Dropshipping is amazing. All of the perks of having an online store without any of the headache of inventory, production, or shipping. Because of these perks it’s also the go-to option for anyone who’s looking to start an online business, to get their toes wet.
Many people don’t know that dropshipping is a method that’s also used by large companies. The reason? It comes down to the economical advantage – does the higher cost of dropshipping outweigh the savings of lower maintenance and overhead costs? In many cases, the answer is yes.
Costs of fulfillment as a barrier to growth
Managing fulfillment for a growing ecommerce entity can be expensive. Besides the time that it takes, it also incurs many expenses, that some companies are choosing to omit, by outsourcing their fulfillment and using dropshipping.
The overhead costs are what people usually take for granted. A fulfillment facility will have to cover expenses from rent and utilities, to salaries for the employees doing the physical fulfilling, plus any equipment necessary.
As you can see in this infographic with date collected by Square Foot, you can see that $5,000 per month will get you a modest rental space, with sizes differing around the country.
Unequal shipping costs
To the untrained eye, one might think that there isn’t much to shipping a product. As it turns out, navigating the shipping world is an entire feat of its own. Negotiating shipping prices, label payments, pickups and delivery times in and out of peak seasons can easily be a full-time job, hence entire university programs being dedicated to the topic of logistics.
When using a fulfillment company, you’re getting the expertise, the experience, the work that’s already been put in, but most importantly, you’re getting the lower shipping costs that you as an individual would most likely not be able to command, because of the lower leverage that comes from a small volume of shipped items.
Facilitating rapid growth, testing new products
A fast and easy way with minimal effort to quickly have a LOT of items available in your store, with a very little amount of risk or upfront payments from you.
With dropshipping, you don’t have to take the time to validate your products, or take the risk of ordering inventory for items in your store. The process of adding them to your store is validation enough. Quickly populate your store with the products that you think will be enticing, and let the customers do the deciding. Once clear winners have crystalized, you can consider fulfilling them yourself.
One example is Zappos, the popular online shoe store. They started their business using dropshipping for 100% of their products. They eventually moved on to fulfilling products themselves, but dropshipping in the beginning was what gave them the chance to offer a broad selection of shoes from the very get go, which in turn helped solidify their leading role in the market.
Some major brands have decided to go 100% hands-off with their ecommerce stores, proving that dropshipping is much more than a beginner’s tool to selling online. Some stores build and maintain million dollar businesses by offering dropshipped products alone, take Blinds.com, Wayfair, Gilt, to name a few.
Wayfair runs their business exclusively with dropshipping, managing over 7,000 different vendors, and over 7 million items. They finished 2015 with $2.25 billion in revenue, leading us to understand that dropshipping is a major business.
Scaling by dropshipping is also being pushed into the limelight by services like Amazon FBA (Fulfilled By Amazon). You can send all of your products to Amazon, who will take care of all of the fulfillment process for you. This service is available for those who are using Amazon to sell their products.
Managing seasonal overflow
There can be situations when an online store is hit with a higher volume of sales than predicted. In these cases, rather than letting their customers down and making them wait, large retailers can choose to hook up a dropshipper to take over the orders that the retailer can’t fulfill.
Say you’re hit with a larger order than usual, and you just don’t have the capacity to produce or ship it quickly. Call in the aid of a dropshipper to help with the extra orders, until you can scale to that size.
Selling products that aren’t part of your core business
When you want to offer a product, but it doesn’t make up the foundation of your income, it may be a good idea to outsource the fulfillment. This will save you from investing your time to implement a product, though nice to have, won’t bring you the bulk of your income.
Say, for example, you have a blog or a media outlet. Your primary income will be based on the content that’s consumed (of course this may vary, based on your business model). You can monetize this site by adding merchandise that’s dropshipped, without losing the time or resources that could be dedicated to building your primary source of income.
Dropshipping – the multi-purpose tool that suits both big and small
What large businesses are able to do to take advantage and earn from large-scale dropshipping is that they’re able to add value. Thus doing so, it creates a reason for their existence, and a demand in their niche.
We see that dropshipping can be leveraged to build multi-million dollar businesses, can be used as the smallest of hobby entrepreneurs, or can be used as a springboard to launch a major brand. The tool has become a business model in itself, and is changing the business landscape. The question is, how will you make use of it.