Dropshipping defined: the potential advantages and drawbacks

In the distribution world — where storage capacity and warehouse usage are top priorities — there’s a question that often hangs in the air:

“Where are we going to store all this stuff?”

Now, it's a good idea to keep fast-moving products on hand. They won’t sit around collecting dust, but the challenge is keeping your inventory at the ideal level. Yet, the price to store is high; a warehouse of 80,000 pallets will incur storage costs of $1.6 million per month. But what if there’s a way to avoid this part of distribution? What if you could buy products from suppliers (wholesalers or manufacturers), add value-added services (VAS) to fit your specifications and then ship to customers? All without ever having to warehouse products? Welcome to the world of dropshipping.

Online stores and dropshipping: two great things that go great together

Online shopping swelled in popularity with the onset of COVID-19. Established internet players were caught flat-footed and turned to dropshipping to fulfill surging demand. But, where those online behemoths saw a coping mechanism, entrepreneurs saw opportunity.

It can be the ultimate “side hustle”: you provide the online platform where the purchase is made, but outsource the storage, picking, packing and shipping of your products. You and your supplier receive orders and customer information directly from the online store. Your supplier picks, prints, and ships — and the product arrives at the customer’s address. A computer and a server account are all you need to get started.

A part of customer payments will go to you, and the rest goes to the supplier. As you may expect, the share of revenue going to your supplier is naturally higher, as they incur the costs of stocking and shipping the product.

Dropshipping has developed into a standard retail supply chain that connects sellers and suppliers directly to the customer and saves transportation and storage costs.

Benefits of dropshipping: Low entry costs and flexible product selection

A significant advantage of dropshipping is that the price of entry is low. It's vastly less expensive than establishing a conventional fulfillment operation. And — since the retailer doesn't buy the product from the supplier until it's been bought by the customer — there's much less risk involved and no upfront inventory costs.

An online store offers flexibility. You can easily add and remove products from your store as trends and tastes change. You aren't tied to any one type of product — it'll be easy to pivot between product categories.

Challenges of dropshipping: Competition, customer support and marketing timelines

Because you buy from wholesale suppliers, other online sellers can purchase similar — or even the same — products. Additionally, because you never see the product yourself, you'll be unable to add any type of personalization or branding.

And not shipping to your customer can have its drawbacks. If there’s an issue, the customer will contact you, not the supplier. You’ll have to be able to resolve the issue between the two parties. You're more than likely to take the blame if a solution can’t be found, as the customer doesn’t have visibility into the supplier. As far as they’re concerned, you're the retailer and sole supplier of the product and, for all intents and purposes, the responsibility is yours.

Your marketing will need to cut through the clutter. Because dropshipping is so easy to get into — low investment, low overhead — it's highly competitive. So, effective promotional efforts are critical. Though they can be driven by social media, search and display advertising or even cooperative efforts with other brands, your dropshipping operation’s marketing efforts must be aggressive and effective. Otherwise, sales and their associated profit margins will fall flat.

Rethinking supply distribution

Dropshipping is a revolutionary way to service online customers while avoiding costly upfront investments in processes and infrastructure. It allows small businesses that can’t afford complex fulfillment operations the opportunity to enter the ecommerce space. The model rethinks supply distribution and delivers a relatively effortless way to fulfill customer orders. Additionally, it opens the door for larger players to ditch their distribution centers and save millions of dollars on storage and transportation costs.

Contact us and let’s discuss how NTT DATA’s supply chain operations practice can prepare your dropshipping operation to achieve dependable delivery, improve service and cultivate customer loyalty. Our top supply chain talent, enabled by proven, leading-edge digital assets — tools, methods and content — deliver actionable insights and measurable outcomes to some of today’s largest and most complex supply chains.