3 ways to gain competitive advantage through Dropshipping
(This article is written by a guest writer)
Introduction
Drop shipping allows retailers to quickly “test” new products on the market. Since the retailer doesn’t have to keep goods in stock, introducing new products or replacing parts of the old assortment with new articles may be done in a much quicker way than the more traditional reselling. Other benefits commonly associated with drop shipping are the low entry barriers such as low financial risks to be taken for a retailer while enter a new market. Drop shipping makes it easy for both large and small e-commerce companies to expand their core range and offer cross-sales, compared to more traditional reselling business.
Drop shipping is not only a well-known way of selling goods today. In fact, these days drop shipping, as a sourcing strategy is so well established on the international market of e-commerce; that it is rather seen as a prerequisite for success.
At the same time, drop shipping can mean that margins and revenues are low. For instance, it is common to have lower margins per sold goods, than for traditional retailing. A new debate has arisen, especially in the US, which is one of the more prominent markets for both E-commerce and Drop shipping (together with China).
Is drop shipping still profitable compared to stocking and selling their products on their own?
The answer is, YES!
Recent studies suggest that drop shipping not only continues to grow both in sales and profitability. In addition, new methods and technical instruments are being developed to use drop shipping more efficiently than we have seen before.
Unlike a few years ago, when drop shipping was still considered a new purchasing strategy; retailers, nowadays, need to work out smarter strategies for how to make money from drop shipping.
In this article, I go through some strategies and advice that can be applied to anyone who wants to gain competitive advantage with drop shipping.
This is a post from Skapawebbkraft.se. Please visit our blog to read more about e-commerce and dropshipping in Sweden. On the blog, we also share tips and advice on how to set up an e-commerce to start selling goods via Dropshipping.
Strategies for gaining competitive advantages through Drop shipping
Integrate Drop shipping into Your Assortment Strategy
Many successful retailers and wholesalers work with sophisticated assortment strategies to drive sales to the products that generate the most profit. Drop shipping can play a central role here in order to succeed.
A common strategy is to assort products into a “product hierarchy” that may have 3-6 different levels. The lowest level, within Retailing, sometimes referred to as the “entry level”, gives the least customer benefits but also has the lowest out price. The highest level in the hierarchy has the highest price but also the most customer benefits.
By deciding how you want to label and promote each product within your assortment you may define a smart strategy for your dropshipping business. For instance, imagine that you, as a consumer wants to buy a coffee maker. You search on the web and end up in an E-commerce store that sells coffee makers.
By giving you a product hierarchy with three different options, the retailer can in some sense control and encourage you to make a buying decision that gives the highest profit for the retailer:
Here is an example of how to structure the assortment through a “product hierarchy” for coffee maker:
Entry level product: No-name: Cheapest product within the hierarchy and with low-quality.
Private label product: Affordable and good price, only slightly more expensive than the coffee machine 1 (above) and at least decent functionality and quality.
Famous brand product: This product is typically well known, it is more expensive than option 2 and 3 (above) and intended for the luxury or professional market segment.
In the case above, the retailer has high margins on Coffee maker 1 and 2 but without the Famous Brand (Number 3) it becomes difficult for you as a customer to understand what product you need to make a purchase decision.
The problem arises in the traditional retailing market that does not work with Drop shipping. The retailers that don’t work with drop shipping have to purchase and put option 3 in stock (which also has a higher acquisition price than option 1 nad 2), but which is typically only added to the assortment to drive sales of 1 and 2.
You see, many resellers only use the famous brand to attract customers but they make their main profits from the sales of their own brands (Product 1 & 2 above).
With dropshipping, this type of assortment strategy becomes much cheaper and efficient. Thus, items that sell poorly or infrequently can be offered to the customer via dropshipping and without high purchasing and costs for warehousing in order to stimulate the sales of own brands where the retailer has high margins and keeps the products on stock (the profits in the retail trade today largely come from the sale of Private label products).
2. Retail is Detail – Carefully select products for your assortment
Drop shipping makes parts of the sourcing process easier. Not only because certain parts of the Supply Chain is taken care of by the supplier (drop shipper).
Drop shipping also makes it easier for the retailers to phase in new products in the assortment or to remove items that are considered to sell poorly. Other typical benefits of drop shipping are that you may easily offer additional items to sell before the customer checks out (cross-sales). (For instance, “other customers also bought this product..”) Of course, you can also add items that usually sell in lower volumes that you would never add if you would have to first purchase them and then hold them in stock.
This kind of products are simply not profitable enough to stock compared to other products in your warehouse. This type of item typically belongs to the higher price range. However, if you have a drop shipping business, this sort of items may be worth selling.
The advantage of the dynamic way of adding products to your assortment that drop shipping offers, also involves risks. Since you can test your new products live and in very short time add products to your product range, it is also easy for E-commerce businesses that use drop shipping to lose control of their product range. Don’t forget to follow the traditional guidelines for successful retail:
Build a long-term brand: Make sure your items are of a quality that is in line with your strategy. In which segment do you want to operate? In the low price segment or the professional segment?
DNA: In the retail sector, a big topic is which “DNA” you want your company to represent or get associated with? Selling bicycles, coffee makers, insurance and sweets is of course possible, but basically a bad business idea.
By offering everything between heaven and earth in your product range, you are very likely to find it difficult to position yourself within your market. It will also be difficult to carry out marketing campaigns and reach a defined target group. Instead, you should clearly define your business concept and define your market and customer group.
Design: The retail market is more exposed to competition than ever before. The customer can for instance buy a coffee maker from a hundred different retailers. In addition to price and service, it is primarily design that allows retailers to stand out and offer the customer added value. Therefore, choose your supplier carefully and ensure a high degree of design for each item you want to sell on your website.
3. Do not underestimate the value of Digital Marketing
It is not rare that the conversion rate, for an E-commerce reseller is around 1-3%. To succeed with drop shipping, where margins are also low, large volumes of visitors to your point of sale is needed. For example, if you only have 200-300 visitors a month to your e-commerce store or website, then there will not be much sales.
Marketing through Social media or through SEO, Search Engine Optimization, is a prerequisite for success with Drop shipping. Not only for small e-commerce businesses and startups , but also for large and well-established companies in the industry.
If you do not have the knowledge yourself to drive website or e-commerce traffic. Then you can simply choose to use a platform with smart functionality for SEO.
SEO-functionality could differ depending on what E-commerce platform you use. Even simple ways for you to structure information in a way that promotes SEO makes a great difference for you to attract visitors to your Point of Sale.
You should investigate which keywords are frequently used for the product you want to sell and how high the competition is on the market if the keywords you want to use have a chance to rank high in Google’s ranking. There are many tools available on the market but one of the more popular tools that allows you to track and investigate the best Keywords for you is Google Keyword planner.
When it comes to E-commerce platforms that are optimized for SEO, there are both good and bad platforms to choose from. Some of the better solutions available on the market from an SEO perspective are in particular Woocommerce and Shopify.
Both of these platforms are also integrated with Droshi and are therefore easy to use for Dropshipping. Another platform that generally ranks high in international surveys and is optimized for SEO is Wix. Wix also offers a plan completely free of charge which allows you to test the platform before deciding.
Jacob,
Skapawebbkraft.se
