One of our clients recently communicated their intention of discontinuing their dropship program because of low margins on these orders. They make far more profit on bulk warehouse orders than onesies and twosies going to individual consumers. It got us thinking, how can we, as a technology partner, help make this the post-covid necessity of dropshipping viable for clients? Is dropshipping worth it? But first let’s look at why drop ship order margins are so tight.
The Hidden Cost of Dropshipping
When a wholesaler drop-ships, they have to factor in the cost of “…storing the products, insuring the products, and other associated costs like paying staff to retrieve, package and process single items,” as is described in this article: How to Boost Your Drop Shipping Profits and Improve Your Margin from Salehoo.com. When pricing items for drop-shipping, these additional costs must be accounted for, while also maintaining competitive pricing to keep up with the big box stores who advertise loss leaders to get people in the door. Then when you add in the cost of EDI and retailers forcing suppliers to use third party platforms like CommerceHub, how is anyone supposed to make any money? According to printful.com, in 2020 the drop-ship industry produced $128 billion in revenue and is predicted to rise to over $500 billion by 2025. With these numbers, drop-shipping is not going anywhere, but who is making all of this profit? Certainly the benefits of drop-shipping are largely in the retailer’s favor, because the onus of inventory management and shipping falls on the supplier. Add to that, quality control also falls on the supplier so if you’re not on top of your game, your relationship with the retailer could suffer.
The Benefits to Dropshipping
It’s not all pain and suffering though as there are a few benefits to the supplier. We have all heard that inventory takes up valuable real estate so any time you can unload some of it is a good thing. Dropshipping is a good way to get rid of extra inventory, and especially attractive for high-dollar and/or large items. It’s also a great way to get your brand out in front of consumers – from shipping updates to packaging, don’t be shy about your logo. One could also argue that having access to sales data for the consumer market allows for greater insight with respect to both forecasting and product development. Perhaps the greatest advantage for the supplier is that with traditional bulk orders the order-to-cash cycle is often quite long. With the drop-ship business model, revenue is almost immediate and as they say, cash is king, and that cannot be overstated.
Make Dropshipping Work for YOU
So all that said, how can you take advantage of this business model and be profitable? One thing that may help is to outsource your fulfillment process. This will help protect your relationship with the retailer as the fulfillment partner will take on the responsibility of meeting shipping SLAs and quality control. In some cases, you can take advantage of the reduced shipping rates your retailers have negotiated. But more often, you will foot the bill for shipping and hybrid models can often save you money as this article: How to Handle the Many Challenges of Drop Shipping from capacityllc.com describes, “If you look to ship more economically you will want to look at hybrid services like UPS SurePost or Mail Innovations or FedEx’s SmartPost. These involve inducting into the UPS/FedEx networks which then hand it off to USPS for the last mile. The costs are roughly half the straight parcel carrier Ground Residential rates.” Another option is to require a minimum order quantity, which increases your average order value. If you have a minimum of 100 units, you are guaranteed those units and can simply fulfill the orders as they come in. Clear and upfront communication is key here.
From a technology standpoint, having your systems as tightly integrated as possible will benefit you tremendously. The following bullets illustrate the ways in which dropshipping can be successfully incorporated into your supply chain:
- Import all sales orders from multiple channels into a single platform
- Comply with Inventory Advice (EDI 846) requirements and ensure that you’re providing comprehensive product data, even images
- Leverage API-based connections so that order status and inventory information is communicated in either real-time or near real-time
- Take advantage of all data you can get your hands on with a good business visibility tool (have you heard of Syncrofy?)
Before you abandon your dropship program due to seemingly tight margins, first ensure that you are automating as much as possible and exploiting the technology available to you. Communicate with your retailers about what is working and what is not. Don’t like dealing with third-party platforms? Tell them! We are always happy to consult with you to offer guidance as you navigate this post-pandemic and immediate “prime” gratification world we live in.