Dropshipping has evolved from being seen as an ‘alternative’ business model for fulfilling customer orders placed through an online store to become one of the most popular and profitable e-commerce models around.
However, dropshipping is typically a temporary means to an end. Eventually, most brands reach their limits with the dropship model and opt to bring inventory in-house.
Wondering if the time is right for you to stop the drop?
This blog will help you weigh up the pros and cons. But first, some context…
What is dropshipping?
Although it’s only become a buzzword in recent years, dropshipping has technically been around for decades – starting back in the 1960s and 1970s when mail order catalogs became popular.
It’s a retail fulfillment method used by e-commerce stores who don’t want to, or aren’t able to, directly handle the products they sell. It’s a safe, cost-effective way for entrepreneurs to get off the ground and for established ecommerce stores to grow.
How does dropshipping work?
When a customer hits ‘buy’ on a product from a business that uses dropshipping, a request is immediately forwarded to a wholesaler, supplier or manufacturer. This ‘invisible’ third party then supplies and ships the item to the customer on the seller’s behalf – and sends the seller a bill for the service.
Dropshipped items can still be fully branded and customers are typically unaware that a dropshipping service has even been used.
What are the benefits of dropshipping?
The dropship business model is popular because:
- No inventory necessary. Dropshipping negates the need for upfront inventory.
- Reduced risk. Dropshipping requires less investment, which means less risk.
- Low overhead costs. Without inventory to buy or a warehouse to manage, overhead costs are typically low.
- Flexible working. A dropshipping business can be managed from anywhere in the world.
- Easier growth. Dropship businesses can scale quickly because it’s the suppliers that take on the additional workload.
Pros and cons of bringing inventory in house
Despite the benefits, most merchants reach a point where they want to bring some, if not all, inventory in-house to maximize profitability and gain more control.
But before ditching dropshipping, there are advantages and disadvantages to holding inventory in-house you should consider.
Pros
1. Lower prices
Despite requiring minimal investment, dropshipping isn’t always the cheapest way to do business. Look at the per-unit cost, and by extension, the landed cost of your current set-up. You may be able to lower costs (and therefore maximize your profit) by managing inventory yourself, especially as suppliers may offer a more favorable rate if you ship items yourself.
2. Quality control
When your inventory is under your own roof, you can handle the packaging and quality control. Consumers increasingly care about the unboxing experience of shopping online, so being able to add value here can be a real advantage.
Custom packaging, branded packaging, and fulfillment speed are just a few things you can directly manage when moving products from dropping to in-house fulfillment.
3. Better Shipping rates
If you’re bring lots of inventory in -house, you’ll be shipping out a lot, too – which means you could secure better shipping rates from your providers. A dropshipper typically charges a premium for shipping supplies and fulfillment, so shipping your items yourself can cut costs significantly. Do your sums and speak to a range of shipping providers.
Cons
1. Reduced cash flow
Inventory is expensive to purchase, ship, store, and move. By taking on items in-house, you tie up cash in stock. Dedicated inventory planning software is essential so you can know exactly how much to order and when, minimizing stock turn and keeping cash flow healthy.
2. Potential stockouts and deadstock
Relying on spreadsheets, guesswork or both to plan your inventory is a recipe for overstock and, on the flip side, stockouts (which are both cash flow killers). The antidote is accurate demand forecasting and reliable buying recommendations, which are what Inventory Planner does best.
3. Staffing and storage costs
Managing inventory and fulfilling orders requires a lot of time and resources. Warehouses need staff, orders must be packaged, and shipping must be arranged to make sure everything is running properly.
In order to maximize profitability, businesses must manage both their inventory and their workforce efficiently so they are getting the most out of those overhead costs. You’ll need detailed, customized reporting that highlights the key data so you can make data-driven decisions.
Don’t stop the drop without Inventory Planner
Book a demo to see for yourself why our inventory planning software is essential to managing your own fulfillment.