Dropshipping is actually an order fulfilment model that does not require the company operating the online store to keep the products in stock. Instead, the store sells the product online and forwards the order to a third-party vendor, who then ships the order to the customer.

However, contrary to the popular belief, this business model does not necessarily mean getting rich in a short time. There are many ads on how to open an online store with this profile and with the fact that you can make extra profit in a short time with little capital investment.

At first glance, it seems simple, since you will sell goods from another business to the consumer at retail price, that you obtained at wholesale price, keeping the difference. But when all factors are taken into account this model can also present difficulties.

Low profit margins

Since you don't have to stock up and keep your own stock, warehousing costs are low. In order to achieve high returns, turnover must be increased, since a significant part of the revenue goes to the wholesaler. For a start-up, this is extremely difficult. Low margins, on the other hand, are not enough to cover marketing costs, online store maintenance and the management of online orders.

High competition

Since very little capital is required to start a dropshipping business, this low entry opportunity also results in high competition. Moreover, there is no exclusivity vis-à-vis the supplier, so any number of competitors can sell exactly the same products. Thus, potential customers can buy the same thing cheaper from someone else.

Quality complaints, complaint handling

In e-commerce, if customers complain about product quality, slow delivery, or return procedures, the company operating the online store can handle the problem directly. However, during dropshipping, businesses are more or less at the mercy of the supplier, while at the same time the business has to deal directly with the customer’s complaint. You can't send the customer to the supplier to fix the problem. Communication will be slower and the customer gets dissatisfied. The company operating the online store cannot verify the product delivered is of good quality, although this can be eliminated by ordering a sample before the given product is listed in the online store. But there is still the risk that quality may deteriorate over time.

Contracts, legal issues

It is advisable to lay down the rights and obligations of the parties in a contract, which is concluded between the company operating the online store and the company delivering the goods. This can settle the procedure for handling complaints, response deadlines or even delivery conditions. It can be problematic if the supplier is unable to prove the origin of the goods, or if someone else's trademark is used unlawfully. The contract may also specify how the parties handle returned or damaged products, how long it takes to complete an order from sale to delivery, whether the customer can contact the supplier's customer service directly, whether the supplier insures the order during delivery.

There may also be a business model where the online store company engages an intermediary to collect the value of the goods, as well as packaging and shipping. Recently, the National Bank of Hungary (MNB) issued a statement on this activity. According to the MNB's position, if the courier service transfers the purchase price paid by the customer to the payment account of the intermediary, the transfer will be sent to the intermediary. If a certain part of the purchase price is transferred by the intermediary to the wholesaler and the dropshipper, payment transactions between payment accounts may arise if the business is carried out on a commercial basis. This activity is a payment service that requires authorisation. However, there are exceptions to payment services, therefore the given activity does not necessarily require an MNB license. However, it is necessary to thoroughly examine the model.

For some products, dropshipping can be a good solution

Some products cost more to store and transport than others, so under certain circumstances it may be more profitable to sell in a dropshipping model than to store yourself. This includes products that take up a lot of space, such as furniture, heavy or fragile products, or even jewellery or antiques. Here, the wholesaler (supplier) has more expertise in storage and securing products.

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