Dropshipping is not economical and even less ecological.
Oh, that was a tough nut, wasn’t it? But how do I get it?
Dropshipping – what is it?
Let’s start at the very beginning with the question of what dropshipping is, what’s really behind it and why most companies inevitably have to fail because of it.
Most retailers already know dropshipping as drop shipping. In the case of a drop shipment, the dealer accepts an end customer’s order, even though he does not have the goods in stock himself. He forwards this order to his wholesaler or manufacturer, who in turn delivers (sometimes anonymously) directly to the end customer.
A simple business model and sounds very profitable, because we as a dealer have no own storage costs, but outsource this cost point to the supplier. This business model takes advantage of marketplaces such as eBay, Amazon and even real, -. In the markets mentioned, we as dealers immediately benefit from an enormous reach, excellent infrastructure and established customer service. In return, we pay a relatively low sales commission. Simple principle and most online retailers have been familiar with at least two of the marketplaces for more than ten years. But how is it that the whole thing should not be worth it?
How dropshipping works
To do this, we have to go a little further:
Let’s take a look at how a drop shipping business is structured in detail. First of all, there is an end customer who comes to us with a demand. We confirm that we can meet this demand at a price mentioned (ideally this is the MSRP), but (currently) we do not have the item in stock ourselves. After our end customer has ordered, we pass the order on to our wholesaler or manufacturer with the request to deliver directly to the customer. Our wholesaler is now checking whether he can provide the ordered quantities at the required conditions. If he cannot do this, he passes the order on to another location or rejects our request. If he can fulfil them, the only question left is who will bear the freight costs?
Oh, we haven’t considered that yet! Who takes care of the freight? We already have a first stumbling block here, why many companies have to fail because of the dropshipping business model. They do not take freight costs into account in their pricing.
Who delivers dropshipping?
After we have clarified this, another hurdle has been cleared. Our supplier prepares the order for delivery and hands it over to the shipping service provider. He delivers the request to the end customer; everyone is happy.
Nearly! Because now it comes as it had to come: the end customer doesn’t like or doesn’t like the goods, and he wants to send them back. We naturally reject that, don’t we?
Dropshipping – who is liable?
Wrong, the end customer has an unlimited right of withdrawal and that for two weeks from delivery. Also, he is entitled to at least 24 months warranty for purchased products. So the goods come back, have to be checked, and if everything goes well, they have to be resumed. But first the question again: Who pays the return shipping costs?
And we have already reached the next stumbling block for the entrepreneur. Who takes this into account? After all, the customer orders because he likes the goods (it says: ‘Goods bought as seen’ and ‘Illustration can differ from the delivered item’ – everything is clear). Is that so? What about your ordering behaviour?
Correctly, in reality, the clothing sector alone returns around 65% of the items purchased – more from women, less from men. So we also have to factor this factor into our price calculation, and we shouldn’t forget that we probably paid for the original shipping out of our own pockets. Quite apart from the fact that we have paid for the ordered goods, but the customer gets his money back!
Is it dropshipping on the side – a success story for founders?
And it is becoming increasingly clear why the dropshipping business model does not pay off, even if the entire online world is currently tempting it as the panacea for e-commerce. It is easy to manage from the living room and even part-time. But in the real world, there is a lot more to it. If you are seriously dealing with the topic of dropshipping and maybe even in your online shop, you have to include some factors in your calculation.
Because seasoned shop owners know: Without marketing, there is no turnover. And without sales, certainly no profit!
So if you are considering the idea of building and operating a successful company using the dropshipping business model, you have to come up with a good plan. And a good plan is based on a crisis-proof calculation. If you plan that well, you can also easily organize your e-commerce venture from the living room.
How do you start dropshipping?
But there is a long way to go.
How do you find dropshipping suppliers?
Let us examine from the beginning how we will achieve our goal: First of all (after we are clear about our range) we have to choose one or more suppliers.
What are our requirements for a suitable supplier?
Sure, it has to be reliable, but it also has to ship quickly, has a high never-out-of-stock stock, ideally provides a regular inventory file and provide all relevant product data and image links in one file. We also have to negotiate good terms with the supplier so that our margin is as high as possible. We’ll cover margins a little later, though.
After choosing the supplier, we have to think about suitable products and their distribution channels.
Dropshipping – what to sell?
What requirements do we place on our products?
Ideally, they are easy to explain or self-explanatory, we have a meaningful data structure and a detailed picture or video material. Furthermore, the price structure can be selected so that we can comply with the RRP and still get the highest possible profit from every sale. The return rate also plays a not insignificant role – if our supplier already has data on it, this can make a decisive contribution to the selection. Of course, articles with a relatively low return rate (always measured against comparable articles) are best suited, because each return costs us (depending on the calculation) valuable euros and thus decides on the success and failure of the business model.
Where to sell using dropshipping?
Now for the appropriate choice of the distribution channel. The distribution channel can vary from product to product.
What options do we have? And what are your advantages?
In e-commerce, we differentiate into two sales channels: our online shop and external marketplaces. One of the first considerations is which product is suitable for which sales channel. Because not every product fits every shop, some products are too special, too extravagant, too cheap or only not suitable for this target group. To reduce unnecessary costs, it is, therefore, necessary to ask the question where my end customers buy for each product. Does my product fit into the portfolio of the online shop? And where do other retailers or manufacturers sell similar products?
After we have clarified these fundamental questions for our products, we now know whether the selected products fit into our shop, on Amazon, on eBay or another e-commerce marketplace. The next step is data preparation according to the specifications of the chosen online shop. The more detailed the data can be delivered, the higher the likelihood from the beginning that our offers will be found quickly or easily by the end customer.
What do I have to consider with dropshipping?
How is the data structured?
Perhaps you already have detailed data in an ERP (Enterprise Resource Planning) or PIM (Product Information Management) system. All you have to do is transfer it to the correct format. Otherwise, the suppliers can be asked for help. Usually, you will quickly receive a comprehensive file with all available product data or make it possible for download. Make sure that this file also contains media links.
If there is no ERP, but we are talking about product data maintenance, the question arises at the same time with which interface you want to connect. There is no question that one or maybe two online shops can easily be operated with Excel tables, but then it gets confusing. Or what do you do when an order has to be split between several suppliers? You can quickly lose track of things.
Hence my advice: Think about which software you want to work within a good time.
How do you manage your offers?
I work with Tradebyte, an interface that can connect to over 90 channels in more than 16 countries. Here you deliver your product data, network it with the connected chain, and from there it runs almost automatically. I have already integrated a PIM for each channel, I keep an overview of stocks, and I can control prices for each channel individually.
Oh, yes, the sales prices … Didn’t I talk about the correct calculation earlier? How was it the same?
What does dropshipping cost?
Let us first consider what we know. There is a purchase price that we negotiated with the supplier. We have to think about the freight costs, i.e. how high the freight costs to the end customer are for me. How high do we estimate the return rate and what expenses can be expected per item? Because we have to assign the return freight (measured by the quota) as a percentage to each article sold. Also, there are costs such as packaging material, processing of returns (also as a percentage) and possible customs duties or other VAT rates than are customary in Germany. In the Netherlands and Belgium, for example, it is 21%. However, these are easy to calculate if we expect net prices. Also, there are all sales commissions and the necessary fees. Caution is advised with staggering sales commissions,
In the illustration below, I once inserted such a calculation formula. It quickly gets confusing, doesn’t it? But do not worry, in this rare case, it is an astronomical price calculation for a graduated commission with four price scales. I also got into the habit of never selling below the manufacturer’s suggested retail price, because I’d instead allow a little more leeway for a higher return rate or reserves for a new connection than one day find that the item is no longer profitable.
Closing word – When is dropshipping successfully implemented?
This brings me back to my initial
claim: dropshipping is not economical and even less ecological.
I stick to it! Unless I set up a realistic price calculation in advance, in which I also plan margins for myself. And I’d instead calculate a few cents more for innovative packaging – so make my contribution than offer the lowest price on hell. Because otherwise, my business model is exactly that: cheap! And I will never be successful and crisis-proof on the market. The current economic situation clearly shows how vulnerable most companies are when sales have been falling for a month.
Anyone who thinks “that alone is no guarantee of success”, I immediately agree with 100%. Because being successful is a constant process of monitoring, adjusting offers and observing the market. Only those who know what is going on in their economic field will build a permanently successful dropshipping company that is profitable in the long run.