Drop it like it’s hot: as many as one in three ecommerce retailers leverage dropshipping, the order fulfillment method that allows businesses to sell products without the cost of inventory management.
Dropshipping has a lot to offer retailers — in fact, ecommerce giants like Zappos and Amazon used dropshipping to scale their businesses — but it’s not the right choice for everyone. If you’re considering using dropshipping to scale your supply chain, keep reading. We share what dropshipping is, how it works, and the pros and cons retailers must consider.
What Is Dropshipping?
Dropshipping is a style of order fulfillment that allows retailers to sell products online without having to manage the inventory themselves. Once the retailer makes a sale, they share the order with a third-party supplier. This third-party supplier, often a wholesaler or manufacturer, manages the rest of the fulfillment process, packaging and shipping the product directly to the customer.
How Dropshipping Works
Dropshipping works best when the process is automated. Ideally, here’s what happens:
- A customer places an order on an ecommerce retailer’s website.
- The retailer sends the customer’s order directly to a third-party supplier.
- The supplier fulfills and ships the order to the customer.
To set up dropshipping for your ecommerce business, step one is finding a supplier. You can locate individual suppliers by region using supplier directories like AliExpress or Alibaba. Depending on your ecommerce platform, you may be able to use an app that automates this work for you: for example, retailers who host their store on Shopify can use Oberlo to add products from thousands of suppliers around the world.
Once you’ve found some potential suppliers, it’s time to vet them. Since the customer originally bought the item on your website, they’ll judge your brand on how well their order is fulfilled — even though a third party is the one fulfilling it.
As such, it’s important for ecommerce merchants to thoroughly evaluate suppliers and consider how their brand may be impacted. Read reviews about the supplier. Inquire about their customer service and returns policy. How quickly can customers expect to receive their order? How does the returns process work? What if a product arrives damaged?
Finally, prepare to sell. Perform a competitive analysis on pricing. Integrate your sales and fulfillment software with the supplier. Market the products and add them to your website. If dropshipped products have a longer fulfillment time, mention that on the product page to avoid disappointing your customers.
Is Dropshipping Right for Your Business?
Consider these pros and cons to decide whether to go the dropshipping route.
Benefits of Dropshipping
The benefits of dropshipping range from low overhead to increased scalability.
Benefit #1: Low Overhead Costs
The minimal overhead costs may be the most attractive thing about dropshipping. Since retailers aren’t physically managing the inventory, they don’t have to incur all the costs associated with inventory management — like purchasing and maintaining warehouse space, stocking products, and hiring staff to oversee everything.
Benefit #2: Broad Product Selection
Retailers can search hundreds of thousands of products to find items that best match their brand and customer demand. Dropshipping also offers retailers a low-cost way to test and experiment with new product lines. Instead of estimating demand and filling up their own warehouse space with product, retailers can test demand by purchasing new items through their dropshipping suppliers.
Along the same lines, ecommerce merchants can leverage dropshipping to meet seasonal fluctuations in product demand, without running the risk of overstocking their own warehouses.
Dropshipping can also be a smart option for merchants who expand into product lines that require additional TLC, such as valuable items that need enhanced security or products that need to be kept at a certain temperature or within specific lighting conditions. Instead of retrofitting your own warehouse, you can partner with dropshippers who have storage centers that already meet these requirements.
Benefit #3: Affordable Scalability
With a traditional ecommerce setup, retailers stock their own warehouses. You may ship from a single location, or have several warehouses located strategically across your state or country. As your business grows, it costs more — and it takes longer — to ship to customers who are located farther away from your warehouses. This eats into your profit margins and your customer satisfaction scores.
When you use dropshipping, you no longer have to expand warehouse space and staff in lockstep with your order volumes. The additional costs of inventory management get passed on to your dropshipping partner. You can even partner with multiple dropshippers to lower shipping costs and prevent delays to far-away regions. This enables you to scale and keep costs manageable.
Benefit #4: Risk Protection
Finally, if something happens to your warehouse, like a fire or natural disaster, all of your inventory could be gone in a moment. By partnering with dropshippers, retailers significantly mitigate their risk.
Disadvantages of Dropshipping
Dropshipping offers many benefits, but there are a few key downsides to consider.
Disadvantage #1: Low Profit Margins
The reduced overhead of dropshipping comes with lower profit margins. The retailer’s profit depends on the difference between how much they pay the third-party supplier for the product, and the retail price they list on their website.
Even though third-party suppliers often give retailers these products at a discount, the margins may not be enough to support a new business. However, dropshipping can provide an additional revenue stream for more tenured merchants.
Disadvantage #2: Less Control Over the Supply Chain
With dropshipping, you are outsourcing a key stage of the fulfillment process to a third party. You don’t control how fast the products ship or in what condition they arrive; the third party does. If the dropshipper is unreliable, your brand could end up paying for it in bad reviews.
For some merchants, the benefits of dropshipping outweigh this risk. Retailers can further mitigate their risk by thoroughly evaluating their third-party suppliers, and having plans in place for managing customer service complaints if things don’t work out.
Disadvantage #3: No Branding
Finally, since the dropshipper is shipping the products, not you, your customers will receive something that doesn’t come in your branded packaging or with your logo on it. It may also arrive in packaging that doesn’t live up to your brand aesthetic.
The one exception is if the supplier offers white-labeling, like wholesale supplier SupplyMeDirect. By opting into white-label dropshipping, retailers can still maintain control of their brand while enjoying the convenience of this fulfillment model.
More Ways to Grow Your Ecommerce Business
While dropshipping usually isn’t the right move for ecommerce startups, it can be a smart move for retailers who are ready to scale. Whatever your size, consider these additional ways to grow your ecommerce business.
- Create a subscription offering. Can any of your products be replaced on a regular basis? If you sell perishable items, encourage customers to subscribe so they never run out. Even if you sell clothing, subscription offerings can ensure your customers always have something fresh to add to their closet.
- Implement an affiliate program. With an affiliate program, bloggers and influencers sign up to become ambassadors for your brand and market your products to their followers. When followers purchase your products through their affiliate URL, you pay a small commission to the affiliate.
- Expand your customer loyalty offerings. Customers can be the best marketers. Beef up your customer loyalty program (or start one) by offering rewards for customers who share your brand on social media or refer friends and family to your store.
- Accept digital payments. Adoption of digital wallet technology has ballooned during the pandemic. By accepting the payment methods your customers use, you’ll run into less friction at checkout and reduce cart abandonment.
- Offer Buy Now, Pay Later (BNPL) at checkout. This flexible payment method, where customers can split their payment into multiple installments, is immensely popular with younger shoppers, and brands are reaping the benefits. One in four merchants already accept BNPL, with many reporting an increase in overall sales and repeat customers.
Zip can help with that last one. Our partner merchants on average enjoy a 20% increase in conversion, 80% increase in repeat customer rate, and 60% increase in AOV. Learn how you can add Zip to your checkout today.
Amelia Willson is an online marketer-turned-freelance writer, based in sunny southern California. She covers ecommerce, sleep health, tech, and online marketing. When she’s not busy writing, you can find her at the beach or walking her dog Rockefeller. Connect with her on LinkedIn.