Dropship is an attractive proposition for retailers who want to extend their ranges and grow sales without the need to physically hold the stock.
With dropship, an item purchased by a customer – either through a website or perhaps ordered via a social channel or even in store – is distributed direct from the supplier straight to the consumer. This strategy makes it possible to improve working capital and reduce the costs associated with stock-holding, particularly of large, slow-moving items.
The pros – flexibility and scalability
Possibly the biggest advantage to dropshipping is that it’s possible to launch an ecommerce store, or extend your existing product range without having to invest heavily in inventory up front. Traditionally, retailers have had to tie up huge amounts of capital purchasing inventory. With the dropshipping model, the product is only purchased once a retailer has made the sale and been paid by the customer. Overheads can be kept low because the retailer doesn’t have to deal with purchasing inventory or managing a warehouse.
There is flexibility in terms of location – so a retailer is not limited to having product stored in its own warehouse or DC.
A wide selection of products can be made available which is seen as a great way to grow sales, and expand into new categories via an existing store, catalogue or website. For example, if suppliers stock an item, it can be listed for sale on a website at no additional cost.
It’s also easy to scale. By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing a retailer to expand with fewer growing pains and less incremental work. Sales growth will always bring additional work – especially related to customer service – but business that utilise dropshipping do tend to scale particularly well relative to traditional ecommerce businesses.
The cons – shipping complexity and margin for error
Low margins are the biggest disadvantage to operating in a highly competitive dropshipping niche. Clearly the overhead costs are minimal – meaning merchants can sell items at a slim margin just to get sales momentum going and build a customer base. But they need to consider the impact of operating on this reduced margin longer term.
Embarking on a drop ship strategy means a retailer is likely to face shipping complexities. If products have been sourced through a number of different suppliers for dropship fulfilment, the logistics planning and shipping costs will be higher and more complicated.
Inventory management will be difficult, because the retailer may not have visibility of supplier stockholding or be able to track the dropship lines through the extended supply chain. There is not one ‘owned’ stockholding in a single location to keep track of. Over time it’s likely that joined up IT will ease this situation, but there will always be issues around who manages the stock and supply chain data, when suppliers are handling orders and fulfilment in this way.
Relying on others also opens a retailer up to more fulfilment errors, and therefore customer service issues. Even the best dropshipping suppliers make mistakes fulfilling orders. And low-quality suppliers will cause frustration with missing items, botched shipments and sub-standard packing, which can damage a business’s reputation.
How can retailers make effective use of dropship?
The dropship model has some definite advantages but it comes with a number of built-in complexities that retailers must be aware of.
With this in mind, we asked Ed Bradley, Co-Founder and CEO of Virtualstock to provide tips to retailers on how to use dropship most effectively and guarantee operational success.
Here’s what he recommends:
- Define your strategic and organisational aims
Before choosing to implement dropship, retailers need to define their aims and what they are looking to offer their customers. They must identify where dropship will create the most value and prioritise those areas that will provide early, quick wins. This will enable a focus on how to best scale dropship operations in the right category areas.
The objective of most retailers is not to become an online behemoth like Amazon; most retailers want to provide their customers with a full range of core products, supplemented by a comprehensive peripheral range of complementary products that their customers would expect them to offer. Retailers should strive to provide a seamless extension of their core ranges, so the customer feels that they are buying directly from the retailer rather than from a third party.
- Have clear objectives around product
Single category retailers can and should utilise dropship to reclaim market share. As e-commerce has grown, online retail giants have not defined themselves as product specialists, and therefore traditional retailers are seeking ways to reclaim market share in their core ranges and be the category specialists. To do this, retailers need to harness the dropship suppliers in their categories and range those products online, so they can offer their customers the full extended ranges they expect.
Retailers should also use dropship to model, test and trial new products, as well as the price elasticity of demand. One of the key advantages of dropship is that it allows retailers to curate ranges, have a strategy around price elasticity and exercise complete control over the customer journey.
- Take active steps to deliver a seamless customer experience
Retailers need to be focused on delivering a seamless and consistent experience for the consumer from the completion of the order to delivery. This can be achieved by establishing clear shipping rules and delivery policies with suppliers. Whether the product comes from the retailer’s warehouse or from a dropship supplier, the proposition and experience for the consumer must remain the same. For example, if retailers communicate five different steps of their order and delivery process, then the supplier must have the equivalent communication, in order that it appears completely under the control of that retailer.
- Work with suppliers to establish clear KPIs
Retailers regularly operate dropship teams whose primary function is to manage suppliers. Their key operational duty is to engage with the supplier and ensure they are grading them on core KPIs. Through dropship, retailers can have a real time visibility over product data which allows them to effectively grade suppliers. If an individual supplier falls below the required benchmark, then clear courses of action must be established.
Think of dropship as means of progressing the omnichannel journey
Retail is in the midst of a monumental shift towards omnichannel, whereby customers are increasingly served across many touchpoints and receive their goods in many different ways. Those retailers who can offer a unique, specialist and differentiated proposition to the customer, needn’t sit back and watch their market share erode.
Dropship provides the mechanism through which to stay in the game and compete with the likes of Amazon and Asos by adding new products, capturing new sales, and remaining relevant.
For many retailers, that journey is only just underway.