One of the most difficult departments for e-commerce startups to handle is that of inventory management. It takes up many resources and needs a lot of focus. As an alternative, many startups have embraced the dropshipping model of order fulfilment. Here,the store owners do not own inventory. Instead they collaborate with a dropshipping supplier, who directly sends the ordered products to the customer. It is an extremely attractive option for e-commerce startups despite the many risks. In this article we help you to understand this concept so that you can seamlessly follow the dropshipping model.
How it Works
Let us understand how this process works in a simple manner :
- A customer makes a purchase from your store.
- The order is then forwarded to the dropshipping partner. It could be either manual or automatic, based on the arrangement.
- The dropshipping supplier directly sends the orders to the customers. The customer receives the order with the e-commerce store’s branding and packaging. Hence, they feel that the order has directly arrived from the e-commerce store.
Benefits of Dropshipping
Due to its hassle-free nature there are a lot of benefits to dropshipping. These are discussed below:
- Resources Saved On Inventory Management: Inventory management is an exhaustive process which takes a lot of time and resources, as well as a constant source of tension due to the fact that it requires constant attention. For a startup, it can drain resources very quickly. Which is why a lot of e-commerce startups prefer to follow the dropshipping model as all the aforementioned issues become non-existent.
- Wider Product Listings: Since there is no cost related to inventory management, it is possible to list a greater number of products if the need arises.
- Remote Management: There is complete freedom and authority to work from any location. All that is required is communication with the dropshipping supplier, and consider how technology has advanced, that can be done from anywhere.
More Output With The Same Effort: Due to its nature, the startup is capable of giving out more orders by putting in the same amount of effort. This is where it differs from inventory management because it takes more effort to more 1000 pieces of inventory than 100 pieces. Since dropshipping does not require you to spend resources in managing inventory, you can maintain the same efforts and increase the inventory managed and sold.
How To Reduce Risks
While it is easy to get lured into dropshipping, it is essential to understand the risks in this model. Once properly understood it is easy to find out what can be done to reduce them and emerge as a success.
1) Finding the right suppliers: One of the biggest risks involved in dropshipping is that of finding the appropriate suppliers. If you do not have a trustworthy supplier, it is extremely difficult to continue your e-commerce business as it is the base of all your operations. Even if it takes a lot of time, do focus your energies on finding the right dropshipping supplier. Here are a few things which you must keep in mind.
- Constant Communication – If at any point you feel that there is any lack or gap of communication with the vendor, then it is advisable to start planning for contingencies.
- Written Agreement – Have a written agreement where everything is specified and spelled out so that there is no ambiguity or doubt.. A written documentation is essential to avoid any doubts or ambiguity in the future, so you must take as much time as possible to prepare it properly.
- Checking Operational Benchmarks – Keeping a combination of data based and subjective benchmarks could come in very handy. If the supplier fails to improve upon them, you should consider a change. These could be pointers like delivery speed, response rate, quality of response, etc.
2) Selling the products at Minimum Advertised Price: Low margins are a major risk factor in the dropshipping model. To reduce this risk, you can sell products at the minimum advertised price. It is the price at which a product is advertised at, and cannot be sold beyond that price. It helps you to limit fluctuating prices and keep your margins in control.
3) Leveraging Technology Appropriately: Many e-commerce store owners are afraid of dropshipping because of the number of elements which are out of control, such as shipping, return of goods, if inventory is out of stock or not. This can be reduced by using the appropriate tracking software and transfer of data between the store and the dropshipping supplier. Some of these could be :
- Tracking software to find out the quantity of inventory that a supplier has.
- Tracking software for shipments
- Automatic update of sales figures
- Communication platform between the retailer and supplier
It might have be an intital expenditure, but will have immediate benefits due to the time and effort saved and potential costs reduced.
Yes, it does have its fair share of risks. But if implemented effectively with the correct tools as well as tracking and monitoring infrastructure, dropshipping is an ideal solution for e-commerce startups.