Drop Shipping 101: An Extensive Guide To Understanding This Modern-day Business Model

Did you know that there are almost 2.5 billion online shoppers around the world*?

In the year 2014, the number was close to 1.32bn and then it gradually increased to 1.79bn in 2018 and in the year 2020, it was 2.5bn*.

Another interesting statistic that would complement the point we are trying to convey here is that close to 16.1% of all sales in retail came from Ecommerce in the year 2020.

Now for a customer, this wouldn’t matter.

But for someone who is looking for ways to grow a retail or an ecommerce business and capitalize on trends, these numbers should. With these two statistics, you could take that decision to grow your store and make way for profits in the coming months – all thanks to the next business model we are about to discuss in this post.

In our Grow Your Business series, we have been working towards understanding different business models that you could deploy to grow your venture. Last post was all about understanding the multi-vendor market space and today, we are going to shed light on a rather unique concept which is of very recent origin.

Say Hello To Drop Shipping

Drop shipping is a lucrative and unique concept that has identified a distinct business model and carved a space for itself in the retail sector. In simple words, let’s find out what it is all about.

What Is It?

This is part of the retail fulfilment process, where orders are fulfilled by your drop shipment company.

Okay. Now, imagine that you run a drop shipping business. In this, you get orders from a customer who has used your store to purchase a good or a product. When you receive the order from the customer, you forward the order and its requirements to the manufacturer or wholesaler who then take care of fulfilling the order.

How Is This Lucrative?

When you team up with a manufacturer or a wholesaler, you get the order at wholesale price. But when you sell the same product to your customer, you mark it up for profits after considering the expenses involved in running your business.

For instance, if a customer has ordered a pair of headphones, the price they would pay on your store is $99. However, the price you would quote and receive from your wholesaler is somewhere around $79. You just made $20 profits by acting as the intermediary.

You are the middleman in the shipment procedure that acts as the bridge between a customer and the manufacturer.

This is a tested model that is not without its share of statistics.

In the year 2017, close to 23% of all international online sales were fulfilled through the drop shipping model. This 23% loosely translated to around $85bn in revenue.
Not just that. Close to 27% of the retailers worldwide have adopted the drop shipping model.
As far as profitability is concerned, suppliers do get the advantage of drop shipping. Statistics reveal that suppliers make 18.3% more profits through drop shipping than finding their own customers.

Advantages of Drop Shipping

You don’t have to maintain an inventory or take care of supply-chain.
Your business revolves around managing and fulfilling orders.
You don’t have to indulge in packing and shipping products or goods.
Starting a drop shipping business involves little capital.
You have the liberty to choose your market, niche and products.
You hardly require real estate to run this business.

Challenges In Drop Shipping

Despite sounding simple and easy to execute, drop shipping has its fair share of challenges. Let’s look at some of the most prominent ones.

Customer acquisition – where you have to make efforts to advertise and brand your business and fetch as many customers as possible to sustain the business and make profits

Real-world Scenario: You have started a new drop shipping business but are struggling to get new customers as your online visibility and credibility are low. Plus, you haven’t made proper investments in getting a good app developed that seems legitimate.

Order management – these two simple words encapsulate complex concerns like you having to manage the quantity of orders, price fluctuations and shipping charges and more

Real-world Scenario: There are several instances where customers cancel or modify quantity or products even after orders are placed. Without a proper order management system, you would end up delivering wrong orders.

Manage multiple sources – a serious concern that only multiplies when you have one wholesaler for every product type.

Real-world Scenario: When you decide to offer several products in your online store, you would have to find relevant manufacturers or wholesalers for each. As your virtual inventory increases, it becomes equally tough to manage relationships with each vendor.

Order fulfilment concerns – which include tracking product shipments, managing deliveries and ensuring they happen, processing orders and more.

Real-world Scenario - Though you don’t take care of these, you are still accountable from a customer perspective. You are the point of contact for your customer and responsible for all their questions regarding their purchase. You either have to have a dedicated team or find an alternate solution to tackle this.

Tackling The Challenges In Drop Shipping

All concerns have a solution and they are often right in front of us. We just have to pay attention and apply logic. As far as tackling challenges in drop shipping is concerned, we have identified three concrete solutions that would fix all the shortcomings we have discussed so far.

Let’s look at them.

A Solid Website/Mobile App – this involves getting an extensive website or mobile app developed for your store that is airtight in terms of UI, safety and usability.

Order Automation – this automates the entire burden involved in managing orders and fulfilling them as you can directly forward orders of diverse requirements to their respective manufacturers or suppliers through automation

Inventory Automation – similar to order automation, your website or app could automatically notify and update your customers when a product is out of stock or whenever there would be delays in fulfilling specific orders when your manufacturer makes a simple modification in their dashboard

Case Study

One of the best examples of drop shipping done right is Wayfair, an online store specifically designed for home furniture and décor products. With tech and innovation at the fulcrum of operation, Wayfair offers up to 18 million products to choose from for its customers. From houseware to home improvement, a visitor can find what they are looking for and sometimes what they aren’t looking for as well.

Initially established in 2002 by two Cornell students on a shoestring budget, the business grew to over 250 individual websites for specific furniture products. In 2011, the duo decided to merge everything together under one roof, eventually setting up Wayfair as one megastore for furniture.

As of June 30, 2020, the company generated a revenue of $11.5bn and has employed over 16,000 people. It has earned several prestigious awards such as Webby Award for Best Shopping App, Best Retail App, E-Retailer Marketer of the Year 2017 and more.

Future Of Drop Shipping

The future of drop shipping is only exciting as new and advanced techniques and approaches are being implemented in this niche. From data science and analytics concepts of today to advanced contactless delivery mechanisms like drone-based order fulfilment techniques, drop shipping is all about becoming more futuristic in the coming months.

Moreover, with behavioral targeting, drop shipping business owners can accurately determine when a particular product would be reordered by a customer and automate the entire process as well.

Simultaneously, with the incorporation of influencer marketing strategies, drop shipping business owners have a world of opportunities ahead of them. And we aren’t even mentioning the involvement of robotics and artificial intelligence in the order fulfilment system.

If you intend to grow your business through drop shipping, the first step is to get an airtight solution developed. Reach out to us to have a website or an app rolled out for your business and lay the foundations for tomorrow’s profits.

Get in touch with us at X-Byte Enterprise Solutions today.

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