The popularity of dropshipping as a business model has been rising in the last few years. In 2018, the value of the global dropshipping market size was $102.2 billion. The current pandemic has affected the world economy shifting purchase behaviors towards eCommerce. Reports say that dropshipping will grow by as much as 28% in the next few years.
For most online retailers, dropshipping is a tempting proposition. However, it’s not going to make you rich immediately. Like any business model, there are some drawbacks and challenges. This time we discuss the intricacies of dropshipping – what it entails, the pros and cons. We also tackle the best dropshipping practices that can help retailers maximize their potential.
What is Dropshipping?
Dropshipping is an order fulfillment process that allows a business to forgo keeping inventory on hand. Instead of storing products, companies can send customer orders; directly to their suppliers. The suppliers fulfill the orders and send the packages directly to the buyer.
At present, nearly 33% of online stores use dropshipping as their fulfillment model. As the eCommerce industry booms, the business model is poised to scale even further.
The Key Players in the Dropshipping Process
There are three critical players in the dropshipping process: manufacturers, wholesalers, and retailers. A dropshipping company’s relationship with these players can contribute to an operation’s success.
Simply put, they create products. Most manufacturers do not sell directly to customers. Instead, they sell in bulk to wholesalers and retailers. Buying inventory from manufacturers ensures that a retailer gets the lowest price on a product. However, most have a minimum purchase requirement. In 2019, there were more than 10 million factories in the world, and that number could be more today.
Wholesalers purchase products in bulk from manufacturers. They mark up the prices of the products slightly and resell them to retailers. Some wholesalers have a minimum purchase requirement. However, the number is much less than a manufacturer.
Anyone that sells products directly to the customer is a retailer. If online store dropships, then they are considered a retailer.
Interestingly, any one of these players can be a dropshipper. So long as they are open to shipping products directly to the buyer, they can act as a dropshipper on behalf of an online store. Nevertheless, transacting with a wholesaler ensures better pricing than choosing a retailer.
The Dropshipping Process
Regardless of a store’s product, the dropshipping process is straightforward:
- Customer places an order.
When a customer places an order on a retailer’s website, both retailer and buyer get a confirmation of the purchase. The payment is sent directly to the retailer’s account.
- Merchant places the order with its supplier.
Once an order is marked as paid by the customer, the retailer forwards the customer’s order details to their supplier. The retailer then pays for the supplier’s pricing on the product. There are a few software available that enables retailers to forgo the email process. However, for new operations, an email to the supplier suffices.
- Wholesaler ships the order to the customer
If the item is in stock and the retailer’s payment pushes through, the supplier ships the package directly to the customer. The shipment bears the logo of the retailer as well as their return information.
Pros and Cons of Dropshipping
Dropshipping has been around for years. Still, there are plenty of misconceptions about it. While it does present a fantastic means for growth, it is not without its drawbacks.
- Minimal capital needed
Stocking inventory requires a considerable amount of capital. Between the cost of storage and the investment on initial stocks, traditional retailers often go into debt at the onset of trying to get their eCommerce companies off the ground.
Dropshipping requires minimal capital. Retailers can start making money with zero inventory. The investment lies in marketing a business to the target audiences and connecting with the right suppliers.
Dropshipping allows eCommerce stores to test and try products with minimal chances of coming up on the red. The ease of forgoing on-hand inventory means that retailers can take risks and respond to the market demands.
- Easier Fulfillment Process
The order fulfillment process plays a significant role in a company’s success. Great customer experiences breed loyalty. So it’s not just about fulfilling orders and packing shipments. It requires eCommerce stores to maintain a warehouse, organize and track inventory, ship stock, and handle returns properly.
With dropshipping, these concerns are irrelevant as third-parties take care of all of their fulfillment needs. All there is to do is find potential customers and convert them to loyal patrons.
- Low-Profit Margins
In dropshipping, the overhead is low. However, returns are also smaller. Dropshipping companies rely on discounts given by manufacturers and wholesalers to secure their profit. It takes a considerable number of orders to stay afloat. It is incredibly challenging at the onset without an established customer base.
Between dealing with suppliers, marketing to potential clients, and maintaining branding, dropshipping isn’t a get-rich-quick scheme.
- Difficulty in Finding the Right Suppliers
Eighty-four percent (84%) of eCommerce businesses report that their prime concern is finding the right suppliers for their products. In dropshipping, a good supplier is more than just a company that provides the right products. Suppliers must be able to ship products efficiently and fulfill different scales of orders – big or small.
- Highly Competitive
Because of the low overhead costs, the competition in dropshipping is fierce. Retailers would be hard-pressed to find suppliers that can provide them exclusive contracts on their products. Moreover, more prominent and established dropshipping companies can offer better rates. More often than not, customers will go for lower prices.
When implemented and appropriately planned, dropshipping is a relatively low-risk method in easing your way into establishing your online business. The key to success lies in finding the right partners to support your endeavors. At ZhenHub, we can connect you with our vast network of trusted partners. Sign up today and discover how our tech-enabled services can empower your eCommerce goals.