September 15, 2021
It’s a model that puts all the financial risk of research, development, production, stock acquisition and distribution onto third-party suppliers, meaning an individual product line or even a complete business can be launched virtually risk-free.
For the uninitiated, dropshipping is a model whereby a company essentially acts as a salesperson or intermediary for a manufacturer or supplier. The traditional retail model has retailers actually buying stock at wholesale price from suppliers, then selling it for the retail price at a profit. It suits both parties well, as the supplier doesn’t have to deal with marketing and can have its products stocked in a diverse range of outlets that the retailer chooses.
With dropshipping, the retailer holds no stock, and probably no physical store – it’s entirely online, and takes advantage of manufacturers operating in low-cost economies. The manufacturer or low-cost retailer will even handle the shipping.
Because it has now become a highly competitive model, it’s vital to have a methodical, defined process to keep those products moving. Your entire operation will depend on keeping close tabs on the comings and goings of orders, monitoring advertising and measuring its return on investment, and maintaining a trustworthy brand by studiously avoiding poor quality goods.
It’s relatively easy to make a fast buck selling cheap items to gullible customers, but ethical considerations aside, it’s not the way to make serious money from the model.
Here are our quick tips for making your drop-shipping process run that much more smoothly.
Simply put, the less actual work you have to do yourself, the more products you can sell and the more time you can spend researching new product lines. Just as a restaurant manager doesn’t do all the cooking, waiting and cleaning, nor do you need to trouble yourself with shipping, storage and tracking. As you grow, you might even find yourself outsourcing even the jobs you allocate to yourself – hiring marketers and researchers can pay when they’re bringing money into your organisation. Just make sure you have a solid system in place to oversee your outsourcing operation, because if you’re successful, that’s where your money will be coming from.
Always look for partners that allow you to use APIs to plug directly into their back end and provide a seamless link between your website and their purchasing and fulfillment operation. It’s yet another way of reducing the amount of day-to-day input you have to put into running the business.
Most of the big retailers are happy to provide API access to third party drop-shippers – they still make the same profit from each sale, but they’re greatly increasing the potential for each of their lines. As long as they’re secure and flexible, your customers will not notice that they are going through a separate supplier.
The main source of friction in any retail operation is the holding and distribution of stock. No matter how automated your process, it’s still something that will necessarily take up some of your time and resources. Minimising the amount of physical contact you have with your product is your ultimate goal, and if you can make that zero, you’ve maxed out your handling friction.
Letting suppliers deal with distribution is efficient anyway. It cuts down on their own paperwork and helps guarantee faster deliveries for your customers. It’s like building a bypass road around a city – you just get from A to B faster.
If you’re dealing with shipping, it makes sense to spend some time ensuring you’re using the most appropriate fulfilment partner for particular products and customers.
Some couriers will be better at delivering large objects to people’s living rooms, while others will specialise in reaching inaccessible places off the beaten track. Using intelligent shipping, you can direct certain products to certain addresses while guaranteeing customer satisfaction and maximum efficiency. And that all helps to secure repeat orders and higher profits in the medium and long term. Use a fulfilment partner that can take care of working this out for you, and you’ve got the ultimate in hands-off, frictionless retailing.
When you’re starting out, you probably find your human-to-human interactions with customers and suppliers are quite regular. It’s not a problem if you’re selling one item a day, but when it’s hundreds or thousands, that’s impossible without expanding your team. So look to automation to make customer interactions super-efficient. Don’t assume customers dislike chat-bots and recommendation engines.
Research shows they’d rather have an instant answer from a bot than even a short wait for human interaction. As long as you keep some channel of direct communication open, you’ll find your workload is greatly reduced as soon as you introduce intelligent customer interactions.
The whole process of drop-shipping is geared towards lubricating every possible interaction between the customer and the product. The net result will always be increased sales, as every time any friction point is encountered, a certain number of customers will leak out of the sales funnel.
What’s great about the model is that it’s really easy for anyone to make this an in-house business. Some established retailers are even adding drop-shipping channels to their traditional channels to maximise profits. It’s particularly viable if you are selling in a niche. Customers might already know you as a trusted retailer with a good range of products aimed at their sector. It’s a straightforward step to start experimenting with the model to try out new lines or to diversify into connected niches.
If a line sells well through drop-shipping, you can opt to continue the relationship with the supplier or perhaps seek other suppliers who might be able to offer a better price, but you will need to stock it yourself. It’s much less of a risk if you know there’s already a market for the product, and you’ll be able to benefit from the additional control you have over customer services and the whole fulfilment chain.
Using third party logistics (3PL), you can carry out this step into holding your own stock, while maintaining a seamless chain between your website and the customer’s order fulfilment. Here’s a summary of how the process works, and why it could be beneficial for you to adopt it without needing an outlay on warehousing and fulfillment centres.
The whole point of dropshipping is to cut the time-consuming and cash-jeopardising parts of the supply process out of the equation. So it might seem counter intuitive to use 3PL in your own operation. After all, you never need to hold any stock.
However, if there’s one part of the model that can potentially hold it back, it’s the delivery times. When we say “shipping”, that’s often literally true with this channel. That’s because the cost-effectiveness relies on inexpensive products being marked up and sold into more affluent markets. In practice, in the 2020s, that means sending products on container ships to the European and North American markets, and that can take weeks over oceans.
It’s possible, therefore, to have a compromise solution. You carry small amounts of stock that is regularly replenished by the original seller, but because it’s held in local fulfillment centres, you can offer your customers next-day or even same-day delivery, and in a competitive niche, that can make all the difference.
You might even be able to negotiate an arrangement with your supplier for them to keep your slots full while you get on with the essential business of selling it to your local market. You can use pure dropshipping and analytics to test out new products, advertising channels and target sectors with zero risk.
As long as there is a large imbalance between low production costs and a willingness to pay premium prices in other markets, dropshipping will remain a viable model. While it might at first seem to bypass local warehousing and fulfillment, third party logistics companies certainly have a role to play.
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