Many people who would like to start their home based business may have heard of the term dropshipping but are still unclear of the concept. This article is designed to shed some light on this online business model.

What is dropshipping?

Essentially, dropshipping is a type of business model which has been around since the introduction of the mail order catalog system. It has gained popularity with the recent interest in online business. In dropshipping, you, the retailer, buy products in large quantities from wholesalers, and resell them to your customers in smaller quantities, usually one at a time. While this may seem similar to a traditional retail business model, the main difference lies in the fact that the wholesaler delivers the good directly to your customer on your behalf.

Online auctions

One way to sell products through dropshipping is to setup an online store and receive orders from customers through the store’s online shopping cart. This, however, requires a large investment in terms of infrastructure and time from the reseller, including having to update the website on a constant basis to reflect the current items being sold and their respective pricing.

Online auctions provided by sites such as eBay allow people to setup a dropshipping business more easily. This is accomplished by listing a few items for auction on your virtual store. When your auction is completed, your wholesaler will send the product directly to your winning bidder.

Your profit will be the difference between the bid price and what the wholesaler is charging you for the product. Another thing to keep in mind is that such auction sites will normally charge you a fee for each product you successfully sell. While this fee will put a slight dent in your profit, you are likely to get a higher visibility on these auction sites compared to running your own site.

Advantages

One of the main advantages of dropshipping is that you do not need to keep stock of the goods. This saves you from having to spend a lot of money setting up an inventory, in addition to the cost savings from not having to have a warehouse to store the items. Also, you will be able to establish a ready cash float, since you are paid immediately by your customer on the website, but have some form of credit with your supplier.

Disadvantages

Dropshipping, as with any other business model, has its fair share of disadvantages. A very common problem faced by people who have established dropshipping businesses is that the supplier can run out of stock. If a customer places and order and you are unable to fulfill it soon due to stock shortage, it will reflect badly upon your store. While there are some good wholesalers who will inform their resellers if their stocks are running low, you will need to be proactive to ensure you have ready stock of the items you are selling.

Scams

Perhaps the biggest risk of setting up a new dropshipping business is identifying a trustworthy dropshipper. An easy way to do this is to purchase a list of safe or trusted wholesalers who are known to deliver their items reliably to the customer. This has become necessary due to the recent interest generated by dropshipping, whereby many unscrupulous people disguised as dropshippers have emerged who will take unsuspecting resellers for a ride.

There are also some people who will pose to be wholesalers, when in fact they are middlemen who will charge you a fee to locate wholesalers who can dropship the items you intend to sell. Worse, they will charge you a fee for every transaction you perform with their wholesalers, thereby taking whatever little profit which was left.

Hopefully, with this information, you will be able to get a clearer picture of dropshipping, and will be able to setup a profitable online dropshipping business.