Many e-commerce brands are adopting the dropshipping order fulfillment model – and for a good reason. With this method, they don’t have to stock inventory to fulfill incoming orders. Instead, they can purchase the stock as required from a third-party wholesaler or manufacturer.
Dropshipping enables e-commerce brands to avoid one of the biggest challenges in this sector – inventory management. To ensure that the right products are available at the right time, they need to invest time, money, and resources into demand forecasting and ensure that they have the right amount of inventory to meet customer demands. All of this is easier said than done. Dropshipping can help them avoid these issues.
These brands don’t have to maintain an ongoing inventory or handle product shipping or fulfillment. Instead, they purchase inventory on-demand from a third party after a customer places an order. Thus, they can fulfill orders and serve customers while avoiding the costs and labor of inventory management.
But these benefits notwithstanding – is dropshipping an effective way to build a successful e-commerce business?
This article explores this question. We do a deep dive into some of the downsides of dropshipping so you can wisely decide how to pad yourself from the brunt this model may come back with.
The Return Blows of Dropshipping
Any e-commerce firm looking to adopt drop shipping should be aware of both – its benefits and downsides. Only then can they correctly leverage the approach to lower their costs, maximize their profits, and optimize their customers’ satisfaction. Here are some of the issues you should take note of.
It’s Hard to Track Inventory from Multiple Third Parties
An e-tailer that stocks its inventory can control stock levels, prevent out-of-stocks, and track which products are selling and which ones are not. But with dropshipping, the brand sources its inventory from multiple third parties. These manufacturers or wholesalers usually fulfill orders for brands or e-tailers, which means their inventory can change daily.
It can be hard for e-commerce firms to track this inventory from multiple sources. Equally important, it’s not easy to ensure that enough inventory is available to fulfill all incoming orders.
Supplier Relationships Can Get Bumpy
With dropshipping, the e-commerce company passes the order to a third-party supplier who then ships the product directly to the customer. In this transaction, the e-tailer gets a cut of the sale. Some suppliers may resent giving this commission to the brands and think that the entire sale could be theirs if they sold directly to customers. Other suppliers may prefer to ship products wholesale to a retailer at regular intervals instead of selling them individually to each customer as an order comes in.
Both these scenarios can cause friction between e-commerce brands and their suppliers. To avoid these problems, brands must ensure that they have an agreement with every supplier specifying the terms of sale. But even so, it may not all be smooth sailing because third parties may not blindly agree with the brand’s terms and tend to push back to support their own interests.
Shipping Issues Can Add to Supply Chain Complexities
Working with multiple suppliers also creates supply chain challenges, particularly around shipping. It becomes a big problem when order includes products that must be sourced from different third parties.
In this case, the e-tailer has to pass on the order to all these suppliers. If this wasn’t difficult enough, it will also incur separate shipping charges for sourcing and sending each item to the customer. If passing on these charges to customers increases the final order cost, it may disengage many of them and ultimately affect the brand sales and profits numbers. The only other option is to absorb these costs. However, this too will negatively affect the brand’s bottom line.
Lower Margins
The low barriers to entry in dropshipping encourage many e-commerce firms to adopt the model for their own business. To grow their revenues, many such brands will set up shop and start selling their products – many of which will be of the “me-too” variety – at lower costs.
To remain competitive and meet customers’ expectations for rock-bottom prices, other companies will also have to drop their prices. It can hurt a firm’s potential sales and profit margins.
It Can Affect Customers’ Purchase Experiences
Relying on third parties can create reliability issues in the supply chain. Supplier errors while packaging products, fulfilling orders, managing shipments, or processing returns can frustrate customers. Most customers don’t know – or care – that their orders are not being fulfilled by the company they ordered from. However, they do care that their product packaging is sub-par or that their shipping has been delayed.
These Issues Affect their Shopping Experiences
Further, some suppliers may not be fully legitimate, while others may steal logos or intellectual property and try to pass them as their own. These problems can taint the e-commerce store’s reputation and can also create legal or liability issues. If they remain unresolved, these issues will increase customer churn and lower the firm’s profits.
Limited Branding Opportunities
With dropshipping, e-commerce retailers don’t have full control over the products they sell because these items are usually designed and branded by suppliers. Consequently, the e-store can’t add its own brand voice or personality to the product. This is one reason why dropshipping is not a feasible option for a new e-commerce company that’s still trying to establish its own brand presence.
Conclusion
According to some estimates, about 27% of e-retailers have adopted the dropshipping order fulfillment method. Nonetheless, dropshipping is not a panacea to poor planning or sub-optimal processes so e-commerce firms should be aware of both its pros and cons. This knowledge can help them leverage its potential to grow their own brands and make more money.
We are brewing up another post on the ways to resolve the issues. In the meantime if you want to know how dropshipping can benefit you? Contact us, and we’ll help you address its complexities, and build a thriving, profitable e-commerce brand.
