dropshipping-business-model

Dropshipping Business Model In A Nutshell

Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

Understanding the Concept of Dropshipping

Dropshipping in simple terms is getting supplies from a third party, listing the products on your website without keeping products in stock. When you get the order from a customer, the sale is passed to the third-party supplier, who then ships the order to the customer.

Dropshipping appears for many as an easy way to make money because you aren’t faced with the problem of manufacturing and warehousing. However, in reality, dropshipping is not a way to make easy money; when you factor in all the problems, obstacles, difficulty in quality control, and the potential negative ratings it could give your website, it’s far from easy.

Benefits of Dropshipping

Dropshipping has a few benefits, which makes it ideal for consideration in certain situations

  • Reduces startup risks: Your market survey as a startup may not be accurate, so actively spending on manufacturing these products, which customers do not really fancy, will make it difficult to recoup capital and profit early enough, which can be frustrating. Dropshipping will absolve you from the costs of production, so if customers do not like it, you may decide against selling it in the future.
  • Lowers production costs: Since you aren’t involved in manufacturing, your costs are very minimal
  • Eliminates warehousing and logistics costs: The third party supplier usually handles warehousing and may deliver to you for shipping or handle shipping as well. But generally, the storage cost is reduced.
  • Flexibility: The low risk involved in product selection offers fresh E-commerce businesses flexibility in product selection.
  • Protection from overselling: The market and demand may fluctuate in ways that you don’t even envisage. Rather than overstocking to meet demands that aren’t likely to come, having a dropshipping supplier as a backup saves you money without losing those uncertain sales.
  • Reducing Costs Even When Expanding Business Scope: One unavoidable effect of an expanded business is expensive shipping. The farther out you get from your region, the more shipping fees you’ll incur. Exorbitant shipping fee is a turn off for consumers. Dropshipping can be the perfect solution for some problematic locations that fall outside your profitable regions. Especially when you think that the storage costs in setting up a new warehouse isn’t financially viable. You can also use dropshipping to determine the market demand in a particular region, and if it’s high enough, you could set up a warehouse there.
  • Better Handling Of High-maintenance products: Some products cost more money and facilities to stock and ship than others. It is usually better to Dropship these products than to store them yourself, to save cost.

Examples of High maintenance products are large products that take a lot of space, heavy products that are difficult to move from place to place, Fragile products that must not be broken or destroyed, valuable products that their loss could lead to a huge debt, and products with special conditions (i.e., some food items that must be kept frozen)

Important Factors for Dropshipping

  1. Research what products would fit well with your strategy, market, and customer base.
  2. Research how your competitors are selling the product, namely pricing.
  3. Find the best supplier
  4. Finalize a fulfillment process that works for both of you and incorporate it into your system. Depending on your sales management software, this could be easy or require ironing out some wrinkles.
  5. List and promote your new product. Be sure to specify any special conditions, such as changes in shipping times or locations.

Connected Business Concepts

Franchising Business Models

franchising
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).

Total cost of Ownership

total-cost-of-ownership
The total cost of ownership (TCO) estimates the total cost associated with purchasing and operating an asset. TCO is a more comprehensive way to understand the real cost of ownership. Thus, how much it really costs in the long-term to own something, with all its related direct and indirect purchase costs.

Fractional Ownership

fractional-ownership
Fractional ownership is percentage ownership in an asset where individual shareholders share the benefits in the asset. These benefits may include income sharing, priority access, reduced costs, or other usage rights. Fractional ownership occurs when an individual splits the costs of an asset with others while retaining a portion of the ownership and usage rights to the asset. This makes fractional ownership ideal for expensive items such as vacation homes, yachts, sports cars, high-end motor homes, and private jets.
supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.
revenue-streams-model-matrix
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.
experience-curve
The Experience Curve argues that the more experience a business has in manufacturing a product, the more it can lower costs. As a company gains un know-how, it also gains in terms of labor efficiency, technology-driven learning, product efficiency, and shared experience, to reduce the cost per unit as the cumulative volume of production increases.

Read Also: Amazon Business ModelEtsy Business ModeleBay Business ModelE-commerce Business ModelsPlatform Business Model, How to Start an E-commerce Business, E-commerce Marketing, Amazon SEO.

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