A fulfillment method that is growing in popularity, dropshipping can simplify inventory management for ecommerce sellers. It reduces storage and picking fees, plus it eliminates the risk of having items on hand that just won’t sell.
With the increase in customer preference for online shopping the global dropshipping market is expected to reach over $557 bilion by 2025, with a compound annual growth rate (CAGR) of 28.8% from 2019 to 2025.
“We estimate that more than 75% of all ecommerce sales will go through a drop-shipment or marketplace. If we continue to see ecommerce grow this rapidly, we predict the same number of ecommerce sales from last year will be done through dropshipping in a couple of years. It’s going to be a massive amount.”
There are many reasons why many ecommerce brands are taking on this fulfillment method. There are obvious benefits for retailers, but also many for sellers. What some sellers don’t see are the big challenges that come with dropshipping. Here are some of the biggest hurdles to a successful dropshipping strategy and how to overcome them.
Get Good at Giving Up
Outsourcing your fulfillment means giving up a lot of control. The benefits of working with a reputable, reliable 3PL far outweigh the costs, but it can be an adjustment to outsource if you’re used to fulfilling products yourself.
It’s really important to source a great partner when outsourcing fulfillment. It’s pretty hard to explain to your customers when it’s not your fault that products weren’t in stock, or fulfilled accurately. Even if it is the fulfillment provider’s issue at the end of the day, you’ll take the heat (and lose the customer).
“The number one challenge to dropshipping is finding a fulfillment provider that has the same standards as your brand, and that treats your brand as if it were their own. To tackle this, a brand must get an SLA in place and guard the brand standards as much as possible. Communicate often to maintain the standards you want, i.e reasonable cutoff times, delivery time (carrier), on-time return handling, customer contact, etc.”
When you outsource, it’s imperative that you choose wisely. Look for a provider who has a proven track record of dropshipping for similar products or who have relationships with the retailers you want to have too.
If you’re still fulfilling all products yourself, read these eight signs that it’s time to outsource fulfillment.
Low Volume Means Lower Margins
Timing is everything in fulfillment. Dropshipping is a great model for certain types of products, but also certain order volume. If your volume is too low and you’re not already outsourcing your fulfillment, adding a supply chain partner to dropship for you will cut into your profit margins.
In order to dropship you’ll want to make sure your average monthly order count is worth the cost. Depending on the 3PL you choose to work with there is likely a minimum monthly order volume to start shipping.
There’s an added issue to low volume dropshipping, as opposed to regular DTC or B2B fulfillment. Typically dropshipping works best with low-cost goods, like consumables that get purchased often or CPG items that people use up and buy again. Low-cost items that have a low average monthly volume mean lower margins. Don’t eat into slim profits just to hop on a new fulfillment trend. Try scaling in other channels first before dropshipping. Once you have a solid foundation of steady order volume, month after month, it will work in your favor.
How to quantify the pros and cons of dropshipping.
Finding a Reliable Supplier
One of the main aspects of dropshipping is speed. Goods and products need to be moved from supplier to fulfillment center quickly, sometimes on relatively short notice.
Working with a supplier that is reliably quick is key to making this fulfillment method work. If your supplier can’t make or ship your orders on time you risk stockouts, which is a very fast way to lose customers. Not only can you lose customers this way, you’ll lose revenue which can be debilitating if it’s a perennial occurrence.
Be Clear with Customers about Shipping Times
Dropshipping is faster than traditional fulfillment in some ways, but it doesn’t mean faster shipping to customers. Transit times and last-mile delivery times are still the same. Some sellers who start dropshipping may not understand that and think the speed of getting products from suppliers to the fulfillment center or retailer equals faster overall transit times to customers. That’s just not true.
A few myths about dropshipping:
- Shipping and processing times are faster—nope, fulfillment processing may take the same time, you’ve only cut out the time to store and pick products.
- Shipment tracking isn’t necessary—not at all, tracking your shipment is always a good rule of thumb in case anything gets lost or delayed you can pin point where it happened.
- Customers will appreciate getting their items faster—dropshipping won’t impact the carrier delivery times; always communicate clearly with customers about accurate shipping times.
Returns Can be Difficult
Returns management is complicated and difficult anyway you manage it.
Processing returns when dropshipping greatly depends on your partners. If products are coming directly from your supplier, you’ll need to support your customers through generating an RMA authorization form to ship the product directly back to the supplier. This may result in extra shipping fees if the supplier’s address isn’t in an easy-to-ship zone.
Working with a 3PL can help make returns easier. If they are storing your products for DTC or traditional retail fulfillment, any returns that come back to their center (even if they were dropshipped direct from the supplier) will be able to be restocked and sold again.