The global B2C e-commerce market reached USD 4.4 Trillion in the last year, and approximately 23% of all online sales are fulfilled by drop shippers. But who is a drop shipper exactly, and is a dropshipping store worth it in 2023?
Dropshipping In 2023
A drop shipper is a person or business that owns an e-commerce store and uses a third party to buy inventory and fulfill the logistics. Utilizing a third party for logistics is a huge relief as they do not have to care about the warehousing and shipping of the products.
Based on the projections of IMARC Group , the market size of B2C e-commerce is expected to exceed USD 7 Trillion by 2028. Considering the expansion of B2C e-commerce, the market size of dropshipping business is set for further growth.
However, people think making money in a rapidly growing market is easy. Although more possibilities generally arise in a growing market, the competition also increases. This is one of the reasons why there is only one dropshipping business from ten that survives the first year.
There are different views on why this rate is that high. Some professionals explain this high failure rate by selecting the wrong niche, choosing the wrong marketplace to sell, or not using a proper marketing strategy. There might be cases when these assumptions are correct alone.
Sometimes the real answer is the dropshipping business model itself and, more specifically, its limits. So, taking one step back and observing the business model, what is the reason for the high business failure when it comes to dropshipping business?
Easy setup of online store
A rapidly growing market like e-commerce, including dropshipping, always provides excellent opportunities. Finding a niche with relatively low competition but significant business potential is easier. The question is whether the dropshipping model is the right one to exploit this niche.
People regularly need to pay more attention to the first essential fact: you can only exploit some niche as a drop shipper. Even if there is relatively low competition and you have a good value proposition, there are other business models that can be more effective in several markets.
However, there are niches where dropshipping could be a good option. The problem is that some of these markets are already overcrowded with competitors. Dropshipping is a popular business model because of the low barriers to business entry. Setting up a dropshipping business is a simple way to sell products online.
There is no need to invest in the stock, warehousing, or a physical site where the sale can be made. Several markets might already be well-exploited, but the good thing about expanding e-commerce is that new niches are constantly arising. You must be one step ahead of others to recognize the ideal dropshipping niche for a competitive advantage.
In short, dropshipping is a low-risk business model. The establishment of a dropshipping business is risk-free and fast, and it results in a lot of markets being overcrowded with competitors. However, there are always new niches on the horizon. If you can recognize these markets faster, you can make big money.
Competitive market
As mentioned before, the dropshipping market became super competitive due to the low barriers to business entry. But taking one step back, this is not just the result of easy entry into the business.
The products that most dropshipper sells are mainly limited to common products. In many markets, drop shippers offer almost the same products without being unique. And they regularly do it at very low prices.
One of the problems of reducing prices to compete with rivals is the bigger a company is, the more it can reduce its markups. There are cases in specific markets when bigger dropshipper are even willing to suffer losses in sales in the short term until the number of competitors is reduced and they can increase their prices.
From the strategic angle, this is something that you have to be aware of if you establish a dropshipping business in a competitive niche. You might face very low-profit margins in the short and medium terms. Before entering the competition, you should calculate your budget and plan ahead with a low-profit margin.
As a general rule, remember that before entering into one market, you need to understand the competitors, market size, costs, and pricing. This principle is true for every business model, including drop shipping. Due to the competition nowadays in the dropshipping business, detailed market research is inevitable if you want to set up a successful dropshipping business.
Lack of unique products
Retaining a relatively unique product that you can sell at a high-profit margin for the long term using the dropshipping model seems a tough challenge. The truth is the dropshipping business model was not designed for the sale of unique and own branded products but primarily for mass products.
You should be prepared so that it is easy for your competitors or future competitors to copy products without unique features. It can be a significant drawback if you do not conclude an exclusive agreement with your dropshipping supplier.
No quality and logistics control
It is almost impossible to sell high-quality products if you never have a chance to oversee the product quality. As a drop-shipper, you have no choice but to rely on the supplier regarding product quality or change your supplier, which is a painful process.
If you selected an unreliable supplier and there are issues with the sold products regularly, you have to take responsibility for that. You are the one who talks with the customer and the supplier in parallel to resolve the problem. Imagine doing this with thousands of low-value products. Customer support will become time-consuming and complex soon, and it can take most of your time.
Other aspects are that you do not have control over the shipping time and must handle the customer’s complaints regarding the shipping delays. And over time, you will work with separate suppliers. Your costumer’s orders involve products from more suppliers when you need to coordinate these deliveries.
In short, the fact that there is no control over the shipping time further increases the significance of finding reliable suppliers.
Customer experience
Although the dropshipping model can save a lot of time by moving the shipping responsibility to a third party, this can also damage the customer experience. Conversely, the products are sent to the customers in packaging without any features associated with your brand. There is no possibility of putting something extra in the package to make it more personal. That means there is no customer journey, and customers will not recognize your brand in the future.
In some markets, this can be a massive drawback. In other markets, it is optional but still recommended when customers make one-time purchases. A positive customer experience can lead to word-of-mouth recommendations and positive reviews even when customers make past purchases. This can attract new customers and contribute to your business’s long-term success.
In industries with high competition and many similar products, such as clothing, customer experience can be a key differentiator in converting customers to recurring customers. A recurring customer is an individual who purchases products from the same company frequently. Existing customers that can generate repeat purchases and recommend you to others are the most effective way to build a long-term business.
Acquiring new customers has significantly higher costs. Costs like marketing, advertising, and sales efforts to convince someone to try a product or service for the first time require significant time and money investment.
Understanding whether the customer experience is a must-have feature in the industry where you want to set up a dropshipping business is key. Using the dropshipping model and outsourcing logistics can be a painful trade-off for saving time in markets where having a customer journey is critical.
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When to start a dropshipping business?
While starting a dropshipping business does not require a massive investment, it may lead you to the conclusion that it is an easy task to set up and operate a successful dropshipping business. It is not sufficient to find an ideal niche and exploit this opportunity. More importantly, you must know that the dropshipping model has drawbacks and limitations.
Only some markets can be exploited effectively by using the dropshipping model. Selecting the wrong market can be deadly for your business’s success without proper market research and strategy.
Dropshipping is a business scheme that can work in 2023, but only in some markets. It is limited to specific markets where the described drawbacks do not affect your business.
Being fast is more important than ever; entering the market in the early stages of penetration can help you to establish yourself as a strong competitor in the selected niches.
