How Businesses Benefit from the Rise of Dropshipping

A deliveryman holds a stack of brown packages and smiles as a man signs his name on an iPad to accept dropship packages.

Online sales are the future: Some researchers value the global e-commerce market at upward of $4 trillion in 2020. So for businesses looking to capitalize on that market, how can they meet fulfillment demands?

Dropshipping could be the answer. Dropshipping, a fulfillment process in which an outside company keeps your inventory and ships orders as they come in, is not necessarily a new emergence in logistics. But as retail has changed, dropshipping has become an essential link in the supply chain for consumer retail brands.

An ever-increasing number of companies are opting for a direct-to-consumer business model, which means that dropshipping is on the rise across a variety of vendors and products. Sales in this sector have increased by almost 40% since 2017, and the logistics industry is enabling more businesses to get products to customers faster—while also skipping the need to warehouse their own inventory and fulfill orders.

Is dropshipping a fit for your business? Here's what you need to know.

The Rise of Dropshipping for Modern Merchants

The recent shift toward the direct-to-consumer (D2C or B2C) business model has made drop shipping a highly desirable alternative for merchants looking for the most efficient logistics.

Dropshipping has its roots in big-box, mail order, and catalog stores: think vendors such as Sears, SkyMall and even Amazon. With customers spread farther and wider than in the old brick-and-mortar model, national or regional warehouses handle fulfillment for products across geographic regions. One recent survey found that 80% of its participants reported increased revenue for their retail businesses, and 53% agreed that drop-shipping has helped increase their profit margins.

Now, as more companies serve geographically disparate customers, especially through e-commerce, dropshipping has evolved to be a supply-chain link of choice for small- and mid-market businesses alike. The rise of online shopping, a shift toward direct-to-consumer business models for existing and new companies, and the expansion of product lines has necessitated the implementation of dropshipping.

Consumer expectations have played a big part, too. Now, as consumers expect fast shipping, dropshipping is more essential than ever. A number of reputable dropshipping companies have emerged with a focus on lightning-fast fulfillment and simple package tracking.

The Impact of Dropshipping on Logistics and Supply Chain

Recent advances in technology, like cloud-based data and analytics tracking, have made inventory management simpler. But logistics are still a challenge for many businesses. The many moving parts involved include not only taking account of your stock, but also managing staff both in-house and in warehouses, tracking product movement, handling customer inquiries, and more. Additionally, warehouse space is expensive, and often underutilized. This can add costs into a business's operations.

The right dropshipping program, however, can take some of the pain out of supply-chain and inventory management by streamlining warehousing, packing, shipping, and stock tracking.

Among the benefits of dropshipping are:

  • It’s easy to scale. If you find that you want to expand the amount of volume you’re doing or add new products, for instance, you’ll be partnered with a company who can help make this scale-up easy. Remember, since you won’t have to find warehouse space for expanded operations, you’ll be well primed to grow.
  • It can help you ramp up. If you’re just starting your business, or ramping up a new product launch or market, having logistics in place managed by your drop shipper can make this process much simpler.
  • It can reduce overhead and make inventory management easier. Not having to incur the cost of space to house products can be a huge boost to your bottom line. Additionally, your dropshipping partner will have a system for inventory management in their warehouse, which you will connect to see your stock levels, which products are moving, and how quickly they’re getting there.
  • It can provide you with rich data. You can gain data insights from the work of dropshippers, especially if they have strong inventory management platforms. This may include volume of orders, types of products being ordered, speed at which products are delivered, and more.

Of course, dropshipping comes with disadvantages, too. This may be especially hard for business owners for whom control of every piece of the supply chain is paramount.

Drawbacks to dropshipping may include:

  • It may cut into margins. Adding another link in the supply chain—however efficient it is—does come with a fee. Dropshippers have varying fees, but partnering with one will cost you.
  • You don't directly oversee fulfillment operations and efficiency. Working with a dropshipping company means that you’re well beyond the days of packing envelopes on your kitchen table. That was a process that was easy to control, but working with a dropshipper means putting your trust into the partner that they’ll correctly execute fulfillment efficiently.
  • There may be quality control or supplier errors. Again, since you don’t directly oversee the process in your own warehouse, you may open yourself up to errors or quality control issues. This is particularly concerning for food companies that don't warehouse their own products, as they rely on their partners to have health and safety standards as rigorous as their own. The best way to avoid these is to make a concerted effort to keep an open dialogue with your drop-shipping partner.
  • You could choose the wrong partner. Not every dropshipper is alike. Just like any other business partner you choose, you may not choose the right partner, and could have to start your search again. For instance, if your partner is not as quality-minded as you would like, you may see a higher volume of returns due to things including damage during shipping, or inaccurate fulfillment. This could cost your company a lot of money.

Finding the Right Dropshipping Partner for Your Business

If you feel that dropshipping is the right step for your business, you'll seek out a dropshipping partner to serve your needs.

Here is what you should think about when selecting a partner:

  1. Identify existing fulfillment companies that dropship in the countries of your choice. So, for instance, if you’d like to do business both in the U.S. and the U.K., you may need to work with two different partners, or you may be able to find one who fulfills in both locations.
  2. Investigate their fulfillment processes. You can use these questions to help guide your conversation with a potential drop-hipping partner:
    • Have you worked with businesses in my industry, with similar types of products?
    • How do you ensure that orders are accurate before they're dispatched? If an order is incorrect, what are your steps to fix it?
    • How quickly do orders go out once received? Are you equipped for express or next-day shipping? How about international shipping?
    • How do you handle returns that come back? What is your process for handle re-sellable, damaged, and opened products?
    • What kind of inventory management systems do you use?
    • How do you maintain communication with your retailers?
  3. Get a sense of their fees. As with any business partner, you’ll have to pay to work with a dropshipping partner. Some companies will structure fees differently than others—for instance, some will charge on warehouse space, some on volume of business, some on length of relationship, etc. Get a comprehensive overview of their fees, and estimate how much you’ll be spending.

As the shape of business evolves, with a strong shift toward e-commerce, dropshipping is enabling businesses to scale and helping to fulfill customer desires. You will have to give up some control and revenue to do so, but the trade-off is worth it for many businesses who want to simplify what they're responsible for in their supply chain.

The views expressed by the authors are not necessarily those of Fifth Third Bank, National Association and are solely the opinions of the authors. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.