In 2001, the BeeGees wrote a song called ‘The man in the middle’, which perfectly encapsulates the two forms of online retailing in this title. One needs a hefty financial investment, the other requires a simple company setup and a website, well within the reach of most people, and not so expensive. One requires physical storage space and the other needs nothing more than a virtual shop. Although both are basically online retailing, they have big differences, financially and otherwise.
So, which is which, and how do you choose between the two?
What is e-commerce?
A Brit, Michael Aldrich, joined a modified tv and a real time, multi user, transaction processing computer in 1979, to help with his wife’s weekly shopping. He called it ‘teleshopping’ and it was the precursor for modern online shopping.
(In keeping with the music theme, the first actual retail transaction over the internet was in 1994, between two friends exchanging, for money, a Sting CD.)
So, e-commerce is a business model that allows individuals and companies to buy and sell products and services online. It is done using computers, tablets, smartphones and other smart devices. It doesn’t require a bricks and mortar store, although some companies prefer to do so. It’s a digital version of the old mail order catalogs.
Most importantly, e-commerce businesses have to keep an inventory of goods they advertise online, so that it is immediately available for dispatch. Take, for example, Amazon, with its giant warehouses.
E-commerce is considered a ‘disruptive technology’, in that it has sufficiently altered the way a business is run by being superior to the previous technology.
Pros and Cons of e-commerce
- It’s convenient, 24/7 open
- It’s secure, with high levels of encryption in payments
- An astonishing range of goods and services are on offer, and growing daily
- It’s mobile – buy and sell from anywhere
- Customer service is limited – you can’t really ask for a demo
- No tactile involvement – you can’t touch it, so it might be a lower quality than expected
- No instant pleasure principle – you have to wait for delivery, sometimes for weeks
What is dropshipping?
Dropshipping is an order fulfilling method. Notice the word ‘order’ rather than ‘delivery’. It is where a person, or company, has no inventory, but simply re-directs a customer order to the supplier, who in turn, delivers it to the customer. In effect, ‘the man in the middle’, like a triangle with points A, B and C, A being the customer, B the dropshipper, and C the supplier. There can be as many ‘C’s as the dropshipper wants, and it saves the need for a warehouse and appropriate staff to man it.
It also benefits the supplier, who is probably a wholesaler or even a manufacturer, with a website from the 90’s and minimal access to new customers due to a lack of marketing.
A good example of a dropshipper is Etsy, allowing buying and selling between parties, despite having no products themselves. Amazon also uses dropshipping, as an extension of their in-house program.
Pros and Cons of dropshipping
- Excellent business model for an entrepreneur
- Quickly test out ideas with little downside
- Low overheads – no need for a warehouse
- Less initial capital involved
- Much lower profit margins
- Sourcing from multiple suppliers is tricky, especially not knowing their stock levels
- No control over the supply chain, so shipping problems may arise
- Shipping errors can occur, but you still have to remedy the problem with clients
How to choose between the two, and when to apply them?
If an entrepreneur wants to sell online, after doing sufficient research, then dropshipping is the least expensive way to try out a new idea. The only problem is that suppliers and manufacturers will not deal with a private individual. There must be a company set up, and of course a website. Dropshippers tend to focus on ‘niche’ products, but without customisation and branding.
Of course, a larger company may also try dropshipping, perhaps to introduce a new design or product for a consumer test, then move forward to bulk purchase and warehousing if the product takes off.
But for full control over stock and inventory, e-commerce is the way to go. Higher profit and fewer problems with shipping and supply chains. Branding comes into the fray, and the company can customize many aspects of the stock.
Most individuals, who start with dropshipping, can upscale their business into full e-commerce fulfillment when growth and sales demand, taking the middleman out of the picture, and gaining control over all aspects of the business. From little acorns do mighty oaks grow!