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Young men who post photos of flashy watches, white beaches and fast cars: In their social media profiles they describe themselves as online entrepreneurs and promise quick wealth with little effort. Dropshipping is their magic formula. This is an online mail order business model in which the provider neither produces the advertised products themselves nor has them in stock.
The simple e-commerce practice – also known by the dry term drop shipping – attracts with low start-up and operating costs. Dropshippers ultimately save costs for storage, packaging and shipping. Because the financial risk is low, beginners can get started with minimal capital investment and set up an online shop, with flexible working hours and from anywhere. This is what successful dropshippers say they say in advertising videos and marketing articles. The business model could easily bring “20,000 euros by the end of the month” with which the “9-to-5 hamster wheel” could be abandoned.
Earning money without a lot of effort, time and risk – that sounds tempting. But does dropshipping actually guarantee quick success? Bernd Skiera, professor of electronic commerce at the Goethe University in Frankfurt am Main, doubts this. “If something promises to make easy money, it’s usually not that easy,” he says in an interview with Capital. “Dropshipping can be an interesting business model, but it does involve work and risk.” Only those who offer customers added value can build a profitable business.
Dropshippers act as sellers, but only act as intermediaries. They do not manufacture or stock the products they offer in their online store. Instead, they forward their customers’ orders to the actual manufacturer, who produces the ordered goods and ships them directly to the customer.
Without the physical product in their hands, dropshippers first take care of setting up their web shop. This can be done cost-effectively, for example, using shop systems with a modular principle. Or they sold their goods via third-party e-commerce marketplaces such as Amazon or Ebay. Then comes marketing. For this effort, which they can supposedly manage part-time from their sofa, dropshippers calculate a margin into the sales price, their profit.
In order for this calculation to work out, you have to offer the customer an advantage with your offer. “At best, dropshippers first identify a need that their target group has,” says e-commerce expert Skiera. “And then for that problem, they have to find the product that solves it.” The product should of course be the best on the market, cheap to produce and, if possible, not available elsewhere. This requires thorough research and market knowledge. Anyone who cannot offer this added value runs the risk of the customer ordering the desired product from another provider or even directly from the manufacturer. “It’s hard work to compete in the highly competitive e-commerce market,” says Skiera.
If you manage to attract customers, the difficulties for dropshippers really begin. Although you save on logistics and order processing, you still have to be responsible for the quality of your products, guarantee acceptable delivery times and prove yourself trustworthy. Payment process, queries, returns – since the contract is created between the end customer and the dropshipper, all of these tasks also fall within his area.
As an intermediary, dropshippers cannot control their product before shipping or influence the packaging or the actual contents of the order. The retailer or supplier is central to successful dropshipping. It should be reliable and ship quickly. However, if the manufacturer is located in China, the delivery times are long due to the long delivery routes and shipment tracking is usually not possible. This dependency can also pose a risk in other ways. “If the manufacturer suddenly fails and cannot deliver, I first have to find a replacement. It is questionable whether I will get the same conditions,” says expert Skiera.
Returns can also become a problem in this business model. Returns have to be organized and cost money, which reduces the margin. “Passing on the costs of returns to customers is not that easy,” says Skiera. Your satisfaction ultimately determines the success or failure of the business.
Another challenge for many online entrepreneurs: They have to keep an eye on taxes and customs duties and clarify liability issues. If you don’t know proper bookkeeping, you’ll quickly get into trouble with the authorities and the tax office.
“Online trading is work and not for everyone,” explains expert Skiera. “Anyone who thinks they can build a profitable business with two afternoons at the computer will almost certainly fail.” However, a successful dropshipping business is not impossible if you approach it correctly and find a suitable niche. But success also attracts competition, warns Skiera. “Ultimately, competitors can also approach the service providers who are involved.”