How to use Dropshipping in my Retail Business?

According to Wikipedia, dropshipping is considered as “a supply chain management method in which the retailer does not keep goods in stock but instead transfers the customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer.”

Dropshipping is an important and growing part of your retail ecosystem.We would define it as a retail fulfillment method which allows merchants to avoid holding stock in any given product. Instead, orders are fulfilled (delivered to a customer) by a dropshipper, or agent. This dropshipper can be a wholesaler, manufacturer, brand (like a franchisor) or a third party logistic (3PL) company.

Dropshipping is an important and growing part of the retail ecosystem. Forrester Research believes that online retail in the U.S. exceeded $506 billion last year, and by 2022 it will surpass $712 billion. They also estimated that by the end of 2017, 23% of online sales would be fulfilled using the dropshipping option.

So the question arises, as an established retailer with an online and physical retail business, how should you use dropshipping? Is this an option you want to consider? How does it interplay with your existing business today?

What to Consider When Using a Dropshipping Model?

Dropshipping for E-commerce

Consider dropshipping a lever. It is an order fulfillment method. Many retailers are attracted to the business model. Using dropshipping suppliers means no need to carry inventory of a set of goods. Equally, it means offloading the inventory carrying, and last mile logistics complexity and costs. But, don’t get carried away, these costs still exist.

For an e-commerce business, this can be an easy way to start up fast. In this case, the online business model is to focus on sales and marketing, leaving the backend to the supplier. This is great for an e-commerce entrepreneur. You can start selling and focus on that, rather than managing logistics. However, this path is not paved in gold.

Profit Margins Concerns

To build a successful business takes passion, volumes of hard work, creativity, determination, and time. There is no shortcut. This too is true when you want to start a dropshipping business. Don’t expect an overnight success. There are many drawbacks. You should consider these cons of dropshipping:

  • Low barriers to entry
  • High volume of competitors
  • High costs of goods (including service fees, shipping costs…)
  • Low-profit margins

All told, this can leave the retail entrepreneur facing a difficult business model. Consider your options carefully before jumping to a pureplay dropshipping model.

Supply Chain Control

With this retail fulfillment method, you will NOT have control over the supply chain. This stresses the importance of having solid SLA (service level agreements) with the suppliers. Specifically, it is important to map out when an order is received by the suppliers, that product must ship within a certain time (i.e.: within 24 hours). Failing this can result in customers waiting too long to receive their orders. This will not help with customers’ satisfaction. Worse yet, this can harm your retail brand.

Liabilities

Always ensure you have a good dropshipping contract drafted and signed by both parties.Always ensure you have a good dropshipping contract drafted and signed by both parties. This contract should limit or avoid liabilities to your retail brand, from nefarious activities. Although we hate to think about this, some suppliers practice deceptive, and even illegal activities. Ensure you double check naming, trademarked logos, and the legitimacy of the product. Always evaluate at least one sample of each product you represent. You don’t want to be surprised by a bad customer review stating that your material is misleading.

Web Traffic Rules

Retailers wanting to start up an e-commerce store that ultimately serves as a dropshipping store, need to focus on web traffic. Given the ease of entry, differentiation is a challenge. Ultimately any competitor sourcing from the same manufacturer will have exactly the same product. That is especially true in this model. The merchant (online store) does not even get to see the product to slap on their logo sticker or branding.

In this case, the competitive option is to establish a healthy online traffic flow. Given the low margins, here you will need to sell online in volume. The higher the traffic, and the better your conversion ratio, the higher the chance of making money and turning a profit. Think about options for a strong online presence, social selling, video tutorials, video comparisons, blogging, and so on.

Branding

Closely associated or correlated with web traffic is branding. In the world of dropshipping, brand credit for the product goes to the customer-facing retailer/e-tailer. The dropshipper acts as a ghostwriter. They are in the background and are paid for the work. However, credit for the work or product goes to someone else. In this case the retailing brand.

Building a brand improves customer loyalty. Ultimately, loyalty is what brings people back to your online site. It is what generates regular repeat traffic. As such, remember that the dropshipping service all reflects on the retail brand. Create a partnership that helps build your retail brand and boost customer loyalty.

Dropshipping Product Lever

Advanced retailers have DOM systems. As such, dropshipping easily becomes part of the fulfillment set of choices.As an established retailer, should you consider this option? Simply put, YES. Specifically for any omni-channel retailer, it should be part of the retail fulfillment toolkit. It should be an option, like any other fulfillment method. Most omni-channel and traditional retailers will have warehouses and in-store inventory. Advanced retailers have distributed order management systems. As such, dropshipping easily becomes part of the fulfillment set of choices.

The DOM (distributed order management software) reviews business rules when choosing fulfillment options. Omni-channel retailers can prioritize the business rules. For most cases the merchant sets the priority for ship-from-store, then ship-from-DC (owned). If a product is out of stock, or the shipping costs (distance) exceed a certain threshold, then dropshipping may be a viable option. In our case, the order management software can then choose from a 3PL or a manufacturer.

Adding dropshipping to the options list gives the merchant chain one more lever. Endless aisle becomes a reality, beyond the retailer’s own inventory. This is good for capturing sales, engendering loyalty, and improving customer satisfaction.

Why Add Dropshipping?

Based on a case study from Sodero, one online sporting goods retailer used FedEx and 97% of its 1,700 vendors over a year. Using this dropshipping option saved this retail chain $2.093 million annually. This in transportation and associated cost reductions.

Related to this case study, the Journal of Operational Research Society showed equally compelling figures. This research showed that online retailers using dropshipping could be up to 50% more successful than merchants without.

As one more retail fulfillment option, dropshipping is a good channel to pursue. Part of the equation is to improve the customer experience. The second is to ensure your merchant chain always has the goods desired by shoppers.

Dropshipping Ups and Downs

Between the good and bad, there is a good reason to include dropshipping in your omni-channel model.Together there are various pros and cons to the dropshipping model. It seems very attractive to all retailers from the lack of inventory carrying costs. It also relieves the retail from the logistics burden. This allows merchants to focus on their strengths. These were running a retail operation, e-commerce optimization, building a reputable brand and selling goods.

However, if you are testing out dropshipping as a retail fulfillment model – watch out for the downsides too. Make sure to have strong binding agreements. There should be an SLA on order fulfillment timing. All parties should understand who bears certain costs (lost or stolen packages).

Between the good and bad, there is a good reason to include dropshipping in your omni-channel model. Established businesses should consider this a good option to ensure they deliver on the endless aisle promise. It also lets retailers cater to the long tail. These being products that are seldom purchased or sold, but that still get the occasional request.

 

Author: 

Charles Dimov, VP of Marketing at OrderDynamics

Charles Dimov is VP of Marketing at OrderDynamics. Charles has 23 years experience in Marketing, Sales and Management across various IT and Technology businesses. Previous roles include Chief of Staff, Director Product Marketing, and Director Sales. Charles has held roles in brand name firms like IBM, Ericsson, HP, ADP, and OrderDynamics.

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