The Pros and Cons of Dropshipping (From The Supplier's Perspective)
Dropshipping is where a retailer advertises your product for sale on their website, but doesn’t actually hold any stock. When orders are placed you send the product directly to the end customer. There are thousands of articles online about dropshipping written for the retailer, I wanted to examine it from the supplier's side.
From the retailer's perspective, it can look like (and is often presented as) the perfect business model, with no need for investment or involvement in the order process. So let's start with the positive aspects of dropshipping from the supplier's perspective:
- Dropshipping can stimulate sales of high value items, and goods that are awkward for the retailer to store and/or ship to the end customer.
- Providing a dropshipping service will probably attract more stockists, expanding the online reach of your products.
- You can command a higher than wholesale price for your dropship sales, to cover the extra services you are providing.
Now, here are some of the main problems I see with dropshipping:
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Sending individual items to the end customer is less efficient and less profitable for you. If you already have your own direct retail channel, this will be less of a problem for you. But if you are purely selling your products in bulk, fulfilling retail orders will feel like pulling teeth. And more importantly, your profit margins may not thank you for it.
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Your stock levels may fluctuate quickly, and if retailers aren’t keeping track of this there will be problems with fulfillment of orders. It is much better for you to receive fewer orders of a higher value than lots of little ones. Both in terms of cash flow and efficiency.
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With dropshipping, your sales rely on retailers to be able to effectively sell your products. If they buy up front in the traditional way and hold stock, that risk is all theirs.
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For it to work effectively you will need a system in place for retailers to quickly check stock levels and confirm delivery timescales. This is actually quite easy if you are using a wholesale ordering solution, but is another consideration.
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A dropshipping relationship is less ‘committed’ than a traditional B2B supplier/customer arrangement.
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Retailers selling dropshipped products are more likely to engage in price wars, as they will have little else to make their offering stand out from other stockists. This can devalue your product and cause strain on supplier/customer relationships. What happens if the shipment goes missing or is damaged? Who will communicate with the end customer? Who will be liable for any losses?
Here are some potential problems for your retailers:
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Lack of exclusivity. Selling online is hugely competitive, and it is becoming increasingly difficult to set yourself apart as a retailer. Dropshipping means they will be competing fiercely with other websites. This is even worse for larger, VAT-registered stockists who often end up competing with hobbyists/newbies who (think they) can afford to give larger discounts.
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They lose control. In almost every way. Visibility of stock, quality control, gift-wrapping, packaging, promotional leaflets etc. The packing of orders is the perfect opportunity to build their brand.
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Handing over the fulfillment of orders can create a communication barrier between the retailer and their customer.
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Your responsibility ends once the end customer has received the product. If they request a refund it is the retailer's liability, and they will have to take the product into stock and issue a full refund. If too many refunds come at once, they may find themselves in a very difficult position.
And as for the end customer, I’m sure you can read between the lines above and see how they might lose out from a dropshipped order.
Dropshipping has been massive in the U.S. for years now, and some businesses thrive on this model so there are people out there making it work. It isn't black and white. You may carry a selection of products in your wholesale catalog that really lend themselves to dropshipping. As long as your terms and conditions are clearly stated and agreed upon, allowing customers to offer these items for sale on that basis might work really well for everybody.
Take a look through our blog for more thoughts and advice on wholesale business strategy.