In-depth: Dropshipping – what is it, how does it work and why is it growing in popularity?

Foot Locker

As a retailer, how do you increase your product range or brand selection without tying up money in inventory, warehousing and delivery costs? The answer could be dropshipping.

With dropshipping you sell products that you do not own or handle yourself. As soon as you make a sale, the order is relayed to the dropshipper who will then proceed to ship the product to your customer.

Dropshipping has gained credibility recently with heavyweight brands such as Prada, Net-A-Porter, Nordstrom, Nike and Foot Locker all inking deals to dropship with each other or other brands.

No doubt burned from last year’s disaster of having so much money in pre-ordered product and the prospect of yo-yoing retail lockdowns across the world, dropshipping has become a good way for retailers to hedge their bets and increase sales and basket sizes with shoppers already on their websites. Retailers will have less risk, be able to showcase more styles than usual, try new brands or ideas and have a deeper level of inventory for best-sellers then if they ordered the product to be wholesaled by themselves. The customer is also theirs.

“In terms of technology it’s extremely straight forward and Shopify, for example, has drop shipping capabilities so small as well as large businesses can do it reasonably easily.”

We ask experts to explain how the model works and lay out the pros and cons:

Phoebe Emma of The SEO Girls, which creates SEO strategies for brands across search, e-commerce, Amazon and Pinterest

“This is not a new concept and it has been around for years. However, e-commerce platforms like Shopify have made the barrier to entry lower for smaller brands to start a dropshipping model within a day. There are now plugins available that help connect you to thousands of manufactures within an instant. Making it easy to sell any type of product you want online.

“It is now super easy to set up a dropshipping store using plugins like Dropified, Orbello and other programs that connect you to a manufacturer. These plugins help you control your orders and send the item to the customer’s address.

“As a dropshipper the trade-off from not holding stock yourself results in a smaller profit margin. However this is what is needed if you do not want to hold stock and send it out yourself.

“Holding stock and picking and packing it results in your cashflow being tied up as well as your time and resources. Dropshipping is a great way of utilising someone else’s resources. But this does mean the profit margin you will be looking at is 20%.

“As long as you can bring traffic to your store and convert them with your sales pages then you will be making money.

“Dropshipping has pros of more resources without the investment, ability to sell and offer different products without the investment. Cons are there is less profit margin and less control on resources. You cannot control when your product goes out, you also have less control of the quality of the product.

“Brands are all about using resources in a smart way due to the change that we have seen in the world recently. Using factories to send out their goods rather than sending the goods to a separate distribution centre uses less resources and is better for the environment.

“As these (luxury) brands have quality behind them they are able to negotiate better profit margins and use this model to their advantage. They also recognise that anyone can create a store and help sell their product, they have the resources behind them so are able to use this model to increase their sales.

“Personally, I think the small businesses are killing it, ones that clearly set out their brand intentions and brand their items are normally the most successful. These shops normally concentrate on one product and make sure they are getting the right traffic to their stores. A good example is – https://www.trysnow.com/

“Dropshipping does involves you dealing with the customer service and using your capital to purchase the stock once the order has been made. This is different from an affiliate where you do not come into contact with customer support and do not send the item out. All you are doing is recommending the product. Affiliates receive a percentage of profits but as a dropshipper you are choosing your price and profit margin.”

“To make money from it, it’s really about volume, because you don’t make much money in general per item when you are dropshipping.”

Catherine Erdly, Founder, The Resilient Retail Club, www.resilientretailclub.com, small business expert helping product businesses grow sales & profit.

“In terms of the technology needed, it’s extremely simple, it’s just a question of being able to communicate to the third party supplier when an order has come in and to get them to fulfil it. In terms of technology it’s extremely straight forward and Shopify, for example, has drop shipping capabilities so small as well as large businesses can do it reasonably easily.

“To make money from it, it’s really about volume, because you don’t make much money in general per item when you are dropshipping, the company that has taken the order on behalf of the customer usually only gets a small percentage, sometimes in the single digits in terms of a cut of the sale.

“It’s often associated with higher price items so even if you are making a small percentage of that it may be a decent amount of money per sale.

“The pros are that it allows you to offer a wider range of products including some expensive items that would be a large outlay for you if you had to use the cash to purchase it yourself so, for example, dropshipping is often seen in things like the baby world where a retailer is then able to often bigger items as such as cots and buggies or more expensive pieces of furniture to their customers but not actually hold the physical inventory.

“The cons of dropshipping are that you have to really trust your third party supplier because you are not making much money on every sale, so if all of your time is then spent on servicing customer service queries and issues relating to that supplier not being reliable then that would eat into any kind of profit that you are making from dropshipping.

“For the larger brands, like Prada, Nike and Net-A-Porter, drop shipping will allow them again to expand out their range and learn what the customers want and what the customers are willing to purchase from them without having to invest in additional inventory.

Retailers sometimes use it as well as a tactic to test a new product area or a new type of product so that they can learn from it and if it’s successful they can then expand that out to other areas.”

“It’s often something that’s very prevalent, as I said furniture brands, so for example Wayfair predominately sells through drop shipping. The difference between drop shipping and affiliates is that with drop shipping the customer actually checks out through the retailer’s website whereas with affiliates its more about sending traffic directly over to the supplier for example where they would make the purchase on a different website so drop shipping is about keeping that customers checkout process on the retailer’s website as opposed to sending them off to somebody else.”

Dropshipping could be looked at as a reversed version of “sale or return” or a fast pre-order service for many retailers. The retailer isn’t having to deal with unsold stock at the end of a season and the brand can control the stock and therefore its image better, particularly in the luxury sphere.

The key for any dropshipping tie-up is with inventory automation syncing product data directly from the supplier with the retailer’s listing tool, including stock, SKU, and pricing information. Out of product orders will result in time spent dealing with refunds, queries and, potentially, unhappy customers.

While dropshipping isn’t new, it does offer a tempting avenue for brands to increase sales with a trusted supplier. Working with partners who take customer service as seriously as you do will be the most important thing to make a seamless and easy online sale for brands.

Luxury players trying this type of selling could just be viewing it as a Covid stop-gap until they feel more confident and have the balance sheet to order more via the traditional wholesale model.