In recent years, dropshipping has gotten something of a bad name as ambitious, but severely resource-constrained product sellers have pushed the practical, ethical, and legal limits of eCommerce – many (briefly) scaling to fantastic heights before inevitably getting shut down by their merchant services providers, failing to make good on the promises made to their customers, and (naturally) shifting to selling courses and consulting services to profit off of teaching others how to fail in exactly the same way. But, there really is a lot more to dropshipping than stories like this – especially when strategically used in conjunction with traditional fulfillment models.
In this post, we explore how dropshipping strategies can help eCommerce sellers to:
Overcome capital constraints
Reduce testing costs and risks
Promote non-core products
Service non-core markets
By delaying the purchase of inventory until after it has been sold, dropshipping flips the cash conversion cycle on its head – allowing sellers to finance their outlays for inventory with cash paid by their customers. Of course, there is a limit to this as merchant services providers will generally hold up funds until they are confident that sellers are going to make good on their obligations to their customers; however, for those who are capital-constrained (which is generally true of new entrants), dropshipping is a great way to successfully bootstrap to scale.
Testing Costs and Risks
Dropshipping also helps to reduce the costs and risks associated with testing not only new products, but new business models as well. With a traditional order fulfillment setup, testing requires a material upfront investment in inventory; however, with dropshipping, sellers can rigorously test before having to outlay cash for inventory. Of course, these tests may not be profitable (bulk purchasing is usually required for a seller to turn much of a profit – even on “winners”), but a few days of unprofitable experimentation which establishes a foundation for either moving forwards and escalating commitment or pivoting in a different direction is preferable to an expensive and potentially irreversible error.
Dropshipping is also very useful for sellers who want to offer non-core products which may not fit particularly well into existing order fulfillment structures. Consider, for instance, a product which might make a great addition to a seller’s catalog except for the fact that estimated unit sales are low. Especially if inventory holding costs are high, dropshipping provides an interesting alternative for such a product – sacrificing some of the profit, but reducing the cost and risk otherwise inherent to offering it. Similar logic applies for products which may have unusual handling complexity, storage requirements, etc.
Similar to the above point, dropshipping is also very useful for sellers who want to service markets that are otherwise unmanageable or unaffordable via existing order fulfillment structures. Consider, for instance, a seller who generally services only the United States. If an order comes in from a French customer, it might make sense to dropship from a partner in that geographic market instead of incurring cross-border shipping expenses, tariff responsibility, currency conversion costs, etc.
Admittedly, the acceptability of dropshipping seems to be in material decline due to the unscrupulous actions of a small segment of the eCommerce space; however, when utilized correctly, dropshipping remains a viable strategic option for legitimate eCommerce sellers.