Safe.co.uk is an online retailer specialising in security products. The products it sells are held in a warehouse, ready to ship to customers when they place an order. But there are specific products on its site that are never physically held in stock.
For these, the company uses dropshipping, a method of online commerce where retailers (intermediaries) sell products, but they are shipped directly from the product manufacturer or distributor (the supplier) to the customer. Because it requires little infrastructure, this method is often used by startup entrepreneurs. It also works for established online stores in certain circumstances.
Safe.co.uk uses dropshipping for heavy items that are expensive to ship, says Jonathon Pass, ecommerce executive. “It makes no sense to pay those [shipping] costs twice, when dropshipping means we can have those items shipped directly to customers.”
When you consider the rising cost of shipping – a 2021 report from McKinsey revealed a six-fold increase in the cost to ship a container from China to Europe since the start of 2019 [1] – it’s clear that any potential saving is worth investigating.
Cost is just one factor to consider though. This guide will outline others to help you assess if dropshipping is right for your business and provide you with the building blocks for a successful dropshipping strategy.
Is dropshipping right for your business?
Dropshipping is a growing market: according to Statista, its value is set to reach $476bn globally by 2026, from just $129bn in 2020 [2].
Its popularity isn’t surprising as it offers several benefits to intermediaries and suppliers. Dropshipping reduces the complexity and cost of the intermediary’s supply chain as they don’t need to store the stock, commit to selling a certain amount, or pay for shipping.
Ben Gardner, senior associate and supply chain expert at law firm Pinsent Masons, points out that it can be difficult for a small intermediary business to become established by dropshipping alone. “You need to consider the cost of setting up an online presence and supporting that with marketing until you’re able to build a loyal customer base,” he says.
For suppliers, the key benefit of dropshipping is selling products across multiple platforms without having to manage sales or market their products.
Lockabox is a UK-based manufacturer of lockable storage boxes, and uses dropshipping to sell its products via Safe.co.uk. The business has to cover extra warehousing, packaging, and logistics costs, as well as paying commission to the intermediaries that market its products. But it gains more from access to lucrative sectors through its dropship intermediaries.
“Rather than selling to UK B2C websites, we built strategic relationships with intermediaries who sell regularly into the healthcare, social care, and education markets,” says Peter Morris, the company’s founder. “We know that the NHS has preferred suppliers, and it can be difficult for an SME to gain NHS contracts, but dropshipping puts our product in front of those customers easily.”
Lockabox’s dropshipping strategy also allows it to access international markets with much less investment than attempting to sell directly to customers. “We can sell to business customers in France or the USA without spending a lot on marketing and PR,” says Morris.
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How to create a successful dropshipping strategy
A successful dropshipping strategy should benefit both suppliers and intermediaries, but the focus will differ for each.
Suppliers: protect your brand experience
A successful dropshipping strategy connects you with relevant partners whose customers include demographics you’re looking to target, are established in sectors or international markets you’re looking to break into, and can maintain your brand experience.
The drawback is that you have no control over the purchase experience. Ensuring that you partner with the right intermediaries should be a key part of your strategy.
Lockabox takes several steps to ensure its customers receive a good experience no matter where they buy its products. All intermediaries are vetted and required to use an online system that automatically feeds orders to one of its logistics partners worldwide. This system means orders are fulfilled quickly and shipped using standard Lockabox packaging.
Intermediaries: select the right products, monitor ROI, and incentivise suppliers
A successful dropshipping strategy allows you to increase sales by offering more products without investing in stock upfront, reducing operating costs by decreasing storage and warehousing needs, and reducing risk around testing new products without a long-term commitment.
Achieving these goals is largely down to selecting the right products and partners.
When it comes to selecting products, Gardner advises those intermediaries considering using dropshipping exclusively to start by looking for products that will sell in volume and have enough margin to allow them to offer competitive pricing, since many other sites may sell the same products.
Meanwhile, online stores looking to use dropshipping alongside traditional methods should make individual assessments on where the approach could add value. According to Safe.co.uk’s Pass, the company looks at the potential ROI of selling any new item direct versus using dropshipping to decide on which approach to use.
If you choose to dropship a product, it’s vital to monitor this ROI over time. If sales increase, there could be a point when it becomes more cost-effective to buy stock from the supplier. “If a product is highly popular and sells well, we can then bring it into stock if there is a saving associated with buying in bulk,” says Pass.
Selecting the right partners is equally important. While it’s true that dropshipping pushes back a lot of risk to the supplier, the intermediary is still responsible for collecting and processing orders, returns, and customer service, so you must feel comfortable that your partners will offer the service your customers expect.
“If something goes wrong, the supplier only has to remedy the problem if there’s a legal contract between supplier and intermediary,” says Gardner. “Contracts should have legal and financial triggers that incentivise suppliers to improve service levels, including KPIs around order accuracy, product quality, returns and on-time delivery rates.”
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