Dropshipping

Is Dropshipping Worth it? The Risks and Rewards

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Dropshipping is the ultimate win-win-win. Merchants can grow without holding stock. Suppliers can offload marketing and sales. And buyers get everything they need, at a competitive price, in one place. 

Of course, dropshipping isn’t all high profits and product breadth — a successful program requires companies to overcome several obstacles. But the long and the short of it is dropshipping is worth it if you have the right processes and strategies in place.

Let’s explore why dropshipping is a lucrative business model to consider, how to overcome its challenges, and how to set your business up for all its upsides. 

This article will cover:

‎A ‎‎quick recap: How does dropshipping work?

Dropshipping is an ecommerce fulfillment method that enables merchants to expand their offering without holding inventory. In the simplest terms, dropshipping is where merchants do the selling and suppliers do the distribution. It’s increasingly popular among established retailers with a core product line. They can augment their existing product catalog by dropshipping with suppliers.

Like a marketplace, there are three parties in every dropshipping transaction:

1. The merchant: A retailer or marketplace operator who runs the ecommerce website

2. The buyer: The customer who’s shopping on the merchant’s website

3. The supplier: The dropshipper whose products are featured on the merchant’s website

Is dropshipping worth it in 2023?

The value of the dropshipping market is forecast to grow to 476.1 billion U.S. dollars. And the global dropshipping market is expected to register a compound annual growth rate of 23.4% from 2023 to 2030, far exceeding the desired 8-12% standard. 

All this to say, it’s a notable ecommerce trend, and it’s not going anywhere anytime soon. 

To understand why, let’s look at some of the key benefits businesses get with the dropshipping model. 

Forecasting agility 

On a good day, stock is hard to predict, especially when considering factors that impact demand plans, like seasonality, social media trends, and weather events. Add in inflation, which has thrown consumer behavior for a loop, and supply chain disruption, which has impacted production and supply, and businesses are caught in an inventory maelstrom that can seem impossible to predict. 

Instead of ordering supply in bulk, dropshipping allows merchants to purchase supply as needed. Merchants aren’t left liquidating inventory that didn’t sell. And if a product sells out from one supplier, the opportunity exists to fill that void with a new one. Essentially, merchants don’t need to count on a precise forecast to dictate inventory. They have the agility to accommodate swings in demand and supply.

Optimized warehouse management

Under traditional growth models, expanding your product assortment means growing your carrying costs — and warehousing costs are not to be understated. Dropshipping allows merchants to expand without having to take on new warehouses. 

Add products that require different fulfillment models 

If you stock office supplies but want to expand into office furniture, your existing warehouse strategy might not accommodate large, heavy items — and revenue from those items might not warrant a new warehouse. 

By sourcing suppliers to dropship items that have requirements your warehouses can’t accommodate, you can expand without taking on the warehousing expense. Ideally, you’ll dropship items that are too heavy, fragile, large, small, or different from the products you currently warehouse. 

Regional expansion 

As you expand into new markets, dropshipping can be a great solution for shipping outside your home operating region, which can get exponentially more expensive the further the shipment ventures from its origin. 

Sourcing local suppliers to dropship can help reduce shipping costs and remove deterrents, like complicated taxes and duty. As a bonus to alleviating the costs of entry into a new region, dropshipping allows you to test the region to see if your offering sticks.

Product assortment 

One of the main appeals of dropshipping is that it gives you a soft landing for expanding beyond your niche. In addition to the practical benefit of dropshipping products with unique fulfillment needs, dropshipping is an efficient way of adding a product line that doesn’t fit your existing business model. 

Ho‎w do you make money dropshipping? 

When merchants make a dropship sale, two transactions occur: the customer pays the merchant, and the merchant pays the supplier. The beauty of dropshipping is you’re in control of setting the price. How much you make depends on how much your markup and the volume of products you sell. Dropshipping allows you to profit without the overhead costs of warehousing and delivery since you don’t need to store and ship the goods. 

Typically, margins on dropshipped products are between 15-20%. While this isn’t inordinately high, it’s on the high end, considering Shopify has deemed a 10% net profit margin average for retailers.  

Here are five ways to make dropshipping even more profitable: 

  1. Keep a pulse on demand: Add dropship products that are high in demand or trending.  A dropshipping program allows you to add products quickly. Say a new kind of coffee goes viral. Merchants can onboard suppliers and quickly capitalize on the buzz. 
  2. Price products strategically: Not too high, not too low: a Goldilocks philosophy is critical for pricing dropshipped items. Since merchants typically set the purchasing price, the goal is to price items high enough to ensure a healthy margin but low enough to be competitive. 
  3. Offer subscriptions: Subscriptions give you recurring revenue and inventory turnover — both of which make sellers happy too. The longer a buyer subscribes, the more volume you receive, and the deeper the discount the buyer should get. 
  4. Up-sell via bundles: More is more. By selling a group of products at a lower cost than they would sell individually, you increase the value of a transaction and, thus, rake in more profit.
  5. Cross-selling complimentary products: Cross-selling is an excellent strategy for businesses augmenting their core catalog with dropshipped products. You can increase the transaction value by offering complementary products to the ones in their cart. For example, if a buyer has your core coffee maker in their cart, you can sell a supplier’s coffee subscription along with it.

Dr‎opshipping sounds great. But what’s the catch?

While there are plenty of upsides, as with anything, dropshipping comes with its own set of challenges and risks. Here are a few factors to be aware of: 

Carefully vet your suppliers

When you add dropshipping to an existing ecommerce business model, your brand is suddenly a reflection of its suppliers. Thus, you want to be sure every supplier in your dropship program is trustworthy. 

In addition to the standard KYV checks, you’ll want to scrutinize supplier products to ensure they’re top-notch and in line with the quality of products your core business provides. Building performance requirements into your SLAs is a good idea to set the standard for what’s expected and when you’ll take action.  

Select the right products 

Just because dropshipping has less overhead doesn’t mean you should start selling everything. Hone in on what makes the most sense for your customers — and your bottom line. Sell core adjacent products and be selective of what you dropship. 

Favor items that:

  • Have different fulfillment needs
  • Enrich your product catalog without detracting from it
  • Are high in demand
  • Can be competitively priced
  • Result in high-margin or high-volume sales

Choose the right technology

To dropship is to be agile. To be agile is to have fine-tuned commerce, fintech, and logistics processes that can scale as required. A regular ecommerce platform does not have the supplier management tools to communicate dropshipped orders to suppliers. Nor does it have the necessary integrations to match merchant and supplier systems. A purpose-built dropshipping platform is the way forward to avoid costly custom development bills and miscommunications with suppliers and merchants. 

Concluding thoughts  

For the business that wants to expand its catalog, embrace agility, and give its customers what they want and need — without the logistics of fulfillment — dropshipping is worth the leap.

🔵 Learn more about how to expand your inventory without risk. 🔵

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