In recent years, e-commerce has become increasingly important in the global economy. With the COVID-19 pandemic and the resulting increase in online shopping, e-commerce has become an even more essential part of many businesses. But, managing inventory and shipping can be a challenge for e-commerce businesses, especially in the current economy.

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That's where dropshipping comes in.

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Dropshipping is a business model that enables businesses to sell products without having to manage inventory or handle shipping.

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Instead, the business partners with a supplier who handles the inventory and shipping, and the business simply markets and sells the products.

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There are different types of dropshipping, including traditional dropshipping, collaborative dropshipping, and reverse dropshipping. Each has its own benefits and challenges, and the right approach will depend on each business' unique needs and goals.

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In this article, we will dive deep into each type of dropshipping, the specific benefits and challenges of each.

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Traditional Dropshipping

Traditional dropshipping has now been around for many years. It is a popular e-commerce business model that enables businesses to sell products without holding inventory or managing shipping. Here's how it works:

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1. The business finds a supplier who is willing to dropship their products.

2. The business lists the supplier's products on their e-commerce store.

3. When a customer makes a purchase, the business orders the product from the supplier and provides the customer's shipping information.

4. The supplier ships the product directly to the customer.

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Advantages

The biggest advantages of traditional dropshipping is that it eliminates the need to hold inventory or manage shipping, which can be a huge cost and time saver for small businesses.

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It also allows businesses to offer a wider range of products without the need to invest in additional inventory.

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There is far less risk when using traditional dropshipping as apposed to purchasing your own inventory. If you fail to sell the dropship products, your company is not at a loss for the excess inventory.

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Also, anyone can start a store that utilizes dropshipping. Meaning that someone can start from nothing and build an entire store with products and focus on branding.

Downsides

One common issue is long shipping times, as the products are often sourced from countries like China and can take several weeks to arrive.

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This can lead to customer frustration and negative reviews, which can hurt the business's reputation.

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This highlights another issue, which is the potential for low-quality products, as the supplier may not have the same quality control standards as the business.

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This can also lead to customer dissatisfaction and negative reviews.

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Traditional dropshipping can also be very competitive, as many businesses use the same suppliers and products, leading to price wars and a race to the bottom.

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This can make it difficult for businesses to differentiate themselves and maintain profitability.

Take Away

While traditional dropshipping can offer some benefits, such as cost and time savings, the potential downsides, such as long shipping times and low-quality products, won't be a fit for most ecommerce brands. To stand out in a competitive market, businesses may find success with traditional dropshipping by utilizing less-known networks, and staying off of competitive spaces like Amazon.

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Reverse Dropshipping

Reverse dropshipping is a relatively new and growing e-commerce business model that involves sourcing high-quality products from developed countries and selling them to markets in developing countries. Here's how it works:

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1. The business finds a supplier in a developed country, such as the USA or the UK, who produce specific products that are in demand in developing countries, such as China or Indonesia.

2. The business lists the supplier's products on their e-commerce store, targeting the developing country's market.

3. When a customer makes a purchase, the business orders the product from the supplier and provides the customer's shipping information.

4. The supplier ships the product directly to the customer in the developing market.

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Advantages

One of the biggest advantages of reverse dropshipping is the potential for high-profit margins.

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High-quality, brand name products from developed countries can command a premium price in developing countries where such products may be difficult to obtain.

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This means that businesses can make a significant profit on each sale, even after paying the supplier and shipping costs. By increasing the price to a level that wealthy consumers in that country can afford the cost.

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Because reverse dropshipping enables businesses to offer high-quality products to wealthy customers in developing countries, brand loyalty and customer satisfaction are easy to maintain. Because without your company, they may not have access to the products otherwise. This can help you quickly build brand loyalty, and requires far less risk than traditional dropshipping, because you know that the products are high-end.

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Downsides

One challenge is finding the right suppliers and products, as sourcing high-quality products can be more difficult and costly than traditional dropshipping. And because this is a relatively new trend, there are no apps or technology to support this method.

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Sellers often have to pay for products upfront at full retail price, and upsell the product without permission from the original company.

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The other struggle is that businesses will need to have a deep understanding of the developing markets. The barriers may including cultural differences, marketing strategies, government regulations and logistics. Language barriers may be another stumble in reverse dropshipping, as a deep understanding of the language will be needed to interact with customers, create a brand presence in the new market, and generate meaningful marketing content. There are also claims by some that this method is unethical, where the model is dependent on marking up products based on a scarcity in the market.

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Take Away

Reverse dropshipping is an interesting new trend in the dropshipping space. Time will tell how brands are able to succeed using this model. Businesses without deep understanding of the new developing market would be wise to stay away from this method, but reverse dropshipping is a great option for anyone willing to take on and own a new market. Quick wins are available to those willing to take the risk.

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Collaborative Dropshipping

Collaborative dropshipping involves partnering with other e-commerce businesses to expand product offerings, cross-selling opportunities, and order value. Here's how it works:

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1. A business partners with other e-commerce businesses to add their products to their online store.

2. When a customer purchases one of the partner's products, the business sends the order details to the partner.

3. The partner then ships the product directly to the customer.

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Advantages

One of the main advantages of collaborative dropshipping is the potential to increase cross-selling opportunities. By partnering with other businesses, a business can offer a wider range of products to customers, which can lead to more purchases and increased customer loyalty.

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Another benefit of collaborative dropshipping is the potential to increase the average order value. By offering a wider range of products, businesses can encourage customers to purchase more items, resulting in higher order values. There is also no need for additional inventory which helps you save on inventory costs while exploring new product offerings, or boosting your upsell offerings.

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The biggest upside to collaborative dropshipping vs traditional and reverse, is that a business can have extremely low shipping times. Because both stores are based in the US, companies are able to ship their products faster to the customer. Businesses also have more control over the quality of the product selections, because most products have already been successfully sold online already. Which gives brands the opportunity to easily vet partner stores before selling their products.

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Another advantage is the potential for the business to get their own products on other stores. Allowing them to in essence be a dropship supplier as well, without the risk of their brand being ruined by poorly built stores.

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One platform that enables e-commerce businesses to implement collaborative dropshipping is Carro. Carro provides an easy-to-use directory of successful Shopify stores, which businesses can use to add products to their own store. When a customer purchases one of these products, the order is automatically sent to the origin Shopify store, which then handles the order fulfillment.

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Carro also offers a range of features to help businesses manage products and partnerships, including improved search-ability, product management controls, the ability to create joint sale events, and manage discounts.

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Downsides

A major downside of collaborative dropshipping is the limited control over fulfillment. Because the brands that fulfill the products already have their own stores, it will be harder to arrange any type of custom fulfillment process.

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Reduced profit margins also play as a downside for collaborative dropshipping. Generally the wholesale margin of products from parter stores in the US are not at the same deep discount as a traditional dropshipping model.

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As with all three dropshipping models, the potential for supplier errors are always something to consider. If the supplier doesn't fulfill the order, ultimately your brand is hurt.

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It is also possible to lose partnerships over time if the partnership wasn't mutually beneficial. Which may hurt brand building in the long term if businesses are unable to find new partners to supply the product.

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Large enterprise stores like Amazon and Walmart don't work well with this model either. Because the margin is lower, most of the margin would be eaten in fees by the big networks.

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Take Away

Collaborative dropshipping is great for any business looking to expand on their current offerings. Companies are able to feel assured that the products they are offering are to a high-quality level, and communication is easier being in the same country, and often the same time zone as the partner business. Niche brands can easily find other brands that work well with their niche, for example, women led companies can find and work with other women led companies. And often companies can get their original products on their new partners store as well, expanding reach and instantly gaining a new audience for their existing product.

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That being said, collaborative dropshipping is not a great idea for businesses who want really large profit margins, are looking for a way to make fast money from marking up products, or aren't fully committed to a long-term partnership with another store. This model isn't great for large enterprise stores like Amazon either.

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Conclusion

Dropshipping is not going away any time soon. As the market evolves, so will dropshipping techniques. Any brand looking to expand their product offerings, and increase their revenue should seriously consider adding one of these dropshipping models to their business. But they need to take their time considering what the end goal is for their business, and which model will take them there most effectively.

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Traditional Dropshipping - Great for new stores without an existing product

Reverse Dropshipping - Great for stores looking to unlock an untaped market

Collaborative Dropshipping - Great for stores looking to increase AOV, upsells, and new customers

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