While the concept of dropshipping is nothing new (it’s been around since the 70’s) it’s starting to increase in popularity thanks to the e-commerce boom. Dropshipping itself is a simple concept. Rather than shipping goods to a retailer, they go from the manufacturer directly to the consumer. The earliest forms of dropshipping came in the form of radio and television ads. Even certain brick and mortar stores used dropshipping as a means of selling bulkier items like furniture that would typically take of a great deal of storage space or that cost more to transport.

Drop Shipping Is On The Rise

Now, with ad space available virtually (read literally) everywhere, drop shipping is on the rise. Companies like Zappos, and Wish are taking advantage of advertising through social media sites like Instagram and Facebook and are able to reach millions of potential consumers with next to no effort. Shopify, in particular, is an interesting company to look at when it comes to dropshipping. The total amount of money to go through Shopify over the course of 2017 was an astounding $27 billion. This was a 70 percent increase in revenue from the 2016 sales figures. Yet in all the years that Shopify has been in operation, it has yet to turn a profit. That’s right, Shopify has yet to see anything in return for its massive revenue streak.

When you look at it in that light, it kind of makes dropshipping seem like a scam. But in reality, there’s a bit more to it than that.

Dropshipping as a Business Model

As a business model, there’s something to be said for dropshipping. It eliminates the need of heavy capital investments in both inventory and warehousing space. Because there’s no need to buy bulk inventory, there’s no inventory risk (shrink, damage, unsold merchandise) which further reduces the financial burdens for a burgeoning business. While it does mean slimmer margins, a savvy entrepreneur with the right items and a good logistics setup can make a successful entrance into an otherwise tough market.

Additionally, dropshipping is also great for existing stores to test out new products without the need for a heavy purchase. By listing a product on their website and seeing what sells, a company can gather enough market data to determine whether or not it’s a worthwhile product to invest in. It might cost a little more upfront with extra shipping fees, but it’s better than having an excessive amount of stock sitting around and taking up valuable warehouse space.

To give an example of how widely spread the dropshipping business model is now, here are some of the stats on dropshipping compiled by Quartz:

2 million: Advertisers on Instagram per month

$10.9 billion: Projected Instagram ad revenues this year

500,000: Number of merchants on the e-commerce platform Shopify, up 74% in the last five years

$1 million: Sales per minute facilitated by Shopify around big shopping days like Thanksgiving

The Uneven Field

While dropshipping has merit as a business plan, there is a certain unevenness to the playing field. Many of the companies that advertise on social media sites are actually overlaps for much bigger Asian wholesale companies. In this “accuracy by volume” method of advertising, these companies are able to list a multitude of different products to the same target audience with little effort. However, the disadvantage doesn’t stop there. Shipping from China is, in many ways, cheaper and easier than it is to ship within the United States.

“Under the terms of a 2010 treaty, postal authorities get a set fee from their foreign counterparts to deliver a package within their borders,” said Adam Pasick of Quartz.

“If a company from China wants to ship something to a US consumer, the USPS gets no more than $1.50—which often makes it cheaper for Chinese merchants to ship a package up to 4.4 lbs from Shenzhen to Des Moines than it costs to ship from, say, Seattle,” he added. This is why low-cost goods from Alibaba go for little more than a $10 shipping charge.

Bigger Players in the Field

It isn’t just Asian wholesalers that are taking advantage of this business model. Large retailers like Macy’s, Home Depot, and Pier 1 Imports are also using dropshipping as a means of increasing their online market presences. This stands to reason, as omnichannel and online shopping are beginning to gain popularity over the strictly brick and mortar experience.

While most of the goods that come from these dropship based web-stores are more than lackluster, there is still a great deal of potential for the business model, especially for businesses that already have a physical presence. Not only can it cut down on warehousing costs and inventory risks but it can offer a great deal to the customer experience as a whole. Expanded product lines combined with easy to order and easier to receive goods is in keeping with the change in consumer expectations and the shift in market conditions.

Preparing for the Future

Combining dropship marketing with a well-developed logistics system might have some merit in the near future as e-commerce continues to grow and develop. If you don’t believe us, just remember that Amazon started as a dropship company before it became the e-commerce titan it is today. At BlueGrace, our freight specialists work with you every step of the way to understand your requirements and set up a solution that’s tailored to your needs. For more information on how we can help you prepare you for the future and simplify your supply chain, contact us using the form below: