If you’re interested in starting an eCommerce business, or you’d like to grow an existing business, chances are you’ve thought about dropshipping. The internet is full of stories of entrepreneurs who have gone from zero to $1 million in sales in a matter of months simply through dropshipping. With headlines like that, who wouldn’t want to try it out?
But before you go all in on dropshipping, you need to have a solid understanding of the business model and the opportunities and challenges associated with it. Here’s how to decide if dropshipping is right for you and set yourself up for success from the beginning.
What is dropshipping?
Dropshipping is an order fulfilment method where the retailer doesn’t stock any products. Instead, when they make a sale, they pass the order onto a supplier, who ships the order directly to the customer.
The concept has reportedly been around since the days of mail-order catalogues in the 1960s, but it has become much more widespread in recent years, thanks to the rise of online shopping.
The global dropshipping market was estimated to be worth US$102.2 billion in 2018 and it’s forecast to grow at a CAGR of 28.8 per cent from 2019 to 2025, according to Grand View Research.
Another driver of the dropshipping boom is the development of platforms such as Shopify, which have made it possible for entrepreneurs to launch e-commerce sites, connect with suppliers, market their products and manage orders without needing a lot of experience or resources.
The risks and rewards of dropshipping
As with any venture, there are both risks and rewards to dropshipping, and they differ somewhat based on your role in the relationship.
If you’re the retailer, one of the biggest benefits of dropshipping is the small amount of capital required to start and run your business. Instead of spending thousands of dollars in inventory and only turning a profit after it has sold, with dropshipping, you’ll earn a small margin on each order without the risk of an upfront investment.
This makes testing out new products and styles much less stressful, since, if they don’t sell, you haven’t actually lost anything. It also means you can offer a wide range of products, thereby attracting a bigger customer base and increasing sales. For instance, the biggest online furniture retailer in Australia, Temple & Webster, which has over 130,000 SKUs, does dropshipping.
But there are also drawbacks. Because of the relative ease of starting a dropshipping business, there’s a lot of competition from other entrepreneurs, which can put pressure on prices and lead to low margins. While you might not have a lot of money tied up in inventory, you still need to do a lot of sales to support your business.
You also lack a certain amount of control over your supply chain, so if something goes wrong — such as a pandemic that disrupts global freight — it can be hard to fix. This can be especially difficult when a supplier makes a mistake that negatively impacts the customer experience, such as taking too long to fulfil an order, or packing an order poorly so that the item breaks. At the end of the day, it’s on the retailer to smooth out any customer complaints.
If you’re the supplier, the biggest benefit of dropshipping is the opportunity to expand your business and increase your profits, since you can charge retailers a higher price for items sold individually than you can for bulk orders. It also means you can get closer to the customer and gain valuable insights from their buying behaviour, without having to go to the trouble of building your own retail store and dealing with customer service enquiries.
Finally, shipping is one of the biggest challenges around dropshipping that you’ll face as a supplier. Since you’re paying to ship each item, the cost can really eat into your margin, especially if you ship large or heavy items. It can also be annoying to seek out the best price for different types of freight from each courier and manage their different labelling requirements. Using a shipping aggregator like Shippit can help address these issues.
For example, Meubilair, a furniture supplier that fulfills dropship orders on behalf of Temple & Webster, Fantastic Furniture and small, online furniture sellers, was able to reduce its fulfilment time by 80 per cent and its shipping costs by 40 per cent, thanks to Shippit’s centralised approach.
“I have 10 different retailers that I do freight for and their orders come in all different shapes and sizes. I use Shippit’s CSV bulk upload feature to save the amount of time it takes fulfilling orders for so many different retailers. This also allows us to choose the freight too,” Brendan Van Eyk, a director at Meubilair, said.
Whether you’re a retailer or supplier, dropshipping can help you grow your business without a lot of upfront investment, but it’s a lot of hard work and it’s not for everyone. If you do decide to go down the dropshipping route, make sure you find a way to minimise your exposure, for instance, by keeping shipping costs in check with Shippit.