The landscape of modern retail is undergoing a second shift. Retailers around the world have moved from “why would I dropship?” to “how quickly can I get started?”
This article provides a brief overview of dropshipping, its advantages and disadvantages, and strategies to ensure your dropshipping program is successful from day one.
What Is Dropship?
Dropship is a business model. The retailer does not maintain stock of the products being listed, instead having 3rd-party suppliers fulfill the orders placed by customers.
In its essence, dropshipping involves three steps:
- A customer orders off of the retailer’s online store.
- The retailer automatically forwards the order to the supplier for fulfillment.
- The supplier(s) fulfill the order by shipping directly to the customer.
The dropship model enables superior customer experiences: retailers are able to offer an expanded assortment and richer customer journey, suppliers are able to own their fulfillment, and customers receive more of what they want from the brands they trust.
The continued expansion of ecommerce has prompted many retailers to ask about the pros and cons of dropship itself.
Below is a summary of the advantages and disadvantages for retailers looking to implement or grow their own dropship program.
What Are The Advantages?
There are 8 powerful advantages to launching a dropship program:
1. Better Cash Flow
Dropship enables retailers to consistently stay ahead on cash. Retailer’s capture the customer’s payment upon checkout, and then payout the supplier upon shipment at the agreed-to margin.
Many retailers offer up-to 90 day terms to their suppliers to further maintain their cash positions as well.
2. Faster ROI
Gone are the days of store leases and sitting on 7-figures of inventory. By not having to take inventory positions or make multi-year commitments, retailers avoid the need for multi-stage budget approvals and
Instead, dropship retailers can have a storefront launched in a matter of weeks with a fraction of the upfront cost. The combination of a lowered cost base alongside a growing ecommerce landscape leads to faster payback periods and improved ROI.
3. Fast to Launch
Spinning up a dropship program is a strategic project that doesn’t require the same timeline that a new store opening or year-long product sourcing project.
Successful dropship launches require a modern ecommerce program, an integration platform, and niche apps to manage functionality like reviews and returns. This decreases the time-to-launch from months to weeks.
4. Dominance at Scale
Well-known retailers with adoring customer bases are those best positioned to rollout dropship quickly and effectively. Retailers previously steadfast on remaining exclusively brick-and-mortar are now scaling their ecommerce presence in tandem with traditional retail. The combination of their recognizable brand alongside an omni-channel approach allows them to remain prominent in every avenue a consumer is looking to purchase.
5. Deeper Customer Information
Retailers continue to own their customer throughout the dropship purchase journey, while capturing a far deeper level of understanding. Alongside typical data such as purchase history, retailers can measure individual responses to targeted advertising campaigns and upsell opportunities.
6. Scalable Curation
The combination of rapid experimentation alongside richer customer data allows for retailers to gain insights into the ideal curation for their catalogue. High-quality suppliers are made available to onboard within minutes and can be shared with different consumer personas in order to determine the optimal catalogue of brands and products for a retailer’s customer base. An easily scaled curation allows retailers to offer more of what their customers love.
7. Superior Customer Experience
Whoever said specialization is for insects had never heard of dropship. With suppliers responsible for inventory and fulfillment, retailers can double-down on their core competency: their customer experience.
With customers able to shop more of what they want from high-quality brands, a retailer’s resources are freed up to focus on the purchase journey, marketing promotions, customer service, and the end-to-end customer experience.
8. Higher Customer Lifetime Value
The brilliance of dropship is found in the increases to customer lifetime value. More rapid iteration within the retail catalogue provides a constant flow of new brands and products for customers to discover. Customer engagement skyrockets and there are endless opportunities for multi-channel marketing and promotional efforts.
When retailers leverage their trusted relationships with customers, they become the go-to source for recommendations and discovery, which spurs repeat purchases and even customer referrals.
How To Manage The Downsides?
There are a few common downsides to running a dropship program. However, there are also solutions used to mitigate the risk involved:
1. Lower Margins
A common complaint of retailers familiar with traditional wholesale models is that the margins are lower in dropship than in wholesale. In some industries, a shift from a 50% retail margin to 25% margin leaves retailers wondering how the bottom-line will continue to grow.
While true on paper, many retailers who compare the P&L of their dropship channel to brick-and-mortar wholesale channels find that by eliminating the costs of warehousing, shipping, and handling returns, their dropship programs’ profitability is much higher than their traditional wholesale model.
2. Information Management
Given the ease of onboarding new vendors, dropship programs can grow to include 100+ vendors spanning tens of product categories. With a far greater number of vendors to manage, the lives of ecommerce managers can become chaotic.
By leveraging tools that automate the sourcing, onboarding, and integrating of suppliers, ecommerce managers are able to eliminate much of the manual work involved in fulfilling orders. Instead, automated transactions empower retail teams to refocus on the customer’s experience and ways to bring them even greater value.
3. Supplier Quality
Any dropship program will struggle without high-quality suppliers providing valuable products for sale.
Whereas the first iteration of dropship featured low-quality goods sourced from unstable supply chains, the highest quality suppliers have enabled themselves to ship worldwide with orders placed through dropship retailers.
Platforms who source and vet suppliers eliminate the uncertainty that retailers face when looking to expand their assortment.
4. Shipping Time
As a retailer, customer relationships are the lifeline of your business. One of the most common complaints of the dropship model is that shipping times can leave customers frustrated with their purchase.
By having enforceable supplier service-level agreements (SLAs), retailers can police their supplier base to ensure that only reliable suppliers are made available to purchase. Enforceable SLAs spur better customer expectations and services levels.
Components of Success
Given the advantages of launching a dropship program, it has become a strategic imperative for many retailers spanning industries and countries worldwide.
There are four core pillars involved in launching a successful dropship program:
The most important component of any successful launch is the vision driving the implementation. The primary questions to answer are where the dropship program fits within the broader retail strategy as well as how success will be measured.
When considering strategy, determine whether the dropship program will become the primary means of enabling customer purchases or whether it is used to compliment an existing brick-and-mortar approach.
Given the ease of entry, dropship also affords the opportunity to experiment — will the program be launched under the existing brand or used to experiment in targeting a new customer persona under a sub-brand?
The other core component is the success metrics that are measured. Most often, Gross Merchandise Value (GMV) is used to determine the size (and success) of a dropship program.
After clarifying the purpose that the program is intended to fulfill, focus should turn towards the types of suppliers and products being offered within the dropship channel. A strong alignment between a retailer’s curation and a customer's desires leads to higher customer satisfaction and repeat purchases.
Suppliers are best sourced through a customer-centric lens. Starting from the perspective of the ideal customer’s preferences and working backwards towards the types of products and brands they want to discover allows retailers to ensure they are curating for the right set of needs.
Lastly, suppliers come in all shapes and sizes. Some are new to dropship while others are experts. Being able to screen and onboard these suppliers with ease is crucial to success.
After setting a vision and confirming the catalogue of suppliers most aligned to customers’ needs, the correct platform needs to be invested into. There are two primary investments to be made when building out the dropship platform: customer-facing and supplier-enabling.
To ensure a smooth customer journey, retailers look to a modern ecommerce platform with the functionality needed for discovery and checkout, such as Magento, WooCommerce, and of course, Shopify.
To ensure a smooth onboarding journey for suppliers, retailers look to a modern B2B integration platform to source, onboard, integrate, and manage their relationships. Convictional enables retailers to accomplish these goals.
When all of the pieces (vision, suppliers, platform) are in place, the final decisions to confirm are the talent required on the retailer’s side.
Successful dropship programs have an individual or team specifically tasked to the management of the platform and suppliers, that of an Ecommerce Manager.
In addition, there is often a more senior executive who champions the project and leads the strategic projects of new markets to enter and new means of differentiating within the industry.
How To Get Started
Successful dropship programs arise when talented retail teams invest in the tools and processes that lead to success.
Teams who have effectively managed short timelines to launch while managing rapidly vendor onboarding and drive a short path to GMV are those who are able to remain effective in an ever-changing ecommerce environment.
For advice on how to launch or scale a successful dropship program, get in touch with a Convictional ecommerce expert today.