Marketing

Ecommerce Dropshipping: Is it Still Profitable in 2018?

Dropshipping has become an increasingly popular logistics solution for ecommerce managers. But is it still profitable in 2018?

Amanda Pofahl

Latin American Market Expert
March 13 2018 · 9 min read
   

Ecommerce dropshipping has become increasingly popular in the last few years. With the rise of ecommerce, dropshipping has become a viable shipping solution for many ecommerce owners. The best part about dropshipping is that there are multiple vendors across the world that can satisfy your shipping needs, if you’re still a growing brand that wants to explore a new country.

How does the drop-shipping model work?

Few people really understand what drop-shipping is all about, let alone claim to master the processes. In its essence, ecommerce drop-shipping is a type of business model solution that enables companies to operate without maintaining inventory, warehouses and a logistics system that’s managed in-house. There are many ecommerce managers that have reviewed what the market demand is out there, and then found drop-shipping companies that satisfy the demand for that specific region or demographic.

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Drop-shipping companies partner directly with ecommerce owners so that they don’t need to pass large operating costs, labor expenses and management fees on to customers. They offer flexible packages that allow owners to grow as and when there is demand being generated for the product. While most 3PL companies have fixed rates and pricing schemes, drop-shipping is ecommerce-first and understands the variable nature of demand curves.

In other words, the customer places an order online. The order is sent to the drop-shipping company, who labels and packages it and then ships the package off to the customer.

It is a great time-saver as there is no longer any lag time between departments because drop-shipping companies are experts within their field.

If you haven’t already, then feel free to check out our extensive article on ecommerce business models, so that you can choose the best one to suit your needs and perform for your advantage. Read more HERE.

What are the advantages of drop-shipping?

Like all things that save time, it saves money. First and foremost, it’s a great way to build up your margins so that you can invest in other products and research the ones that are working. It’s also incredibly easy to set up.

You don’t need to do any coding or backend systems development to set up a drop-shipping enterprise. All you need is the right business model, a partner and some transparency in operations. This is done so that all players in the contract understand the specifics of drop-shipping.

Enhanced market understanding and insights

Drop-shipping companies, in turn, understand the e-commerce market from top to bottom. This helps them in satisfying the specific needs of ecommerce owners who may want customization in packaging or delivery.

They also understand the importance of refunds, returns and reissue problems. They have systems in place to be able to handle that effectively, thereby mitigating some of the brand-risks that owners may have to face.

For the ecommerce owner, it’s a simple way of doing business. They can focus on the things that they are actually good at – brand development, marketing, product research and development, etc. They can find a partner that fits well with their approach and also gives them insights that they would have never gotten otherwise.

For instance, drop-shipping companies in Latin America understand the importance of offering different payment options. EBANX comes in handy here, providing multiple local-specific payment options for ecommerce owners that want to expand to this region.

Flexibility, low risk and ease of business 

Probably one of the more attractive advantages of drop-shipping is decentralized operations. As the ecommerce owner, you can travel abroad, sample items in new regions, or work on-the-go on a remote island.

You’re assured that everything is running smoothly because the drop-shipping company works independently of your schedule and timing. You are free to travel, run remote teams and work on product branding from anywhere around the world.

There is also no risk involved in not selling enough products to justify cost of inventory. Many times, inventory management can become a cost center for companies, and it makes sense for them to let go of products that aren’t selling beyond a specific threshold.

In this sense, companies can leverage their brand and continue innovating on products they’d like to sell without much worry about minimum order quantities and lead time.

Ideally, the fewer amount of steps involved in getting a customer the product that they have ordered, the better it is. Whether it is t-shirts in Mississippi or watches in Brazil, your drop-shipping partner will make sure that everything is taken care of when it comes to shipment.

The disadvantages of dropshipping

Ultimately, it comes to quality of customization and user-experience. You can outsource your logistics and warehousing to third parties, but you may not have complete control over the quality of the final experience or the way that its delivered.

Mistakes made by drop-shipping companies are mistakes done under your brand’s umbrella. Customers may express their frustration and write negative comments about your brand, without you or your staff having a clear picture as to what has happened to cause these feelings.

Increased competition

Although dropshipping may be an easier way to process shipments, it may open up doors for competitors. Since the dropshipping company takes care of everything after the customer has placed the order, it may be difficult for you to differentiate in the long-run. The startup capital needed to issue drop-shipping orders is low and your competitors might take up the opportunity in 2018.

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Hence, the question of profitability. If drop-shipping vendors have made things so easy for your competitors, then what’s the point of doing it still. The real question here, lies in the fact that you, as a store owner, need to keep innovating to provide the best quality products and service.

This may require time and energy that you may not have had prior to this. It’s especially competitive if you’re in an industry that doesn’t have a deep enough niche.

If your competitors can drop-ship from anywhere in the world, your industry has suddenly opened up to cheaper imitation and global competitors. You have to cut prices or offer more for less, if you want to keep running the same operation.

This also means that bigger brands will try to get more out of dropshipping and therefore successfully negotiate cheaper rates due to economies of scale. This changes things up in 2018, as the advantages may be outweighed by the disadvantages.

Is it profitable to dropship in 2018?

Ecommerce dropshipping has become increasingly popular over the last few years. If you’re a US based ecommerce company, you’re already facing more than 350K competitors that are using Shopify’s ready to build platform. This means that the start-up costs are smaller and competition has skyrocketed.  

With internet penetration increasingly year over year, the competition from the global market is going to eat into your margins. If you’re working with manufacturers that have existing partnerships with bigger brands, you’re going to get outbid.

Increased investment in marketing, customer service and research

The other area to consider here is the fact that there is more investment needed in consumer outreach. With so much competition using the same website platform, the same shipping and inventory methods and the same marketing methods for advertising – your business is being affected at every corner.

The best way to pivot into a more profitable 2018, is to go deeper on multiple niches. If you’re dominating in mobile phone covers, then consider going only iPhone based. Or if you’re selling editing software for B2B companies, consider focusing only on companies in the mid-west.

The more you focus on a niche and grow that audience base, the better it is in terms of profitability. You can also upsell to the same type of customers, thereby increasing your margins, and you can rely on a homogenous market to produce deeper insights.

Creating a relationship-based business model

If you continue to operate and compete with what you’ve been doing in the past few years, then you will be outpaced by tougher competition. The customer needs to understand that there is a relationship-based model at the heart of your company, and not simply a transactional one. When you can fulfil many smaller requirements, you can make a larger profit and invest in your business further.

Also this creates further differentiation. According to experts, dropshipping companies can gross 10-30% margins, while traditional ecommerce shops can go up to 50% depending on their partnerships and price sensitivity. You need to differentiate your offerings, like a traditional shop, so that you can retain those kinds of margins.

The other component to the profitability discussion for ecommerce dropshipping is product quality. The shop is only as successful as the quality of the product and over time you may not have complete access to how the quality is.

Your customers may start to complain in hordes, and you may even face lawsuits emerging from damages, in case the product gets a virus or overheats. In that case, dropshipping is certainly not profitable at all, as fighting lawsuits and customer refunds will put you under quickly.

Conclusion

It’s important to note that there isn’t a clear-cut answer for profitability when it comes to drop-shipping. While many entrepreneurs run multiple types of drop-shipping operations simultaneously, they may varied impacts on different types of industry awareness.

Following the key principles of long-term growth like differentiation in service/product, exploring deeper niches, and excellent customer service, will help you sustain your operation for long-term gains.

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