Small businesses and eCommerce startups are at the center of the new online economy. They drive a lot of the innovation happening in sales, manufacturing, and technology. Many of these businesses rely heavily on a supply chain method called dropshipping, which offers some incredible benefits. Below, check out three important ideas that you and your business must understand about dropshipping:
#1: What It Is
This can seem a little obvious if you already know about dropshipping. However, you would be surprised how many people are still confused by this concept. There are people all over the world founding small businesses and ecommerce stores without any idea what dropshipping is or how they could use it to benefit their startup. For such an important concept, dropshipping seems to have very little name recognition.
So if that’s you – if you are someone who could use a little more clarity on what dropshipping actually is – then this first point is specifically aimed to help you understand a retail fulfillment method that could radically change your way of doing business.
Put simply, dropshipping is a supply chain management concept where a business or eCommerce store does not keep products in inventory or in stock. Instead, when a sale is made, the store will purchase the product from a third party – typically a manufacturer or another retailer. This third party will receive details of the customer order and ship the goods directly to the consumer.
In general, the original retailer that made the sale profits from the difference between the retail price and the wholesale price. Other methods of profit also exist – for example, the original retailer might get a percentage of the sales in commission.
The core difference between dropshipping and traditional sales is that the original retailer, the store, does not own any products before selling them. This gives the retailer much more flexibility and lowers the overhead cost of operating, among other benefits.
#2: Dropshipping is Great for Startups
There are a number of real benefits to dropshipping. We have already mentioned one – no product or inventory to keep onsite. This is especially good for startups, who often have trouble finding enough physical space for display and storage of all the products for sale (i.e. a warehouse or storefront). Especially at first, a startup may be attracted to being free of the physical requirements of owning products.
Being without inventory has other benefits as well. Think about how much capital a new business must invest in inventory even to get off the ground. If a new startup wants to sell high-end vacuums with a traditional sales model, they must purchase hundreds, perhaps thousands of new vacuums that they will attempt to sell. This is a huge investment, and may not offer huge rewards.
Dropshipping, by comparison, has a low barrier to entry than traditional buy and sell enterprises. Unlike our vacuum retailer example, a retailer who is using dropshipping would not purchase a product until they have already made a sale. This significantly lowers the initial capital required to start your business or add on a new product line.
Another benefit of dropshipping is increased awareness of your business. As a retailer or a manufacturer, dropshipping would allow you to do business with more and varied companies for less money – more exposure for less upfront cost and lower costs.
#3: Dropshipping Means Better Investment
When a retailer spends less money investing in product inventory, storage, and shipping, they will have more capital on hand to invest in growing the business. Some eCommerce stores that use dropshipping only require a computer and an internet connection to run the business. Think about how low the overhead is for that business! They have optimal flexibility in location and product selection.
Now, your business may not be able to be that small or that mobile. But it still could benefit from dropshipping by allowing you to invest in things that matter.
What if, instead of investing in product and warehouses, you could invest in efficient digital infrastructure for your business? As your business grows, you will need new software solutions to hand additional orders and increased demand.
Here are some areas that are ripe for investment from companies implementing dropshipping:
- Talented and experienced web developers who can construct the perfect online experience for your consumers,
- eCommerce technologies like EDI infrastructure which can lower costs and increase revenue,
- and quality employees who meet the needs of your consumers and are loyal to your brand.
All investments cost money. Dropshipping may be a way to reevaluate how you invest your capital, choosing things that can make your business healthier in the long run and that add value to your customers.