What Is eCommerce Dropshipping and How Does It Work?

eCommerce dropshipping and how it works

One significant early challenge any eCommerce business that deals in physical goods must face is the question of inventory. How much to order? Where to store it? When to reorder? How to ship? The questions of aligning supply with demand and fulfilling orders have always been significant challenges in the incipient stages of a company.

In recent years, however, a new solution for fulfillment has emerged, one that can dramatically reduce the costs and headaches associated with inventory: dropshipping. 

What is dropshipping for eCommerce?

Dropshipping is a method of order fulfillment wherein the seller keeps no inventory itself, but fulfills orders via a wholesaler or manufacturer by placing a duplicate order at a price that secures the seller a nice margin. The seller is effectively a third party to the sale. Success tends to come as a result of effective targeted marketing.

One imprecise but helpful parallel many of us deal with regularly is online food delivery. When we order delivery from a restaurant through one of these apps, the prices are often marked up from what they would be at the restaurant itself, to account for the platform’s marketing costs. The difference is that these food delivery platforms often hire their own delivery drivers to fulfill orders. In dropshipping, the inventory and delivery are both handled by the wholesaler. 

What are the benefits of dropshipping for eCommerce?

Dropshipping can provide some attractive scenarios for eCommerce business owners:

  • Attractive Startup Costs: Dropshipping is a particularly attractive business model for nascent eCommerce companies with small budgets. It doesn’t require a significant outlay of cash to build and hold inventory as most eCommerce models do. It frees up time and capital for research, marketing, and various other necessities, and reduces risk in the early stages of the business.
  • Simple Startup Logistics: Similarly, early logistics can be a difficult problem to solve for incipient eCommerce companies. Dropshipping eliminates much of the headache. Suppliers have already solved many of these problems, providing effective inventory and shipping services for other companies. No need to calculate safety stock, or to optimize distribution, especially in the early stages. 
  • Flexibility: One of the great hurdles in starting a business is defining your model and niche early on. Part of the reason this is such a trap for entrepreneurs is the commitment of time and capital necessary in a traditional model. Dropshipping allows for greater flexibility in these early stages. With fewer overhead costs, eCommerce owners are allowed a little more leeway for trial and error in marketing techniques, target audience, and even the products sold.

What are some potential problems with dropshipping?

Though dropshipping eliminates many of the hurdles faced by startup ecommerce companies, it does have several drawbacks worth considering.

  • Lower Margins: The simplicity of the dropshipping model comes with a cost. The average profit margin for a dropshipping business is between 15-20%. A direct-to-consumer eCommerce company, on the other hand, should see profit margins of at least 40% and sometimes as much as 60%.
  • Quality Control: With your inventory out of your control, several issues can arise. Subpar build quality can be an issue with suppliers that cut corners. Deliveries may be delayed, and customer complaints regarding these delays may not be easily remedied. Since your supplier’s operations are out of your business’s purview, you may be stuck dealing with customer complaints for which you have no realistic short term solution beyond changing suppliers. 
  • Competition: All the benefits of dropshipping that you’re reaping are just as easily exploited by others, making the marketplace extremely competitive. Indeed, you may find yourself competing with companies selling the exact same products from the exact same dropshippers that you are!

Is dropshipping right for my eCommerce business?

Dropshipping may indeed be the right choice for your eCommerce business. Zoey provides an eCommerce solution that can facilitate working with multiple vendors to launch an eCommerce business linked to dropshippers. For more information on Zoey and how it can streamline the process for you, talk to our team today:

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Patrick Gallagher is a financial writer with nearly a decade of experience in communications with business owners and other high-net worth individuals. He was a writer for the New York Times and worked for several nonprofits. He holds an M.B.A. from the University of Minnesota. He lives in Atlanta with his family and two very rambunctious dogs. 

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