Dropshipping : Is the Model Beneficial for Small Businesses in 2023? (Pros + Cons)
Dropshipping is gaining traction in the e-commerce market for creating an easy link between manufacturers and buyers. In some cases, the dropshipping business model can even reduce overall startup and intermediary costs. Small commerce businesses thrive for new and trending ways to monetize their online stores without getting a load on pockets. As e-commerce intensifies, should small businesses consider dropshipping as one of the retail fulfillment options?
The multichannel approach made shopping more accessible, but more sales channels need more efficiency to track and restock inventories fast, complete fulfillments across channels and deliver orders on time. This becomes daunting for small businesses as they need more finance to integrate the best solutions for their inventory control. That’s why most small businesses end up selling at a minimum scale with limited customer reach.
Amidst all this, growing eCommerce is yet curious about techniques and trends to simplify fulfilment processes and expected deliveries. This is when dropshipping comes under the notice of small eCommerce businesses. Under this, retailers can start selling online without worrying about manufacturing, packaging, and logistics.
But trying any new trend comes with a huge risk of falling. It’s evident if you are currently surrounded by questions like –
- How profitable dropshipping for small businesses could be?
- Can dropshipping help build an eCommerce brand?
- Is the future of dropshipping viable?
- Can small business scale using the dropship model?
Like other trends, the dropshipping business model also comes with some benefits and challenges. Let’s discuss them in detail.
“Enterprise dropship has been around for decades but has recently gained popularity due to the growing consumer expectations for broader assortment and category selection. In an effort to improve the customer experience and increase revenue, retailers are expanding their virtual inventory without incurring additional carrying and fulfilment costs by utilizing drop ship programs.”
Thuy Mai,
President and CEO of DiCentral,
Press Release: Supply Chain Dive
What is Dropshipping?
Dropshipping is a retail fulfillment model in eCommerce where retailers dropship (sell) products without keeping in-stock inventory. Under the dropship model, there are three major role players – Retailer (Dropshipper), Supplier, and Customer.
Dropshippers display suppliers’ products on their online store, accept orders, and then pay the ordered product cost to suppliers and inform them to ship the order directly to customers on behalf of a retailer. Hence it reduces startup costs because you pay when the product is actually sold to customers. Starting a whole dropshipping business or adding it as one of your shipping options requires a deep understanding of different angles of dropshipping business model.
How does Dropshipping work?
There is a dropshipping contract between suppliers and retailers. One dropshipping supplier could have multiple retailers, or one retailer could have many suppliers.
Dropshipping Suppliers
Dropshipping suppliers are manufacturers or wholesalers who entered a dropshipping contract to allow the display of their products on retailers’ websites. They are responsible for manufacturing, packaging, storing, and maintaining warehouse inventories. Furthermore, they receive customer orders from retailers and deliver orders directly to customers on behalf of a retailer.
Dropshippers or Retailers
Dropshippers are retailers or merchants who own an online store that displays and markets suppliers’ products at a selling price. They accept and process orders, receive payments from customers, and hand over these orders to respective suppliers for deliveries. They provide a complete customer service and support system as any other eCommerce store.
Customers
Customers have no differentiated role under the dropshipping model. Their sole interaction is with the retailer and its eCommerce store. For any of their inconvenience or product dissatisfaction, the retailer is the answerable one.
Why is dropshipping a popular model for small businesses? (Pros)
# Less Capital and Overhead Required
When starting a selling business, thousands of dollars are invested in inventory upfront. This takes over a significant share of the initial capital of small retailers, which, if saved, could be utilized for other business activities and expansion.
The average online retailer spends 11% of its turnover on logistics. (Source – Shopify)
Dropshipping business reduces this capital requirement and related manufacturing, packaging, carrying, storing, and shipping costs. It even eliminates human resource requirements as you need no labor cost for packaging, transporting, loading, or unloading goods and no cost for managing the warehouse, book-keeping, and delivery man. All you need to do is find trending products from reliable manufacturers and start dropshipping those products on your eCommerce store without investing a single dollar in purchasing and maintaining upfront inventory.
# Low Risk Involved
In the initial stages, every small business likes to work in a less risky environment. Constantly changing customers’ behavior and shopping trends is nothing new for eCommerce sellers. New products and improvised launches daily result in tons of losses in outdated stock being sold at reduced prices. At times, these clearances do not even recover intrinsic value.
Dropshipping minimizes the risk of unsold and damaged inventory, as you’re not burdened by any stock you paid for in advance. Small retailers can easily switch their product portfolio and listings to new trending items without commitment or bounding to selling purchased stock.
# Remove Inventory Control Hardship
Selling businesses mentioned stock management as one of the most tedious operations of their routines. Thanks to automation tools taking the edge off this boredom. From reordering cycles to determining new shifts, there is a lot you can benefit your business from inventory optimization tools. But new small retailers still have to spend a lot of time and money finding the right talent for integrating this automation.
Dropshipping, on the other hand, is a way to start selling earlier without controlling any inventory. Under dropshipping, eCommerce business owners are free from –
- Tracking Inventories.
- Handling returns.
- Accounting inbound and outbound shipments.
- Planning and optimizing reorders.
- Reacting to market shifts.
- Maintaining Stocks.
# Easy Scaling –
Upholding increasing sales and keeping up with market demands needs an increase in work and additional efforts. Growing customer base requires more data and support, hence more resources. This becomes challenging for small eCommerce retailers to scale at a steady pace.
Dropshipping allows you to handle more orders easily by leveraging dropshipping suppliers for fulfillment processes. Unlike traditional e-commerce, the dropship model reduces most of the extra work related to stock, shipment, and deliveries so that you can expand without adding to resources and work pain. Especially for small businesses, dropshipping can help you grow your product portfolio and attain a competitive edge in the e-commerce market.
# Greater Flexibility Around Offerings
Moreover, in the eCommerce industry, top brands constantly need to keep up with the market and competitive requirements and launch new and improvised solutions now and then. However, bringing new products to market is more complicated than we think. You need strong R&D support. Also, initial advertisement expenditure can cost a fortune.
Dropshippers are not limited to any product scope. Dropshipping business model is the best choice for small eCommerce retailers who want to swap product lines as market demand varies. When any specific brand offering does not bind you, you can test a range of products and even business fields with minimum downside and then sell products that work well for your online store and have huge profit potential.
What are some challenges of the dropship model for small businesses? (Cons)
Low Margins –
With more and more businesses getting online, small eCommerce retailers are under pressure to sell more competitively and grow their revenues. They focus more on reducing their costs instead of increasing selling prices.
With no considerable investment in building a robust eCommerce website, dropshippers may have to settle for minimum profits. Dropshipping is a highly competitive business model where more than one eCommerce website may list the same products. In such a scenario, dropshipping retailers are bound to sell at the current market price; hence no scope to increase your revenue freely. However, better customer support and the right choice of products can help you get more customers in the long run.
No control over the supply chain
Under dropshipping, suppliers regulate the flow of goods. Hence you have no control over improving or managing how suppliers produce or procure goods. You cannot increase the quantities of products that customers love more on your website. In case the supply is limited, all you can do is find better substitutes to list and sell on your online store.
Delayed Communication
Seamless communication could be more effortless when all departments work under one roof. Dropshipping reduces this conversation speed, as the logistics house is not interconnected with the retailer’s online store. For instance, if an order is delayed, your customer will check with you, and then you’ll check with suppliers, therefore an extended chain of communication and delayed answering.
However, you can use infallible software to sync your online store with suppliers’ operations, like product availability and live delivery tracking. You can also automate shifting orders to suppliers for fast and efficient communication.
Dual Responsibility
With the responsibility of customer dissatisfaction on your website, you are also answerable for any inconvenience or product defects from the suppliers’ end. Customers have only interaction with online stores and not manufacturers. So You have to take responsibility for missing items, low-quality packing, and delayed shipments and apologize to your customers for the same.
Though all your digital marketing strategies are strong enough to attract more customers for conversion, any mistakes or compromises of your suppliers can be hazardous for your customer experience and brand image.
Inconvenient Shipments
For today, when we “bulk shop” everything in one go, dropship retailers may encounter drawbacks as shipping processes are being fulfilled by suppliers. For online stores which list products from multiple suppliers, orders are fulfilled individually by each supplier. It may become inconvenient and complex for customers to place and track bulk orders.
Let’s say a customer orders three items, each from a different supplier. In this case, customers will receive their order in three separate deliveries. While, as a wise dropshipper, you can’t charge your customers for three shipping fees, you may have to bear the cost. It even increases your work as you must inform each supplier individually about order details. Automation may help.
Limited Product Branding
When you hold no authority over product experience, you got no unique branding or USP for your eCommerce business. Dropshipping does help small businesses start selling online faster, but each product is sold under the branding of the true owners. Also, you get no access to the customization of products and their benefits. You can only grow your eCommerce business by marketing your online store as an identified brand dealing in a range of quality products.
Should small retailers look forward to dropshipping in 2023 –
With rising buying shifts and eCommerce trends, startups and small online retailers can get their hands on dropshipping and explore their growth areas. The dropshipping business model has some definite eCommerce advantages for small businesses, like the scope to start with less and grow eventually. On the other hand, planning great strategies can bring down complexities and challenges. Lack of consistency and perseverance can be huge oversights for dropshippers.
Dropshipping is a new lucrative trend among small eCommerce retailers. It may continue to gain traction in the next few years due to its simplicity of starting with comparatively fewer resources than other traditional eCommerce.
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