customer's door to letting your computer do the bulk of the work for you. However, they fail to mention is that when you sell other people's goods at a low margin, you also foot the transaction fees, marketing, ad fees and more—leaving a minimal profit for yourself. In fact, it can be far from easy.
MORE FROMFORBES ADVISOR
What exactly is dropshipping?
Dropshipping is an e-commerce business model that does not require an individual or business to keep products in stock. You don't possess or own any inventory of your selling products. Instead, you sell the product and then pass the order to a third-party supplier. From there, the supplier ships the order to the customer. You never see or touch the product. This process allows you to offer a wide selection of products without having to buy them and keep the inventory. You are only responsible for finding customers. Hence the attractiveness of this fulfillment service. You are not required to divulge your shipping method, but you do need to perform due diligence with the company you are doing business with to deliver the product ordered. Any delays are beyond your control and will reflect negatively on your customer satisfaction and possibly reviews.
It sounds like a good deal, but there's much more to consider before one ventures into the e-commerce business. Therefore, with my experience as CEO of a logistics fulfillment company, I want to simplify the steps in the process and make it easier to see the upsides and the downsides.
How does dropshipping work?
Generally speaking, this is the most common sequence in the industry:
First, you must enter into a product sales agreement with a third-party dropship supplier. Then it's time to promote the agreed upon products via direct advertising or digital marketing strategies. Once you receive an order for a product(s), you put the order into the third-party's ordering system. Then your customer gets a confirmation of the order via email from you, and your dropship company fulfills the purchase with the packaging and shipping of the product. The customer receives the product from your fulfillment house and a follow-up email regarding their satisfaction with you. Finally, you can ask your customer to place a review on Google or Yelp from you.
What are the upsides of dropshipping?
• There is minimal investment.
• It's easy to start.
• There's low overhead.
• You don't need inventory.
• You can sell a wide array of products.
• It can be easy to scale up.
What are the downsides of dropshipping?
• Low barriers to entry can lead to unscrupulous suppliers and fulfillment houses.
• Loads of competition demands that you stay on top of your marketing.
• Low margins make for not a lot of money for all your day-to-day management.
• Product quality control can be nonexistent.
• Product availability can be variable and unknown.
• Lack of control over the handling and shipping methods can lead to customer service headaches.
• Third-party customer support may or may not be sufficient.
Be wary of work-at-home scam artists.
The pandemic ushered in and gained acceptance for remote working. The economic environment gave scam artists a bounty of potential victims. They offer internet-based work-at-home schemes that one actively promotes through social media channels. One of the ways the con artists get your hard-earned money is by providing an obsolete or fake list of dropshippers or middlemen—all charging fees that can leave you with a thin profit margin. In addition, people can use artificial intelligence (AI) tools, such as ChatGPT, to market services or content a chatbot has created.
Is dropshipping right for you?
If you are interested in a dropshipping business, there are a few things you must consider:
• Make sure you understand this is not a get-rich-quick business model.
• Know what your financial expectations are and their feasibility.
• Have the time to dedicate to the business.
• Research potential markets and the size of the competition.
• You must have knowledge in running and optimizing your online presence.
• Be aware that retail is highly complicated and subject to trends.
How can you protect yourself?
There are many ways to protect yourself if you are thinking about starting a dropshipping business. You can:
• Check online consumer protection websites.
• Research the third-party suppliers and fulfillment companies and look for red flags.
• Ask questions from the beginning of your intent to use a supplier or warehouse.
• Avoid providing personal information upfront.
• Avoid paying money upfront.
• Walk away if it's too good to be true.
Ultimately, the decision to start a dropshipping business is in your hands. What will it be? By sharing the upsides and downsides of dropshipping, you now have additional information to help you decide.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
