Dropshipping is perhaps one of the most powerful eCommerce tools available.
In 2017, Forrester Research found that more than 23% of all online sales were fulfilled through dropshipping, equal to $85 billion in sales. More than a third of online stores have adopted dropshipping today, with an expected CAGR growth of 32% by 2025.
As the eCommerce industry continues to grow, dropshipping is likely to remain an important mainstay for young startups and growing businesses.
But despite its global use, dropshipping is not always the best solution for every company. Its unconventional strategy, coupled with higher liability rates, may not be a good fit under certain circumstances. It’s essential to clearly understand the industry and compare its pros and cons before switching over.
This article will explore the meaning of dropshipping from an online perspective, evaluate its benefits and drawbacks, and discuss what to consider before stepping into the space.
What is Dropshipping
Contrary to popular belief, dropshipping is not a type of business. It’s actually a method of inventory management and order fulfillment that reduces the warehousing burden on eCommerce stores.
Instead of vendors keeping inventory in stock, dropshipping allows them to fulfill product orders by having the products shipped directly to consumers without much (if any) fulfillment interaction on the part of the brand.
Dropshipping Meaning for Online Businesses
In the context of online business, dropshipping refers to eCommerce companies using third-party suppliers to fulfill orders. Brands are the storefront, performing all advertising and marketing to raise awareness, build an audience, and make a sale.
When orders are placed, the company pays third-party dropshippers to manage and deliver the final product. Amazon’s Fulfilled By Amazon is one example of dropshipping, with individual sellers building their brand while Amazon holds the stock in its warehouses and takes care of product fulfillment.
In other instances, the eCommerce business keeps all of its stock with the manufacturer and never personally touches it, instead acting as a middleman between the consumer and the fulfillment process.
Who is Ecommerce Dropshipping Ideal for?
For eCommerce companies just starting out, a dropshipping arrangement can be extremely beneficial. Some of the main advantages include:
- Dropshipping eliminates the need for upfront capital and reduces unnecessary warehouse space.
- There are no limitations on how much a brand can sell, so long as the supplier has sufficient inventory.
- Dropshipping can be used to test new products or inventory without making substantial or expensive long-term arrangements.
Dropshipping has been used with great success by a number of well-known brands, including Wayfair, Ikea and J.C. Penney.
Benefits of Dropshipping
By reducing overall expenses and capitalizing on product testing, eCommerce brands can quickly scale their inventory needs to meet the demands of their customers. Let’s explore each of these points in greater detail.
Lower Capital Investment
New business owners experience dramatic upfront savings when launching a dropshipping relationship. Not only do dropshippers eliminate the need to buy warehouses or inventory, but they also enable brands to operate with significantly lower budgets.
Research has shown that brands that utilize dropshipping have 18.33% higher profit margins than those selling through traditional channels.
Low Overhead for Small Businesses
Apart from their initial capital, eCommerce brands also save on long-term overhead costs. There’s no need to spend money on managing a warehouse, nor any reason to restock or resupply owned inventory. This also means avoiding expensive personnel or warehouse fees, which accounts for nearly 10% of average yearly overhead.
Solid Strategy for Testing New Items
Dropshipping enables brands to experiment with new products, all without investing in pricey or long-term creation processes. Ecommerce brands can test new inventory and bundling opportunities with extremely low risk, using a third-party supplier to help fulfill orders instead of buying all the stock and then discovering that nobody wants to buy it.
Considering the fact that 30% of business inventory is slow moving or ‘dead,’ it pays to try before you buy.
Easy to Scale Inventory Need
Because 66% of online consumers would buy from competitors with more shipping options, continuous scaling is critical for the modern business. However, scaling inventory demand can be difficult using traditional fulfillment processes. By working with a good dropshipper, eCommerce companies enjoy less inventory tracking, infrequent item forecasting, and increased shipment options over time.
Things to Consider Before Employing Ecommerce Dropshipping
Dropshipping is an excellent fulfillment strategy, but it isn’t a good fit for every business. Not only is the industry increasingly competitive, but shared warehouses, low customization, and higher liability can be off-putting to some eCommerce professionals.
The dropshipping industry was worth $125 billion in 2021, with hundreds of thousands of businesses located worldwide. But not all dropshippers can withstand the test of time. A failure rate of 90% prevents the vast majority from passing the five-year mark.
The convenience of dropshipping is also arguably its biggest drawback: other eCommerce businesses can sell the same product that you do, making it very difficult to stand out from the crowd unless you establish a strong brand.
Shared Warehouse Means Inventory Fulfillment Challenges
Even the most efficient dropshipper can’t completely prevent fulfillment delays. In fact, using a dropshipper that many other businesses rely on can result in unforeseen logistical challenges. Inventory can fluctuate daily (particularly if one of your competitors runs a sale that generates an increase of orders), leading to logistical issues ranging from out-of-stocks to late shipments.
With shared warehouses, your products are at the mercy of other business demands, so flawless execution is not possible 100% of the time.
You Lose Brand Customization
Because a dropshipping strategy means eCommerce operations never directly interact with sold inventory, companies will not have the opportunity to add branded or customized touches to their products. This can be a problem for newer companies looking to build trust or engagement, or develop a sustainable brand reputation, and so this depersonalizing effect needs to be mitigated in other aspects of your marketing channels.
Using a supplier that doesn’t deliver an exceptional experience can significantly damage your brand reputation. Dropshippers that maintain poor quality product, or unethically sell products from patented intellectual property, can create a host of serious trademark concerns that reflect back on your business.
A lack of transparency between your company and your customers can leave lasting negative impressions: 54% of consumers would stop purchasing from a brand after a breach in trust.
How to Get Started with the Dropshipping Business Model
It’s important to have a firm understanding of the market before establishing a dropshipping relationship with a supplier. Performing some market research, using an ERP tool, and sourcing high-quality providers are all key to future success.
Market research is one of the most influential steps of the partnership process. Not only does it put your business ahead of upcoming trends or growing niches, but it minimizes competition too.
There are a few ways to conduct market research as an eCommerce business:
- Understand your target customer, including their demographics and psychographics.
- Evaluate the needs of your business and identify how dropshipping could alleviate pain points.
- Perform a cost-benefit analysis, specifically targeting your potential savings or revenue boosts.
Employ an ERP Tool
Leveraging ERP software in dropshipping relationships can be priceless for eCommerce businesses. Providers like xentral offer 100% control over logistics management, connecting to a variety of warehouses according to your needs.
Product data management is further simplified with optimized inventory management tools, from item-level tracking to critical document storage. Best of all, everything is available in a single, streamlined, cloud-based program.
Get a demo of Xentral for free by getting in touch with the team today.
Integrate with the Right Supplier
The importance of integrating with the right supplier cannot be overstated. Making a solid partnership today could lead to greater opportunities tomorrow, including higher profit margins and better customer satisfaction. To make the most of your partnership, it’s important to plug into third-party operations that can be integrated into your ERP system.
While searching for a credible dropshipping supplier, keep on the lookout for these effective qualities:
- Excellent reviews from vetted sources
- Strong history of effective use cases
- High accuracy and speed in delivery
- Agreeable cost for your budget
Choose ERP Software To Seamlessly Manage Dropshipping Tasks
When used correctly, eCommerce dropshipping can help business owners better manage their product catalog, fulfill orders, and meet customer expectations with ease. Choosing the right dropshipping supplier can bring about greater benefits for you and your eCommerce operation, effortlessly scaling your business. In all cases, it’s critical to integrate upcoming solutions with holistic tools built to last.
At Xentral, we provide powerful ERP solutions for eCommerce professionals in any industry. Streamlining business tasks with a host of automations, we make it easier than ever to run your company from a single location. Manage dropshipping tasks, track logistics efforts, and enhance your customers’ experience directly from the cloud.
To inquire about potential dropshipping management solutions, or to see Xentral in action for yourself, schedule a free product tour.