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Dropshipping is a sales and delivery method that enables businesses to sell products, without actually keeping any in stock.
When a buyer place an order, the seller then forwards the buyer details to, and money, to the actual supplier – which is normally called the dropshipper.
Below follows an overview:
Step 1: The Buyer place order from Company A (Seller)
Step 2: Company A (Seller) request a product dispatch from Company B (Dropshipper), directly to the customer
Step 3: The product is shipped directly from the Dropshipper, without ever being handled or processed by the seller.
“How does dropshipping work?”
The seller charge a higher price than the dropshipper does, and keeps the difference when the payment between the two is settled.
The seller may pay the dropshipper on an order to order basis, or after a certain number of orders or time period.
From a seller perspective, this is ideal, as the seller can offer a whole range of products without investing in a large stock.
The Dropshipper benefits too, as they don’t need to invest in sales and marketing, as this taken care of by their sellers (which are sometimes called affiliates).
For the buyer, it shouldn’t make any real difference. Ideally, this should offer lower prices, as the risk is reduced for the wholesaler and seller.
However, when applied in the real world, dropshipping far from the shortcut to success many online sellers hope for. Especially when it comes to dropshipping operations involving buyers in the West, and dropshippers in Asia.
Keep reading, and learn why drop shipping is probably not a sound strategy for your eCommerce business.
1. Your customers are technically classified as Importers, and must therefore pay import duties and other taxes
Let’s say that you place an order from a website, operated by a local company. Then we also assume that the seller is using a dropshipper in China, to deliver that product.
The seller forwards your details, which are printed on the airmail parcel – and shipped all the way to your address.
Here lies a major issue with international dropshipping.
As you receive a parcel from abroad, you therefore ‘become’ the Importer – which means that you are liable for all import duties and other taxes that may arrise.
For obvious reasons, ‘Made for China’ textile labels are not in English.
This problem is even more serious when it comes to ‘sensitive products’, such as toys and electronics – which must comply with strict safety standards.
Keep in mind that it’s you, not the Dropshipper, that will be held liable if any of your customers are injured, or if their property is damaged.
4. Expect nothing but razor thin profit margins
About 10 years ago, when dropshipping was still a novelty, you could add a decent margin on top of the dropshipping price.
But 2007 was a long time ago, and things are not the same.
Today, the marketplace is flooded with China based sellers, offering the same items found on various dropshipping sites, for just a few percent more than the dropshipping price.
In addition, many Dropshipping websites have decided to cut out their sellers and affiliates, completely, and target overseas customers directly.
Finally, Dropshippers also find themselves driven out of business by companies such as Lightinthebox.com and Wish.
Dropshipping can only work under the following conditions:
1. If you sell ‘exclusive products’ that are not available to any seller on the internet. This requires that you form a relationship with a manufacturer, that agrees to ship individual units.
2. The products pass through an intermediary logistics partner, rather than shipping the items directly to the customer.
3. You ensure that the products comply with the safety standards, labeling requirements and documentation requirements in the customer’s country.
But if you were to go through all the hassle of building a ‘sustainable’ dropshipping supply chain, all the benefits of the dropshipping concept are lost.
However, it is not outside the realm of possibility that we will see a new breed of Dropshipper in the future, that actually takes care of these issues. But, as far as I know, no such company is in existence today.
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Asia Import Platform
An all-in-one platform that can help you go from idea to product manufacturing in China, Vietnam, or India. The platform is used by more than 2000 importers worldwide.
Co-founder of Asiaimportal (HK) Limited and based in Hong Kong. He has been quoted in and contributed to Bloomberg, SCMP, Alibaba Insights, Globalsources.com, China Chief Executive, Quartz Magazine and more.
Hey there, I’m Fredrik!
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