Every e-commerce business aims to operate with as low overheads as possible, maximising profit margins. Some e-commerce businesses meet this target using the dropshipping model, but whilst this logistics method can work for some companies, it is not suited to everyone.
This article looks at how dropshipping works, how it differs from a traditional third-party logistics (3PL) provider and its pros and cons to ensure you make the right order fulfilment choice for your e-commerce business
How does dropshipping work?
With dropshipping, a seller does not own the stock they are listing and relies on a supplier to produce and ship products to customers. When an order is received, the seller forwards the order to the supplier, who then directly ships it to the customer on the retailer’s behalf. This business model can be useful for some companies as it negates the need for monitoring inventory, packaging and shipping products yourself.
Whilst this fulfilment method has its advantages, it also has its drawbacks, so companies must assess all aspects to consider whether this is the right option for them.
What are the pros of dropshipping?
Some of the pros of dropshipping are as follows:
Dropshipping is a popular choice for start-up firms as it is a way to quickly get your businesses off the ground. Not owning the stock you are selling removes a businesses’ need to invest in inventory or organise packaging and shipping. The reduced responsibilities can allow start-up businesses to start making money quickly.
Minimal overhead costs
Without the need for a warehouse and the costs involved when stocking inventory, e-commerce businesses that rely on dropshipping can often work from home using just a laptop, keeping overhead expenses at a minimum.
Reduced financial risks
Inventory levels can be a struggle for many small e-commerce businesses. When not monitored correctly, companies can be left with dead stock, resulting in financial losses. With dropshipping, businesses only pay for items ordered by the customer, negating the need for inventory monitoring. This model can make it easier to profit with already reduced overhead costs.
Most of the work comes down to the supplier with dropshipping, making it more scalable than traditional business models. If increased orders come in for one particular product, all businesses need to do is order more from the supplier. Ordering from suppliers is particularly useful during seasonal surges and can allow businesses to capitalise on trends.
What are the cons of dropshipping?
Some of the cons of dropshipping are as follows:
Loss of control
Relying on a third-party manufacturer ultimately means you are at the mercy of another company, taking away your control when it comes to pricing and order fulfilment times. If your supplier ships out a product late or sends out incorrect orders, this will result in dissatisfied customers. As a result, you must choose a trusted supplier to avoid negative reviews.
Although dropshipping might make it easier to create a profit, your margins will likely begin very low. Items must be purchased as a single unit with no bulk buying option like a traditional wholesaler. There can also be dropshipping fees to cover the costs involved with shipping and logistics. Therefore, businesses have to build up considerable customer loyalty before they start making significant profits.
While not having to monitor inventory can benefit businesses that dropship, it can also lead to significant problems. If your supplier is not on top of their inventory levels, this can lead to substantial delays in items being shipped to your customers. Unlike businesses that outsource order fulfilment to a 3PL provider, you are blind to your supplier’s inventory levels, meaning there’s no way for you to know if customers are ordering out of stock items. Therefore, the lack of visibility between companies can lead to a poor customer experience.
Dropship e-commerce businesses that rely on multiple suppliers can be hit with a range of shipping rates, depending on the courier that the supplier uses. This issue is another aspect you have no control over and could result in high costs, eating into your profit margins.
Whilst some e-commerce businesses can find success with dropshipping; it often takes a significant amount of time to make it a profitable venture.
Unlike dropshipping, outsourcing order fulfilment to a 3PL provider can make it easier for e-commerce businesses to create a more seamless customer experience. With complete end-to-end visibility and bespoke packaging options, you can create an order fulfilment solution tailored to your business and client needs.
If you’d like to know more about outsourcing your order fulfilment, please Pointbid a call on 0121 326 7368.
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