Some e-commerce operations have found success with a strategy known as dropshipping. With this approach to order fulfillment, a company promotes products but doesn’t keep them in stock. Once a customer buys an item, the company orders it from a third party that ships it directly to the buyer.
While there are pros and cons to this approach, many e-commerce shops find it to be a useful way to move product. Take a closer look at how dropshipping helps e-commerce sites become profitable.
A Closer Look at How Dropshipping Works
When you start an online business, you may not have adequate physical space in which to store inventory. With dropshipping, you don’t need any space to house products. In effect, you serve as the storefront and chief marketer for the products you sell. You can focus on developing your site’s SEO strategy, creating a vibrant product portfolio, and finding ways to reach potential customers.
When someone purchases a product from your e-commerce site, you make an online purchase of the good from a supplier, taking advantage of wholesale pricing. The supplier ships the item directly to the customer. The e-commerce site’s profit margin is the difference between the price the customer paid and the price the site pays the wholesaler for the product.
The Benefits of Dropshipping for E-Commerce Sites
Image via Flickr by RobertG NL
A study published in the Journal of the Operational Research Society found that online retailers that use dropshipping have the potential to be 50 percent more profitable than their peers that buy and store inventory.
Freedom from storage concerns is the most obvious benefit of dropshipping. Retailers don’t have to rent, buy, or build space to house their products. As a result, the barrier for entry is low for entrepreneurs who want to start an e-commerce operation. They don’t need capital to stock up and house products they hope to sell. In addition, retailers who use dropshipping don’t have the hassles of shipping, returns, inbound product shipments, and inventory management. Because there’s no need to deal with inventory, a business owner can run an e-commerce site from anywhere, including his home.
Another benefit of dropshipping is flexibility. Because the owners of e-commerce sites aren’t trying to push products they’ve already purchased, they can easily add or remove products from their virtual storefront. If they see a certain product is performing well, they can expand the line to provide customers with even more options. On the flip side, they can remove products that underperform. As e-commerce sites get a feel for what sells well, they can scale up operations with minimal additional cost and effort.
In brick-and-mortar stores, retailers must have plenty of inventory on hand to meet consumers’ demands. While customers like being able to buy and take home their product, their options are limited to what the store has on shelves or in its back room. With dropshipping, customers have fewer physical limitations on what they can purchase.
The Platforms for Dropshipping
There are multiple e-commerce platforms that make it easy to set up and run a site that leverages dropshipping. For example, e-commerce platform Shopify allows you to create a customized website that’s appropriate for your business. You can also use the platform to develop product pages. The site doesn’t charge third-party fees in an effort to help your business succeed. If you’re new to e-commerce and dropshipping, Shopify provides an in-depth guide to help you get started. For those who want to manage their e-commerce sites on the go, Shopify offers a completely mobile experience for dropshipping retailers.
Magento is another e-commerce platform that offers a seamless dropshipping experience for retailers and their customers. Thanks to its behind-the-scenes system, customers will never know you’re using dropshipping for your products. As your business grows, Magento allows you to write rules that determine which orders get automatically sent to which wholesalers. You can also identify your preferred suppliers. With this automated system, retailers have more time to focus on marketing rather than processing orders.
Some Potential Drawbacks of Dropshipping
Though there are many advantages to dropshipping, the process does have a few drawbacks. By far, the biggest challenge is low profit margins. With start-up costs being so low, some new e-commerce sites may decide to offer products at extremely low prices, undercutting the prices of established retailers. One way to overcome this drawback is to offer consistent pricing and excellent customer service. Many of the ultra-low-cost sites lack customer service and don’t stay in business long.
An additional challenge is keeping your website’s product availability current. If you’re buying from multiple wholesalers who are also shipping their products for other retailers, your system must keep track of which products are in and out of stock. Because wholesalers have different systems, it’s important that e-commerce sites use a platform that “talks” with the wholesalers’ inventory management databases. Otherwise, a customer may buy a product that’s out of stock, leading to irritation and frustration.
It may seem easy: a customer places an order, the order goes to the wholesaler, and the wholesaler ships the item. But what happens if the supplier makes a mistake? Perhaps the wholesaler ships the wrong item, doesn’t package the item properly, or sends it to the wrong address. Chances are good that the customer will hold the retailer accountable for these errors. When shipping problems occur, the e-commerce site must intervene immediately. It’s an opportunity for retailers to demonstrate their excellent customer service and rectify the mistake.
Finally, it’s important to consider the complicated shipping charges that retailers can incur with dropshipping. If a customer orders five products that originate from five different wholesalers, you can’t charge the customer for shipping five separate items. E-commerce sites must take this shipping situation into consideration when calculating prices and setting preferred profit margins. Failing to account for the shipping charges that come from using many different wholesalers can mean death for a retailer.
Despite the drawbacks and challenges, dropshipping is an effective tool for retailers, especially those in certain niches. By anticipating problems and developing systems to address them, retailers can navigate their way to being successful and profitable using dropshipping.