I spoke with a prospective client earlier this week about his dropshipping business. They were mostly interested in what, if any, benefits could be gleaned from transitioning from a full dropshipping model to a traditional inventory-holding model.
This article focuses on the points of our discussion which should be useful to any dropshipper looking to make the transition.
Dropshipping: relevant pros and cons
Much as already been written on this type of eCommerce already. I certainly do not intend for this article to turn into a 101 study on dropshipping. To give context and contrast, we'll be focusing on the issues of:
Pros and cons: Inventory
Inventory management in dropshipping is quite simple: there isn't any! Your manufacturer takes care of all of this for you! This is certainly a nice benefit. I can't really imagine any cons with being able to 100% neglect the (occasional calculus) of inventory management. It's a big things that our clients are always thrilled to offload to ShipsALot.
Now, the physical consequences of inventory are far more mixed. It may look like you are "saving money" on the fixed costs of warehousing space and labor, but this is just neatly hidden into the portion of the markup the manufacturer gets.
Do not misunderstand: this is nothing short of a tremendous benefit for people starting an eCommerce business. The capital and business proficiency requirements are typically too great for someone new to immediate dive into the deep end.
However, as your business grows, the marginal costs tend to add up to much more than either: sourcing your own warehouse or contracting a fulfillment center.
Furthermore, your customers (and thus your bottom line) tend to suffer significantly from traditional dropshipping techniques. The delay in receiving their product can completely prevent you from forming long-term customers or cause you to lose plenty of revenue through order cancellation.
It is for this attrition that any growing dropshipping business should consider the transition. This effect is typically very visible in most dropshipping businesses sourcing from China.
Pros and cons: Shipping Costs
This is another hidden cost, albeit another powerful favor for beginners. These costs will add linearly, yet your producer benefits from economies of scale: saving significantly on their shipping costs with no motivation to pass those discounts to you.
Again, here, in-housing or outsourcing to a fulfillment center will give you the ability to leverage your growing volume into shipping savings. This property is also highly apparent in China-sourced products. Freight shipments from China are far cheaper per unit than the smaller ones dropshippers typically utilize.
In the beginning: dropship away.
As your business matures and your sales & brand grow, pivot into a managed fulfillment center or insourced warehousing solution. The savings are incredible and your customer experience will improve significantly!