What is a Dropshipping Business? A Guide to the Pros and Cons of Dropshipping

Uber owns no vehicles. Facebook creates no content. And Airbnb owns no real estate. 

Behind each of those businesses is a simple concept.. They provide a way for people who have something to easily connect with the people who need it. 

If you’ve ever thought to yourself, “Wow, that’s a great idea. I wish I had done that,” here’s some good news. You can, and it’s called dropshipping.

What is a Dropshipping Business?

Dropshipping is an online operation where you sell directly to customers without stocking any inventory. You don’t need a physical store and you don’t need a manufacturing facility, shipping center, or warehouse. 

When you receive an order from a customer, you contact your supplier. The supplier packages and ships the product to your customer. You collect the money from your customer, pay your supplier, and pocket the rest for yourself.

There’s a good chance you may be having one of two reactions right now. 

1. “Wow, this is great. Low overhead, it’s all online, I’m going to be rich!”
2. “Wait a second. This seems too easy. What’s the catch?”

The truth about dropshipping is that neither of these reactions is entirely true or false. As with many things in life, there’s a gray area between the two that’s a lot more accurate. Is dropshipping easy? What are some dropshipping risks? So let’s take a look at both the benefits and challenges you’ll likely run into when you start a dropshipping business.

Pros and Cons of Dropshipping 

In this corner: The Pros.

1. It doesn’t cost a lot to get started.

As we mentioned above, there’s usually no inventory to buy. That also means you don’t need a warehouse to hold your inventory, and you don’t need a store where to sell it.

A website, a supplier (or suppliers), and an e-commerce platform (more on this later) can be all you need to start a dropshipping business. Many website hosting and e-commerce platform services are subscription-based, which can mean your financial commitment to them is often only month-to-month or year-to-year.

Being able to get up and running without risking your savings or taking on a large amount of debt has another advantage. You don’t need to generate a ton of sales right off the bat to cover your costs.

That means you can keep the security of your day job, if you’d like, and move into your dropshipping business full-time when it works best for you.

2. It doesn’t cost a lot to keep it going.

The cost of your inventory isn’t just the price of each product. The costs of shipping, packaging, and warehousing those items can take a bite out of the profit you might get from selling them.

In addition, there’s the labor and logistics involved with getting a product through the supply chain and into your customer’s hands. With dropshipping, the costs, coordination, and labor are usually handled by your supplier.

Working with suppliers also can make it easier to sell products that may require special storage or shipping, such as perishable food or fragile items.

3. Your world headquarters can be your dining room table.

While the business world has its share of success stories that started small in a garage, you don’t need to sacrifice your sheltered parking space to launch your dropshipping business. 

If you have an internet service, you can connect to your customers and coordinate with your suppliers from just about anywhere. Which means your headquarters could be almost anywhere in the world.

4. Expand or change your inventory with a click or a swipe.

Is that mineral-rich volcanic face moisturizer no longer selling well? Do you see an opportunity to offer a line of organic teas to complement your memory foam yoga mats? 

A key benefit to consider when you’re thinking about how to start a dropshipping business is how quickly and easily you can change what you sell. It’s often just a matter of finding the right supplier and featuring your new merchandise on your site.

Being able to quickly find and source different suppliers also can be an advantage when products become scarce (remember toilet paper in 2020?), or they suddenly become popular (think: sweatpants, also in 2020). 

Now introducing: The Cons.

1. To make a lot, you have to sell a lot.

While offloading the manufacturing, product storage, and shipping to suppliers can make your life easier, it does come at a cost: a lower profit margin. That’s not ideal for a business, but it’s a challenge you can overcome by having a higher sales volume.

2. To sell a lot, you need good inventory.

Having what a lot of people want is not just a matter of choosing the right products; it’s also about having the right amount available to sell. That often means relying on your suppliers to have what you need when you need it. 

One of the major dropshipping risks is your limited ability to control quality. Since you can’t stroll through your own warehouse, it can be harder to keep an eye on your inventory. Your suppliers also may be handling orders for other dropshippers, which can affect the number of products they (and you) have available.

One way you can stay on top of your inventory is with technology. There are a number of dropshipping apps and software that can help track inventory, as well as several other business operations we’ll talk about a bit later. 

3. Snafus, errors, and unexpected costs.

Other common dropshipping risks come from how much you’ll need to juggle. As we said, to make a lot, you need to sell a lot. And to sell a lot, you’ll likely need more than one supplier, especially if you’re selling a variety of products.

If you’re a believer in not putting all your eggs in one basket, you’ll probably see another advantage in having more than one supplier. If you have multiple sources for some or many of your products, it’s possible to have a backup if a supplier can’t fill an order.

At the same time, it can be difficult to keep track of many eggs in many baskets. If a customer orders several products, you could have multiple suppliers involved in sourcing and shipping. That may create multiple shipping charges that you’ll have to absorb or pass on to your customer.

It also can result in different shipping schedules, which may delay the arrival of some of the items. And that’s usually not a great experience for your customer.

Even when you can control shipping costs and delivery schedules, you’re still at the mercy of your supplier. If they make a mistake and the product goes to the wrong address, or if it arrives damaged, the customer will likely blame you. 

4. You’ve got company.

“A dropshipper walks into a room … and it’s filled with dropshippers.”

What sounds like the opening line of a joke is actually a pretty good observation regarding the dropshipping business. Anyone who is dropshipping risks having to fight through a competitive pool.

According to Grand View Research (1) the global dropshipping market was valued at $102.2 billion just a few years ago. It’s expected to grow 28.8% by 2025. 

That not only means you’re likely to be competing for customers — you’re also likely to be competing for suppliers. If you find suppliers charging more for a product and your competitors are selling it for less, it could be challenging generating profitable sales.

How to Weigh the Pros and Cons of Dropshipping 

Is dropshipping a good idea for you?

At this point, if you feel like dropshipping is both easy and hard, simple and complicated, a risky business and a sure thing, it’s not surprising. Spend a little time researching “how to start dropshipping” online, and it’s not hard to see posts and videos about “making a lot of money” and “is it for real?” 

How to start dropshipping is similar to how to start just about any small business. There are a lot of things to consider. We know. We’ve written about many of them, and we still haven’t covered all of them.

There are some basics that apply to starting almost any business. In fact, we have a guide that covers those basics that you might want to start with.

From there, we can start looking at the steps you can take to get your dropshipping business ideas going.

Protect Against Dropshipping Risks

Dropshipping may seem like a piece of cake. Low overhead. Minimal hands-on work. However, it’s important to keep in mind that it’s still a business and will come with inherent risks. Before you start brainstorming dropship business ideas and weighing the pros and cons, remember that you’ll likely need business liability insurance just like many other businesses. 

Some of the e-commerce insurance coverages we typically recommend for dropshipping businesses include:

General liability insurance coverage – This foundational coverage can help handle costs from third-party accidents, property damage, and bodily injury.

Cyber liability insurance coverage – This type of policy can help cover claims associated with stolen customer data, cyberattacks, breaches, and fraud.

Workers’ compensation insurance – with this coverage, you can protect your business and help take care of employees who get sick or injured on the job.

We can help you get a business insurance quote for your dropshipping business in just 10 minutes online. 

Plus, you can explore business insurance options with help from the Simply Business Resource Center. Discover a crash course in coverage options with Business Insurance 101. What’s more — the free business plan template can help turn dropshipping business ideas into a reality.

Dropshipping Business Ideas 

Just about every successful business started with an idea. While that may seem like an obvious statement, having a good idea — a unique or distinctive idea — can make a big difference. 

1. Look for a unique product to offer.

While you’re thinking about dropshipping business ideas, think about your local supermarket. Let’s say you found a great recipe for Khao Man Gai and you want to whip up a batch for dinner tonight. The recipe calls for Thai chili peppers and fermented soybeans. 

Unfortunately, your local store doesn’t carry either of those. 

In fact, the only place you can find those ingredients is from a little shop 10 miles away. So you make the trip, shell out some cash (who knew Thai chili peppers were that expensive?), and go home to create your Southeast Asian masterpiece.

This is a great example of being the only one (or one of the few) who has a product that someone needs or wants. If there are a lot of people who like Thai cuisine, that little shop could be a profitable business.

One way to land on good dropship business ideas is to ask, “What will my online store offer that others (or relatively few others) offer?” That’s often referred to as a Unique Selling Proposition (USP).

2. Find out what people want.

It’s not always easy to come up with a product that’s both unique or hard to find and is in high demand. Try just focusing on the “high demand” part first to find dropship business ideas.

To find out where the demand is, go to where a lot of people are shopping. In the online world that’s usually a big ecommerce site such as Amazon or Ebay. Check out the bestseller lists to see what’s hot. You also can pick up on trending products by monitoring your social channels.

OK careful reader, you may be asking “If big shopping platforms are already selling a hot product, how can I compete with them?” 

That’s a good question. If you see a lot of competition, that’s a sure sign of a large, healthy, profitable market. Profitably selling that same product could be a challenge.

Rather than keying in the specific product, focus on the market.

For example, if yoga mats are in demand, it may be a sign that yoga is a profitable market. In addition to dropshipping yoga mats, think about what products those customers might also be interested in: yoga blocks, athleisure, health and wellness products. 

The good news is that whatever dropshipping business ideas you land on, there’s likely a supplier who can provide and ship products for them.

3. What are you into?

If yoga is hot, but you don’t know a Downward Facing Dog pose from a Half Lord of the Fishes, don’t worry. Another approach is to focus on something you’re into. The best dropship business ideas for you might be right in front of you.

Do you collect sports memorabilia? Perhaps you’re an organic gardener. Or maybe you enjoy building model trains. If you have a passion or a hobby, you can use that as a way to find dropshipping business ideas.

A big advantage of this approach is that you’re already a customer in this market, so have a good understanding of what types of products people might want to buy and where the trends are headed.

Along with being knowledgeable, you’re also passionate about your particular niche. That can help when you’re trying to connect with customers through your marketing, which we’ll cover later on. 

Plus, loving what you’re doing can be a crucial ingredient to running a successful business.

4. Think about repeat business.

If you’re dealing with small profit margins, then you need to sell a lot of products to make money. One way is to sell to many customers. Another is to sell to those customers many times. 

When considering a product, think about how often a customer might need it. A vintage HO steam locomotive might be a once-in-a-lifetime purchase for a model railroader, but paper towels are something they’ll need over and over again.

Part 2 is Dropping

If you’ve made it this far, you’re probably seriously considering taking the plunge on your dropship business ideas. So how exactly do you get started? Don’t worry, there’s more to come. We conclude this two-part dropshipping series with a step-by-step guide for how to start dropshipping with no money — or, at least, small amounts of it.

(1) Learn more at grandviewresearch.com