Dropshipping allows you to sell and ship products to customers without keeping those products in stock. A third-party partner is used to fulfill orders.
This cost-efficient method of order fulfillment is popular among ecommerce vendors. In fact, about a third of products sold on Amazon are sold through dropshipping and Amazon’s success demonstrates that it can be a highly successful order fulfillment method for businesses.
Before making a decision to drop-ship, it is important to know the fundamentals about how dropshipping works and its pros and cons.
How Does Dropshipping Work?
Dropshipping is outsourcing your company’s inventory and order fulfillment functions to a third-party partner. Rather than keeping merchandise in stock, you team up with a wholesale supplier that stocks the inventory for you.
With a typical drop-shipping model, your company handles marketing and sales functions. When you make a sale, you simply pass your customer’s ordering and shipping information onto your drop-shipping partner instead of handling the order fulfillment yourself. Your partner fulfills the order and ships the customer their merchandise.
Additionally, you can opt to have your customer’s order sent out with your return address and a customized invoice. This arrangement is known as private label shipping and makes it so orders appear to be shipped directly from your place of business. Customers are unaware of a “middle-man” in the process. You avoid the cost and hassle of inventory and order fulfillment in return for sharing a percentage of your profit margin with your wholesale partner.
Dropshipping is used by companies of all sizes, from authors selling print-on-demand books to major companies who rely on wholesale suppliers.
Benefits of Dropshipping
- A primary benefit of dropshipping is flexibility. Dropshipping wholesale suppliers only take their cut as orders come in, so small businesses don’t incur large up-front expenses for inventory and shipping.
- Dropshipping also appeals to businesses for its efficiency. Since vendors who use drop-shipping suppliers don’t have to spend time managing inventory and processing shipments, they have more time to focus on other business functions like marketing, sales and customer service.
- Dropshipping also represents a more efficient use of space, enabling companies to work out of a small office while still moving a large amount of product.
Risks of Dropshipping
While dropshipping can and does work effectively for many businesses, using this order fulfillment model successfully requires managing some potential risks.
- First, your business model must take into account the profit margins. Paying a third-party fulfillment company digs into these margins. For example, an author using CreateSpace print-on-demand book service might expect to earn a royalty of $2.34 on a book that lists at $8.99 after CreateSpace takes its share out.
- Markets for dropshipped merchandise are extremely competitive since it can be done at wholesale prices. Small businesses must find other ways to differentiate themselves from the competition like better service or niche marketing.
- Dropshipping gives businesses little to no control over inventory levels, which can lead to lack of synchronization between your sales and supply availability. You may periodically discover you have sold a customer an item that isn’t in stock.
Strategies to avoid and manage these problems include —
Cultivating multiple suppliers can reduce the risk of running low on merchandise availability. You can also implement a compensation or upgrade policy to customers who order out-of-stock merchandise. You can turn out-of-stock orders into a way to build brand reputation and loyalty.
Dropshipping means you don’t have control over logistical miscalculations or mistakes that your shipping partner encounters. Your partner’s errors will reflect on you. Be prepared to take measures to retain customers when a partner makes an error.
Not having products on hand can create a disconnect between employees and what you are selling. How are customer service representatives supposed to answer questions about items they have not seen or used personally? Keep current product samples on hand at all times to familiarize and train your team.
How to Find Reliable Dropshipping Partners
Illegitimate wholesalers will sometimes charge their partners a subscription fee to do business with them. This is a red flag and a sign that their profit model centers around taking your money rather than sharing in your success. Other purported wholesalers sell to the general public, which means they could be inflating their prices rather than offering their retail partners a square deal.
Genuine drop-shipping suppliers often charge a per-order fee — usually $2 to $5. You should plan to sell enough volume to make this fee worth your investment. Suppliers often charge minimum order sizes too, which helps them avoid partners who aren’t moving enough merchandise to generate a decent profit. Pre-paying suppliers with credit toward your future orders lets them know you’re serious about your business and your partnership with them.
Contact manufacturers of the products you’re interested in selling and ask for a list of their wholesale distributors. You may also be able to obtain this information by attending trade shows and asking exhibitors questions.
Supplier directories including Doba, SaleHoo, Wholesale Central and Worldwide Brands may require a fee but will save you valuable research time.