Is Dropshipping Worth It In 2020: Pros And Cons Of Dropshipping
At SaleSource, we get asked this question on a day to day basis, whether or not dropshipping is still worth it in 2020. Whilst dropshipping competition has increased, the potential earnings have also skyrocketed, with a record breaking number of people buying from ecommerce websites.
However, there are definitely downsides to the dropshipping business model that do need to be considered, such as high competition, potentially low margins and short product lifecycles. In this article we'll take a look at the Pros and Cons of dropshipping to find out if dropshipping is truly worth it.
Pros Of Dropshipping
Dropshipping is a business model where the customer experience is heavily reliant on suppliers, so if you are able to find quality dropship suppliers, then dropshipping can be an extremely lucrative and location independent business model.
All that is needed is a PC and an internet connection. This means that if you are complete beginner in the world of ecommerce and only have a small starting budget, the bottom line is that you can use dropshipping as a stepping stone, after which, with your newly acquired transferrable skills, you can move up to more demanding and lucrative ecommerce ventures, like starting a wholesale ecommerce brand.
Apart from its convenience, dropshipping has a multitude of other benefits:
1.Start-up costs are astronomically low in comparison to other business models
Assuming that you use an open source shopping cart platform (one that is completely free), the bare minimum cost of starting an online dropshipping business is as follows:
- Webhost: between $1-$4 per month
- SSL Certificate: If you choose your webhost wisely, then it’s free
- Open source shopping cart: free
- Free credit card processor: 1-3% transaction fee
- Website Theme/Template: $15-$60 (Optional)
Total cost, around $64 – no upfront inventory cost, no overhead and no warehousing fees - it's hard to imagine a business model that would require less upfront cost than dropshipping. In addition, if you want to start a dropshipping business properly, the recommended way, then here's what the costs will look like:
- Webhost & Store Platform: 14 day free trial then $29 per month (Shopify)
- SaleSource Subscription: 7 day free trial then $69 per month
- Domain with SSL included: $12 per year
- Stripe Credit Card Processor: 2.2% transaction fee
- Website Theme/Template: $180 for Premium Theme (Optional)
- Marketing Budget: $250-$500
2. The set-up is much simpler than it used to be
Back in the day when ecommerce wasn't at the forefront of every ones minds - the days of malls and out of town shopping booming, it was hard to start an ecommerce store. If you wanted to go fully custom, you would have to spend the money to become PCI compliant in order to take card transactions, deal with technical errors that could shut down your web store for days and not only that - there was little information on the internet on how to start an online store, let alone scale one into a profitable business.
In 2020 there are hundreds of services that will setup an online store for you. Shopify can be your ecommerce platform, SaleSource can be your research and marketing platform, Oberlo can be the medium between you and your supplier. The type of service you get will obviously depend on your budget, but in most cases all you need is a Shopify and SaleSource subscription, which currently stand at $29 and $69 per month respectively.
Turning an ecommerce store into a profitable business is not easy, but it's certainly much simpler and less of a headache than it used to be. We encourage you to spend quality time and attention to make your dropshipping store as good as it can be before launching. You can find out more about how to find successful stores to model in your niche here.
3. The risks are much lower compared with traditional brick and mortar stores
Perhaps one of the most attractive characteristics of the dropshipping business model: you stand to lose very little if your business venture goes bust, apart from the time you put in to begin with. This means dropshipping is a low risk, high reward business due to the relatively small upfront investment required.
In comparison to starting a brick and mortal retail store: No expensive liability insurance, no long term leases, no construction work, no investors needed and no employees needed (initially).
A dropshipping business by definition does not require the upfront purchasing of inventory - thus you don't incur warehousing costs and there is no pressure to start making sales from day 1.
The added benefit is that you can list a huge variety of products in your store and test which ones perform the best, without any additional cost. You can spend your time, or "sweat equity" as it's known in the startup world, to refine your store to perfection before selling (something which we highly recommend). The upside to this strategy is clear, the more effort you put into your store, the more likely you are to succeed.
4. Dropshipping gives you freedom to work from where you want
The nature of the business does not require you to have an office, employees, a warehouse or to be located at a certain place. This is exactly why dropshipping become the one of the top businesses of choice in the digital nomad movement, which has risen in popularity in recent years.
Not only that, many stay at home mothers, carers and those living with disabilities have started dropshipping due to the fact that it's far more compatible with their lifestyle than a busy, commuting office job.
Without having to worry about location, offices, employees and warehouses, you can focus on what matters most: scaling your business with knowledge and passion. Indeed, dropshipping has earned its status as one of the most scalable ecommerce business models due to the fact that sales can grow at an exponentially higher rate than business overheads.
Without an office or any employees, it is possible both in theory and in practice to bring in millions of dollars in revenue. In a typical dropshipping business, the two main factors that increase proportionally to revenue are the cost of goods sold and ad spend.
Dropshipping is not a get rich quick scheme, but it is easy to see how this misconception came to be. Comparing dropshipping to other business models, such as Amazon FBA, it's certainly true that the money does come in faster and with less risk.
However, what most entrepreneurs are missing when they see large revenue numbers in screenshots is the amount of work that went into attaining such a high volume of sales. Researching products that will sell & are not saturated, building a high converting ecommerce storefront, creating engaging marketing campaigns - all of these factors contribute to a large sales volume and yet all of these factors take extra time to execute correctly.
When the formula is correct though, incredible results are possible with the dropshipping business model. Dropshipping stores like InspireUplift have scaled their businesses from zero to an estimated $10,000,000 per month in less than 5 years. In addition to InspireUplift, there are countless stores that have been scaled to $100,000 per month in revenue in less than a year. All of these successes require hard work and effort and as many competitive advantages as one can get, especially in 2020.
6. Transitioning From Dropshipping To A Famous Brand
If you've heard of Pura Vida Bracelets or IndestructibleShoes (featured on our top 10 dropshipping stores list) you may be shocked to hear that these companies both started off as dropshipping businesses in order to validate their ideas. Once their brand gained traction and sales, they then transitioned to a wholesale business model selling their own private label products.
Even GymShark, when they first started, dropshipped supplements from popular nutrition stores to help increase their bottom line, and as you might know, are now one of the top brands on Shopify, with a revenue of $128,000,000 in 2019.
Cons of Dropshipping
There are cons to every business model and dropshipping is no exception, as the saying goes "Nothing worth doing is ever easy" and the dropshipping business model has several challenges related to it, some of which you may already be aware of.
1. You won't be always getting the cheapest price from your suppliers
Oftentimes, depending on the size of the order that you place, suppliers will quote you a different price. It is a misconception to assume that the suppliers charge everyone the same: If you're a much bigger customer it makes sense for suppliers to offer discounts on bigger orders. On the other hand if you’re a smaller retailer, it is much more of a hassle for the distributors to deal with your business and individually ship and pack your items - therefore fees might end up being significantly higher.
It is also a misconception to think that Aliexpress Sellers all offer the same best price. Aliexpress sellers can increase prices from their OWN factory suppliers up as much as 1000%, and if you don't have all day to check for every other product on Aliexpress that looks similar, it's likely you won't find the best price.
This is where SaleSource comes in handy, using machine learning, SaleSource shows you all available suppliers for any given product, ensuring that you get the best prices and stay ahead of the competition. With faster shipping times and cheaper prices than your competitors, your store is an objectively better place for customers to buy their products from.
2.The logistics of dropshipping (Long Shipping Times)
The good thing about starting dropshipping in 2019 is that most suppliers (even small ones) offer free ePacket shipping, which makes shipping and tracking your customers orders much easier. However, there can still be numerous issues regarding shipping that can affect your customers.
Different suppliers tend to have different shipping times and even different locations, if a customer orders products via your website that are being sourced from multiple suppliers, they might get all of their packages delivered at different times.
It is for this reason that it is important tokeep the number of suppliers to a minimum and buy everything from a handful of established and trustworthy agents, otherwise your dropshipping business will be afflicted with longer than usual shipping times.
Speaking of longer than usual shipping times, it is also true that if you're dropshipping small and cheap items, it may not be economical to chose ePacket as your shipping option, as ePacket may cost 3-4x the price of the item itself. In this scenario, items typically take 20-40 days to get to the customer under free shipping, which even in dropshipping terms is a long time.
Proper customer expectation management is key, and this issue can be overcome by allowing customers to track their orders directly on your store with a tracking app like Tracktor. In addition, sometimes it may be worth it to pay extra for customers shipping even if it isn't economical, in order to build customer good will and trust.
3. Low Margins
While dropshipping margins are almost certainly higher than brick and mortar retail, you may find that due to the high acquisition costs and generally low product prices (on your website), that margins will float around 20-30%.
Indeed these margins are nothing to scoff at, but the reality, especially when scaling to a six figure monthly revenue, is that you'll take home around 20% of your total sales volume.
However, margins are directly related to the choices you make when creating your dropshipping business, highly profitable dropshipping stores ARE possible, but require high ticket (expensive) items, branding, email remarketing & loyalty campaigns.
The more effort entrepreneurs put into optimising their dropshipping business, the higher their margins will be. This generally takes time, and developing a dropshiping store into a brand can help with this - allowing more effective leveraging of organic traffic from Pinterest, Instagram, Facebook and YouTube.
This article offered an overview of the biggest positives and negatives of the dropshipping business model as it stands in 2020. At SaleSource we believe the benefits of the dropshipping business model far outweigh the few challenges, but we leave readers to make up their own mind.
If you found this article useful, please share it with someone who may be interested - we leave readers with a curated list of the main benefits of dropshipping:
- Start-up cost are practically negligible and can be as low as $250
- Rapid scaling potential, moreso than almost any other business model
- Risks are low as you do not have to store any inventory
- Little pressure to start selling straight away, giving you time to learn the ins and outs of the business on the go
- Gives you freedom to work from where you want
- Ecommerce is growing rapidly, and the potential earnings only increase every year
- Advanced Tools like SaleSource can help you with every part of your dropshipping journey
- Ability to transition from dropshipping to wholesale once brand is establihed