Drop Shipping. You may have heard of it, but what does it actually mean? How is it used in today’s e-commerce world and who is doing it? Before we talk about drop shipping though, let’s take a step back to see how a traditional e-commerce fulfillment model works.
The Traditional E-Commerce Model
In the old days (10-15 years ago), opening a retail store required lots of capital. You needed funding to:
- Buy inventory in bulk from a supplier
- Physical warehouse space to store the inventory
- A storefront to sell the merchandise, whether it is online or brick-and-mortar
Then hopefully you had enough cash left over for marketing.
While cash heavy, buying inventory in bulk led to higher margins. However, the risks involved with this traditional model are high – if inventory goes unsold, it can lead to high loss and wasted space. Yet, this process has been the bread-and-butter of the retail world for quite some time.
Today, it’s easier than ever to start an online store
Nowadays, more and more stores are moving online. Shopping cart platforms like Magento and Shopify make it simple to do what was once unheard of: you can open an online store in a single day and maintain it for as low as $20 a month.
Cost and technology are no longer barriers to entry when starting an online store. However, e-commerce newcomers do not have the same resources as established big-box retailers, so you must find other ways to compete besides price alone. Instead, your focus should be on brand and quality products. It’s about customer experience and curation.
Enter Drop Shipping, the Perfect Fulfillment Model for E-Commerce
This is where drop shipping comes in. Instead of holding inventory themselves, these sellers simply route orders directly to the supplier, and their supplier sends the products straight to the customer. Even though margins are slimmer, it virtually eliminates inventory risk, which is a quite a feat to most retailers just starting out.
Drop shipping is also a smart way for retailers to test the waters with new products. Instead of buying inventory upfront in bulk, you can list items on your site and see what sells, which is worth it even with you break even or lose a little This shifts the competitive advantage from back-office logistics (who can compete with a fulfillment powerhouses like Amazon anyway) to customer experience and marketing – the fun part that most think starting a store is all about.
Drop Shipping Is Nothing New, Is It?
Make no mistake, drop shipping is not just a fad! It has been around for longer than you think. Items sold through TV and radio ads used an early form of drop shipping, and even a few brick-and-mortar stores used this form of fulfillment, especially for larger items (like furniture or equipment) that cost a lot to transport. However, drop shipping has really come into its own over the past decade, especially with the rapid emergence and growth of e-commerce. The fear of customers entering credit card numbers online has been replaced by the fear of not having an online presence quickly enough.
Even the big players in e-commerce are beginning to take advantage of drop shipping, or did in their early days:
- Zappos actually began as a drop shipping company.
- Wayfair.com, the second largest online retailer behind Amazon, has built their whole business around drop shipping.
- Fab and Gilt also rely on drop shipping as a core part of their business.
Drop Shipping Shaping the Future of E-Commerce
Drop shipping is a growing trend because it perfectly fits the e-commerce world. It is here to stay and will continue to shape the way retailers interact with their customers. In the next five or ten years, we can expect traditional retail stores to become showrooms while the real fulfillment happens online, behind the scenes.
Imagine going to a local shop and browsing through the items at your leisure before making your selection. Then you drive home and your purchase will be waiting for you, having been drop shipped to your doorstep before you even got back.
That’s the future that dropshipping is helping make a reality. A world where e-commerce and in-store retail coexist in harmony.
Interested in learning more about drop shipping? We’ll be posting a series of drop shipping guides over the coming weeks. Stay tuned here to learn more.
Leave any of your drop shipping related questions in the comments below!
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