Dropshipping

Its Appeal

Unlike in-house and outsourced fulfillment, dropshipping is all about working with suppliers to sell their products — that’s it. You source the products you want to sell and mark them up on your site. When an order arrives to your business, you route it to the supplier, purchase the product, and they ship it out.

It’s mighty appealing. But there are some drop offs when dropshipping. The phrase “you’re only as good as the company you keep” is important here — when dropshipping, you’re relying heavily on your supplier for two of the most important parts of selling: the product itself and getting it to the customer.

The Upsides to Dropshipping

Shipping orders yourself via JIT means no relying on a third-party — like a logistics provider or dropshipper — that might put quality control at risk. You or your employees are shipping the product; you control how an order’s shipped and don’t need to worry about another service messing it up.

That control gives you the power to brand, something that fulfillment models like outsourced fulfillment and dropshipping don’t guarantee. Choose to brand your orders as you please with custom-branded materials — package the order in logo-emblazoned boxes or add thank you notes to shipments. It’s all in your power.

Managing Returns

Dropshipping is appealing to e-retailers of all sizes, whether they’re just-starting-out or robust. It’s all of the glitz and glamor of online marketing without the baggage of storing and the slog of fulfillment. There’s no cash tied up in inventory and none of the tediousness of picking, packing, and shipping orders.

Here’s a rundown of the benefits it offers:

No upfront, overhead costs

There’s no need to purchase inventory beforehand. You won’t need to rent a warehouse. Heck, you don’t even need a living room; you could run a dropshipping business from your car with an internet connection. All you need to do is find a supplier, market their goods on a site, and purchase product from your vendors once an order arrives.

It’s a step further than outsourcing

Like outsourced fulfillment, your dropshipper manages all aspects related to storing and shipping product. But unlike outsourced, you won’t have to purchase inventory ahead of actual sales or pay a bunch of storage fees.

Sales and marketing only

When dropshipping, the time-consuming tasks of storing, packing, and shipping orders do not exist. That leaves plenty of time to focus on the sexier aspects of ecommerce that lead to sales, like online marketing, customer relations, and brand management.

Flexible product catalogs

There’s no requirement that you work with a single dropshipper. It’s perfectly possible to leverage multiple suppliers at the same time, selling a variety of products. Your options are limited only by how many suppliers you can juggle.

Easy product testing

E-retailers with their eyes on a new product but who are hesitant to buy up inventory can dropship to get an idea of the product’s viability without the financial risk of purchasing inventory.

Control

The model may sound like a walk in the park, but there are some major tradeoffs involved with dropshipping. Although it’s a huge plus for some, control over fulfillment can be a cause of concern. Of all the fulfillment models, it offers the least amount.

An e-retailer that’s dropshipping has no control over the quality of a product or an order, and it’s to a greater extent than other models. Unlike in-house or outsourced fulfillment, at no point in time does a dropshipping e-retailer own or touch the product, their very source of revenue.

It’s one thing to cede some control for the sake of not having to deal with inventory and shipping, but a whole different thing to hand off so much control to the supplier. That heavy reliance can be a source of anxiety.

And, just like the outsourced model, the fact that you have no say in fulfillment can create a few issues:

Branding

The e-retailer’s job when dropshipping is to successfully make sales, and branding helps accomplish that. But employing branded packaging materials? Good luck. Because they own the product, sell to many other businesses, and control fulfillment, suppliers may be unwilling to add your branded touch to their fulfillment processes.

Lack of inventory visibility

Not only is inventory stored away from you and with your supplier, you don’t own it. You’ll definitely want to know if they have inventory on hand, but because of those two factors, you’re relying completely on the supplier for quantity updates. And the issue of inventory visibility is only compounded if you’re working with multiple suppliers.

Complicated returns management

Returned orders are inevitable in ecommerce, but just who will the return be sent to, you or the supplier? Because you’re not involved in fulfillment, it’s likely to be sent to the latter, robbing you of insights into what went wrong and complicating your customer relations. Plus, if a supplier must restock the return, they’re likely to charge you a bit (we’ll get to costs later).

Your Partners

When you boil it down, a dropshipping e-retailer is a middleman because they have no investment in inventory. The fact that you’re essentially a dispensable service brings an element of risk — the supplier can choose to “cut out the middleman,” so to speak.

The second you send a successful order over to the vendor, they’ve got a customer’s information. While it would definitely undermine their credibility amongst merchants, it’s perfectly possible for a supplier to cut the retailer out of the picture unless it’s specifically forbidden in a Negotiated Service Agreement (NSA).

And if they don’t want to cut the middleman (you) out, they can easily replace you. Suppliers work with a variety of retailers to get their goods out of the warehouse, and they tend to prefer the ones that make the most sales. For the most part, they won’t be picky — every sale is a good sale — but it’s important to know that they’re working with other retailers like yourself.

Why else is it important? Other than the fact that they can replace you, it means that you’re likely in price competition with other similar retailers, online or offline, that sell the same products. Margins when dropshipping can be mighty slim, and the more retailers tapping the same supplier’s stock, the more likely a race-to-the-bottom will occur.

Before picking a supplier, you should also vet their fulfillment effectiveness in some way, whether it’s a firsthand look at their process or reviews by other merchants that have worked with them. If shipments are poorly handled — whether they’re not reaching the customer on time or arriving damaged — it will damage your business and brand far more than the actual vendor who’s invisible to the customer.

At the end of the day, both e-retailer and dropshipper are in a mutually beneficial partnership. But the latter has more leverage in the dropshipping model because they own, store, and fulfill the product.

Pick Your Supplier Wisely

Before we get into what you should ask your prospective supplier, let’s briefly cover the supply chain. As a dropshipper, you’ll be working with two potential suppliers, in most cases the latter: manufacturers or wholesalers.

Manufacturers are the very source of the product, the people creating it. They do not sell directly to consumers. Instead, they sell in bulk to wholesalers or large retailers that purchase high quantities. By selling in bulk, the manufacturer frees up space for more products, has less cash tied up in inventory, and can offer discounted prices.

Wholesalers will purchase product in bulk from those manufacturers at discounted prices. They then stock and take care of the product, and sell it to retailers (such as a dropshipping e-retailer) at a reasonable markup.

You’ll be working with one of these two parties, but only if they’re willing to dropship their products — because you’re relying on your supplier to handle inventory and fulfillment, you’ll only be able to sell their products if they’re willing to dropship them. Some are also picky, only choosing to work with retailers that buy up a lot of inventory at once.

As you go about finding your supplier, ask yourself these questions to ensure they meet your demands:

How will they receive my orders?

Because you’re routing orders to them for fulfillment, quick communication with your supplier is big. Does the supplier only accept dropshipment requests in email form? Do they require a call? Can they be integrated with your sales channels or order management system for automated routing? How exactly they communicate with you is crucial.

Are they located near my target customers?

You won’t be shipping, but you’ll be paying for it. Choose a supplier with a warehouse located near your target market to reduce those costs. If your target market is anyone, look to centrally-located suppliers (think Kansas) to ensure 2 to 3 day delivery across the country.

Are they efficient?

A no brainer, you’ll want a supplier that fulfills effectively and without error, especially if you want to prevent returns.

Can I get a look at the product and process?

To be certain that their fulfillment quality is on par with your standards, check out the supplier’s facilities if you can. And, before even conducting business with them, ask for product samples if possible. If they try to charge you for a sample, that’s a red flag!

Are they understanding and supportive?

This is a relationship, but when we say understanding and supportive, we mean do they know their industry (whatever markets their products are in). Check if they also have dedicated representatives to assist you if something comes up.

Finding suppliers is notoriously difficult because they do a poor job marketing themselves. But there are quite a few directories on the dropshipping scene that collect dropshipping wholesalers, manufacturers, and all of their products for easy access. Here are some to take a look at:

• Tradekey
• Doba
• Global Sources
• SaleHoo
• Worldwide Brands
• AliExpress

The Costs

As per usual, a key disadvantage to this model is the cost. Suppliers will want to be compensated for their services, even if you’re doing the work to get the product off the shelf. Dropshipping doesn’t come with quite as many costs as the other models — after all, you won’t have to deal with buying and storing all that inventory — but there are some critical expenses to be aware of.

Margins

When an order is made, you will spend a bit purchasing the order’s product(s). That’s the biggest cost on your end, but — as most merchants understand — margins are what matters most, especially when dropshipping.

The money you make dropshipping is all about margins, and they’re slimmer than using other models like in-house or outsourced fulfillment. You’re buying your product from a third-party, most likely a wholesaler that bought it from a manufacturer. It’s all a game of margins and markups.

As is the case with any business, the balancing act is ensuring that your prices are affordable enough to get consumers buying, yet high enough to have substantial margins. Pricing depends on many factors, but the actual product is what tends to matter most.

To put it bluntly, margins can fluctuate wildly depending on the product you’re looking to sell, and, as many industry-leaders suggest, niches are the key to securing high margins. Niche products are those that fit in a specific, narrow market.

For example, basic electronics tend to have slim margins due to their wide availability. But something specific, like a remote-controlled toy boat, maybe even an entire site dropshipping remote-controlled products, is likely to a) separate you from a competitive, crowded market that bogs down prices and b) provide you with enough of a product-centered brand to warrant above-average prices that reap good margins.

And because the money you’re making is directly related to your product, the supplier is (once again) very important. Selecting one with affordably-priced, dropshippable products is key. Usually your suppliers will be wholesalers, and they’ve purchased a ton of product from a manufacturer at a cheap price. Get an idea of how much the product is sold for by manufacturers to determine just how high the wholesaler has marked up the product.

Per-Order Fees

Suppliers are fulfilling orders for you, and that’s going to come at a cost. Like an outsourced third-party logistics provider (3PL), you can expect a fee for every order fulfilled. Once the supplier picks, packs, and ships the product, they’ll tack on a per-order cost that varies depending on packaging materials involved and the actual cost to ship the product. The per-order fee can range from $2 to $10, potentially more if the product is large or complex. It depends mostly on the product and where it’s to be delivered.

Membership Fees

Those directories listed earlier that you can use to easily source suppliers and products? They want in on the action, too. Some will charge based on monthly use, ranging from $25 to $100 depending on the level of service, and others will charge for an entire year’s worth of access, which could be anywhere between $200 and $1,000 depending on services rendered.

Fair warning, though. If a wholesaler or manufacturer (not a directory that collects the two’s products in a single place) is trying to charge you a membership fee, that’s another red flag. An e-retailer and dropshipping supplier work together for mutual benefit. Charging the merchant for the privilege of doing business is a sign of either a money-gouging partner or a scam.

Minimum Orders

Some of those dropshipping suppliers will require minimum orders before working with you, and, although it isn’t a cost, it will have some financial repercussions. A minimum order is when a supplier requires the retailer to purchase a certain amount of product before doing business with them.

Minimum orders come in two flavors. The first requires the e-retailer to purchase a certain amount of product before working together. The second is a minimum initial order size that applies to the very first order a retailer places with the supplier.

Minimum orders are usually made to make sure that an e-retailer means business and has every intention of selling a supplier’s products. The vendor is sitting on a lot of product and fulfilling orders gets expensive, so having the e-retailer buy up some inventory first is like a security deposit. That minimum initial order size is similar in that it helps filter out any e-retailers that aren’t serious.

This can irritate some e-retailers, because both instances are similar to buying inventory, something many dropshipping merchants are trying to avoid. By purchasing products without orders at-the-ready, you’re essentially tying up your cash in inventory until orders arrive. That’s why it’s very important to pick suppliers that meet your needs as an e-retailer. Your relationship is everything.

The Process

First thing’s first, let’s take a look at how the dropshipping model flows. It’s relatively straightforward, other than the fact that you won’t be storing inventory and you’ll have to route orders to the supplier.

1. Partner with suppliers
   When dropshipping, relationships are everything (I’m sure the phrase is getting old already). The dropshipping suppliers you choose will be based on the products they carry and pricing they offer.
2. Make some sales
   Your job as a dropshipping e-retailer is to effectively market and sell the supplier’s products. No fulfillment for you. Just sell it by branding, content and SEO marketing, and all of the customer-facing functions of running a business.
3. Route your orders to your suppliers
   The most important part. There are a few ways to route orders, and they’ll usually depend on the supplier’s preference; phone call, email, or integration.
   Phone call — Straightforward, you’d call your supplier to place a verbal order. It’s not exactly efficient, it’s a little archaic, but it’s out there.
   Email — The most common form of routing is through email. An e-retailer processes an order on their sales channel or order management system (OMS) and forwards the order information to their supplier.
   Integration — A potentially expensive and automated way of routing orders is by building an integration between a sales channel or OMS and the supplier. It typically costs a sum, but it means every order made on any sales channel automatically makes its way to the supplier for fulfillment without the need for manual work.
4. Suppliers fulfill their orders
   The supplier receives your orders, whips up the packages, and ships them out to your customers. Order tracking info is then relayed back to you via email or through your integrated sales channel(s) or OMS.