dropshipping-business-model

Dropshipping Business Model In A Nutshell

Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

Understanding the Concept of Dropshipping

Dropshipping in simple terms is getting supplies from a third party, listing the products on your website without keeping products in stock. When you get the order from a customer, the sale is passed to the third-party supplier, who then ships the order to the customer.

Dropshipping appears for many as an easy way to make money because you aren’t faced with the problem of manufacturing and warehousing. However, in reality, dropshipping is not a way to make easy money; when you factor in all the problems, obstacles, difficulty in quality control, and the potential negative ratings it could give your website, it’s far from easy.

Benefits of Dropshipping

Dropshipping has a few benefits, which makes it ideal for consideration in certain situations

  • Reduces startup risks: Your market survey as a startup may not be accurate, so actively spending on manufacturing these products, which customers do not really fancy, will make it difficult to recoup capital and profit early enough, which can be frustrating. Dropshipping will absolve you from the costs of production, so if customers do not like it, you may decide against selling it in the future.
  • Lowers production costs: Since you aren’t involved in manufacturing, your costs are very minimal
  • Eliminates warehousing and logistics costs: The third party supplier usually handles warehousing and may deliver to you for shipping or handle shipping as well. But generally, the storage cost is reduced.
  • Flexibility: The low risk involved in product selection offers fresh E-commerce businesses flexibility in product selection.
  • Protection from overselling: The market and demand may fluctuate in ways that you don’t even envisage. Rather than overstocking to meet demands that aren’t likely to come, having a dropshipping supplier as a backup saves you money without losing those uncertain sales.
  • Reducing Costs Even When Expanding Business Scope: One unavoidable effect of an expanded business is expensive shipping. The farther out you get from your region, the more shipping fees you’ll incur. Exorbitant shipping fee is a turn off for consumers. Dropshipping can be the perfect solution for some problematic locations that fall outside your profitable regions. Especially when you think that the storage costs in setting up a new warehouse isn’t financially viable. You can also use dropshipping to determine the market demand in a particular region, and if it’s high enough, you could set up a warehouse there.
  • Better Handling Of High-maintenance products: Some products cost more money and facilities to stock and ship than others. It is usually better to Dropship these products than to store them yourself, to save cost.

Examples of High maintenance products are large products that take a lot of space, heavy products that are difficult to move from place to place, Fragile products that must not be broken or destroyed, valuable products that their loss could lead to a huge debt, and products with special conditions (i.e., some food items that must be kept frozen)

Important Factors for Dropshipping

  1. Research what products would fit well with your strategy, market, and customer base.
  2. Research how your competitors are selling the product, namely pricing.
  3. Find the best supplier
  4. Finalize a fulfillment process that works for both of you and incorporate it into your system. Depending on your sales management software, this could be easy or require ironing out some wrinkles.
  5. List and promote your new product. Be sure to specify any special conditions, such as changes in shipping times or locations.

Connected Business Concepts

Franchising Business Models

franchising
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).

Total cost of Ownership

total-cost-of-ownership
The total cost of ownership (TCO) estimates the total cost associated with purchasing and operating an asset. TCO is a more comprehensive way to understand the real cost of ownership. Thus, how much it really costs in the long-term to own something, with all its related direct and indirect purchase costs.

Fractional Ownership

fractional-ownership
Fractional ownership is percentage ownership in an asset where individual shareholders share the benefits in the asset. These benefits may include income sharing, priority access, reduced costs, or other usage rights. Fractional ownership occurs when an individual splits the costs of an asset with others while retaining a portion of the ownership and usage rights to the asset. This makes fractional ownership ideal for expensive items such as vacation homes, yachts, sports cars, high-end motor homes, and private jets.

Bundling

bundling
Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Unbundling

unbundling
Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

Disruptive Business Models

disruptive-business-models
As pointed out in the book “Unlocking The Value Chain” by Thales Teixeira, business model disruption has followed three waves: unbundling (1994-99), disintermediation (2000-05), and decoupling (2005-onward). Today what’s disrupting the business world is the wave of decoupling. That consists in breaking the customer value chains by identifying valuable activities that can be performed by the decoupler, which can capture a good chunk of the business value from incumbent companies.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Innovation Loop

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Business Scaling

business-scaling
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Four-Step Innovation Process

four-step-innovation-process
A four-step innovation process is a simple tool that businesses can use to drive consistent innovation. The four-step innovation process was created by David Weiss and Claude Legrand as a means of encouraging sustainable innovation within an organization. The process helps businesses solve complex problems with creative ideas instead of relying on low-impact, quick-fix solutions.

History of Innovation

innovation
Innovation in the modern sense is about coming up with solutions to defined or not defined problems that can create a new world. Breakthrough innovations might try to solve in a whole new way, well-defined problems. Business innovation might start by finding solutions to well-defined problems by continuously improving on them.

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