Dropshipping 101

Dropshipping in SA: What to know before embarking on the journey

You probably heard the term dropshipping thrown around recently, and you’ve probably heard of people who have made a lot of money out of the dropshipping business. Perhaps you’ve even given it a shot yourself. We get asked about dropshipping so often so we thought we would write a little guide explaining everything you need to know, before heading down the dropshipping path. 

So what exactly is dropshipping? 

Dropshipping is a business model where you list your suppliers products on your website/sales channel (at a markup), and take orders from customers. You then forward those order details onto your supplier and the supplier ships those products directly to your customer. Your customer pays you, you pay your supplier and you never see the product. This is the truest form of dropshipping, and the easiest to manage. Here’s an image to explain more: 

Another form of dropshipping is what we call fulfilment dropshipping This is where you list a suppliers product on your channel, and place orders with your supplier as customers place orders with you. The supplier then ships to you and you forward the product onto your customer. Often suppliers will also consolidate multiple orders into single parcels for the fulfillment dropshippers so that the shipping cost is less expensive than shipping two or more individual orders. 

Here’s an image to explain more: 

The important thing to note in both the examples above is that the dropshipper doesn’t actually buy the goods until the customer has paid for them. Only once the dropshipper receives the order (and the money) do they order from (and pay) the supplier. 

Fulfillment dropshipping is by far the most common form of dropshipping in South Africa, with very few entrepreneurs opting for the strict dropshipping model. Think of sellers on marketplaces, or websites that quote long delivery times - those are probably fulfillment dropshippers. 

Does dropshipping work and how much money can I make from a dropshipping website? 

Yes and no. Dropshipping can work, and there are some people that make loads of money out of it every month. The reality though is that those people are very few, and those businesses tend not to stick around for long.

“Why are there so few successful dropshippers?” I hear you ask. Well here are a few reasons: 

• Low profit margins - Generally, dropshippers make fairly low profit margins. As a business person if you are making low margins, it’s hard to stay motivated about your business. It’s even harder when what little money you’re making is being ploughed back into marketing to get traffic and sales to your website. In the end, with dropshipping, the juice is seldom worth the squeeze.

• Time - It’s probably the most underestimated commodity in the business world, and even more so when it comes to selling online. Setting up a website, marketing it, packaging orders, responding to customer queries etc all take valuable time. If you’re time poor it’s not going to be a very successful venture, specifically when your margins are not very high.

• Growing competition - With so many merchants setting up drop shipping stores, online stores and other businesses, finding and retaining a customer base is getting harder, and more expensive. What’s worse is that the unimaginative merchants compete on price alone by undercutting their competitors for business. That then ends up in a price war, where merchants basically give up most or all of their margin to turn the sale over their competitors, and that’s not good for anyone.

• Inexperience - To the uninitiated, setting up an online store seems easy, cheap and effortless. The truth is getting setup online can be anything but effortless. From the technical know-how to expensive and time consuming marketing, selling online can be a minefield. Couple that with low margins, time constraints and business issues and you’ll quickly find yourself losing interest, and your business on the road to doom. 

• Supplier problems - the biggest threat to a dropshippers business is out of his control - literally. If a supplier goes bust, or can’t supply for whatever reason, your business is out in the cold and suddenly not making money. It happens regularly, so make sure your supply chain is diversified.  

• Customer service issues - In a world of endless choice, customers have come to expect impeccable service when buying anything from anyone. Excessive delivery times, poor quality products and bad service will lead to bad reviews from your customers, which will equate to less trust for your business and fewer sales. These days poor customer service can severely cripple, or even kill a business. 

All said, dropshipping does however have it’s place in business these days. Specifically at the beginning of a business's life. Dropshipping can be really good for: 

• Low capital ventures - If you’re strapped for capital and you’re looking for a cost effective way to generate some extra money, dropshipping may be your answer. Find a supplier, build a website from the comfort of your couch and start marketing. If it doesn’t work out a few months down the line, all you will have lost is a small amount of money paying your ecommerce platform’s charges, and some time. Don’t try to make dropshipping your final destination though. Use whatever money you generate to build a brand and following and grow your margins from there. Dropshipping shouldn’t be the long term focus of your business strategy. 

• Testing your market - You’ve got a product idea, but you don’t want to throw the life savings at a huge order of widgets before you know a little about how your market will respond to your widgets. Use dropshipping to get this data, before you spend those savings. This information may prove useful down the line and you will be happy that you spent the time and money on your ‘market research’. 

• Building a customer base - By dropshipping popular products inexpensively to a large base of potential customers, you can build a database of existing customers, which you can use later on to market other brands and products. It’s a great inexpensive way to gain a following and customer data. 

• Learning - Dropshipping is a fantastic way to learn about ecommerce, digital marketing, fulfillment and other aspects of ecommerce without having to fork out mega money for a venture that may fail much more expensively and spectacularly. 8/10 businesses fail within the first 3 years of their life, so it’s probably best to learn as much as you can as inexpensively as possible. 

To conclude, we don’t like dropshipping, and we very seldom recommend it to our customers. The only time we like dropshipping is when it’s used for its merits as a tool for your business in the short term.

It’s a cutthroat game with low margins, unnecessary hassles, and with a higher chance of customer dissatisfaction. In addition the chances of long term success and business satisfaction are far, far lower with a dropshipping model than with other business models.