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Managing your inventory is a challenging aspect of your business, especially in the e-commerce space. But your inventory worries could subside with a different supply chain method that has become increasingly popular.
What is dropshipping?
Dropshipping is when a retail business does not keep the products it sells in stock. Instead, when a customer places an order, the seller purchases the item from a third-party supplier (a manufacturer, wholesaler or another retailer) and has it shipped directly to the customer.
So, if your business adopts dropshipping, you act as a shopfront that customers visit and order products from. Once they place an order, you charge the consumer and the dropshipper charges you. You never handle the actual products.
How does dropshipping work?
Dropshipping is management method for a supply chain (the network of suppliers, materials, manufacturers and retailers involved in the creation and distribution of a product, from production to customer delivery).
These are the parties involved in dropshipping:
- Manufacturers create the products. They usually don’t sell to the public; they sell in bulk to wholesalers and retailers instead.
- Wholesalers buy products from manufacturers, and then mark them up before selling them to retailers. Wholesalers usually stock products from a variety of manufacturers.
- Retailers sell products directly to the public, at a markup.
And here’s how it works:
- The customer places an order with your business, the retailer.
- You alert the dropshipping partner — either the manufacturer or the wholesaler — who packages and ships the product to the customer.
- The dropshipping partner charges you, the retailer, for the service and you charge the customer.
Generally, the shorter the supply chain, the greater your profits will be because there are fewer parties taking a cut. A short supply chain is one where you deal directly with the manufacturer.
The benefits of a dropshipping business
Dropshipping is a retail inventory management method that can help your business decrease risk, but there are other benefits as well. When you develop a good business model, it can prove very successful.
Here’s a look at some of the advantages of dropshipping:
- It lowers the costs of starting and maintaining a business
Dropshipping drastically reduces the initial costs of starting an online store since you don’t have to invest in building inventory upfront, which can be cost prohibitive for new and small businesses.
And because you don’t have to deal with purchasing inventory (or managing storage for that inventory), your overhead remains relatively low. It also means you aren’t stuck with products that won’t sell, and you won’t have to mark down those items and take a loss.
- Your location can be flexible
Dropshipping businesses can also be more nimble than businesses with more traditional structures. Because you don’t have physical inventory, you can basically run your store from anywhere you find an internet connection.
- You can offer customers a wider selection of products
Since you don’t have to invest in building your own inventory, you can stay on top of trends and quickly add new products to your site. You can also quickly switch up your offerings without first having to order new items or clear out backstock, perfect for when you have a calendar of retail events to stick to.
- You don’t have to manage inventory
A lack of inventory also means that you won’t have to manage it. Managing inventory can be complicated and time consuming (although inventory management software can make the job much easier). Not having to watch stock, reorder it and process it means that you and your employees have more bandwidth to work on other aspects of your business to help it grow.
The challenges of dropshipping
Dropshipping can be beneficial for business owners, but there are drawbacks that might not bode well with your overall business strategy. Here are a few examples of why some businesses decide against dropshipping for their business:
- Reduced profit margin
As discussed above, the longer your supply chain, the lower your profits. When you consider the costs of handling fees and percentages taken out by various middlemen, it might not be worth it to pursue a dropshipping operation.
There’s also a lot of competition in the dropshipping niche. Because it takes so little investment to get started, dropshipping businesses often provide products at very low prices. To compete, you often have to drop prices too.
- Inventory issues
When you own inventory, it’s easy to check stock levels. But when you get products from multiple suppliers — who in turn are working with other retailers — it’s more difficult to make sure that the products you need are readily available.
- Shipping complexities
If you’re working with a number of suppliers, your shipping costs become quite complicated. Let’s say that a customer orders two items, each from different suppliers, each with different shipping costs. You’ll need to determine how to charge the customer for shipping in a way that the customer won’t feel overcharged.
- Lack of control over customer experience
By putting reliance on a dropshipping partner to get products to your customer, you’re acting in good faith that they will deliver the orders on time and intact. If they don’t come through on their end of the deal, or deliver items late, broken or not at all, it can result in bad reviews and a loss of consumer trust that can negatively impact your company and any customer relationships you’ve worked hard to build up.
- Issues with suppliers
It’s imperative to have solid relationships based on trust and mutual respect with your suppliers. Suppliers are at the core of your business, so be selective about whom you partner with, and never take those relationships for granted by paying them late or being difficult to work with. To build strong partnerships, it’s important that you learn how to manage your suppliers effectively in order to maximise dropshipping efficiency.
How to select a dropshipping supplier
The third party you choose as a supplier will determine your supply chain’s success, so you need to do your due diligence during the selection process.
Generally speaking, you want to set up dropshipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line, so whenever possible, it’s best to work directly with a manufacturer.
Here are some questions to ask potential suppliers:
- How much do you charge?
Crunch the numbers before selecting a dropshipping partner. If the wholesale price isn’t enough for you to make a decent profit off of the products, look elsewhere.
Also ask, is there a handling fee? If so, assess how it may affect your profit margin. Again, every fee and each middleman affects your bottom line, so you want to streamline the process as much as possible.
- How are products shipped?
You want a partner who ships items via a service that provides tracking numbers (which they should send to you). That way, if your customers inquire about the status of their orders, you can provide them with accurate, up-to-the-minute information.
And, with shipping comes returns. Find out the return and warranty policies. If returns aren’t accepted or products not guaranteed, steer clear.
- What is the billing process?
Do dropshipping partners charge your credit card as soon as you submit an order? Or do they send you a monthly bill? Make sure to choose a partner whose billing process is a good fit for your cash flow.
There are a few best practices to implement to assure success for your dropshipping business.
- Make online shopping a pleasure
From ordering to delivery, you want to make the experience as seamless as possible. That starts with a user-friendly e-commerce experience. You want to invest in building an elegant website that is easy to use (on all devices) and simple to understand.
- Be particular about products
While dropshipping allows you to sell a wide variety of products, that doesn’t mean you should sell everything. Do market research and analyse trends to determine what you should be selling in your shop. Think carefully about what is marketable, what is easy to ship and what is hard for people to find locally.
- Focus on quality
Even if you thoroughly vet a supplier, you should remain vigilant about the service once you’re working together. For example, if there are several incidents of damaged products, lost packages or late deliveries, cut ties with the supplier or risk losing the confidence of your customers.
- Be organised
Dropshipping can lead to lots of admin and adds a lot of more work to your operations management. It might be worth finding a dedicated staff member for dealing with the parties in your supply chain, as keeping on top of it all while keeping all parties happy requires equal amounts of organisation, business acumen and, of course, charm.
- Build a trusted business
Your reputation is everything, so not only do you need to follow through on your promises with reliable dropshipping partners and a great website, you should also work to boost your online credibility to ensure customer trust. From building a robust social media presence to creating successful email marketing campaigns, forming strong relationships with your customers will help ensure the success of your drop-shipping business.