Self-help gurus may say that your capacity for greatness is limited only by your capacity to imagine it. This may be true for people with self-esteem issues, but the hard fact for online retailers is that their capacity to make more money is dependent on the stock they have available.
And it isn't just the quantity that matters, but the right quantity for the right product. You can have stock with a lot of one product that doesn't sell well, which means a loss of capital for you, and not enough of what does sell well, which means a loss of potential online sales.
Despite these inventory woes, prospects for an online selling business remain promising. According to the Census Bureau, the online retail industry in the US grossed $227 billion in 2012. This is 5.2 percent of total retail sales for that year, a number that's been projected to grow by almost 17 percent every year thereafter.
In the first quarter of 2014, e-commerce sales were 13 percent higher than for the same period in 2013. Global e-commerce sales are following the same pattern.
To get in on these exponential growth patterns, you'll need to get your inventory under control in a hurry. Inventory management in general is a complicated undertaking, and it takes an experienced retailer to strike just the right balance to maximize sales and minimize exposure.
In most cases, painful lessons have to be learned over time. For start-up online retailers, this can be a daunting prospect. However, there may be a solution to problems associated with inventory and capital investment in expanding your online business: namely, dropshipping.
About 30 percent of all online retailers already use this model to improve their sales, including Amazon, which (as people often forget), started as a dropshipping company for books.
As explained in this article from RetailTouchPoints.com, it's always a good thing for an online retailer when they need less money to sell more. The traditional way to do this is to buy in bulk to get lower prices. Large retailers continue to do this today.
However, that means having more cash outlay at the start for higher profit per online sale at the end of the day. That is, presuming the items you bought in bulk will sell. With dropshipping, you minimize your exposure and inventory risk as a matter of course because you only pay for what you sell in real time.
Dropshipping also eliminates any investment in fulfillment, even if it is just for packaging materials and the space needed to store your inventory. You will also avoid problems such as damaged or stolen goods. You save on time and money when you use dropshipping to expand your retail business beyond what you can afford in inventory.
Suppliers are also on board with this scheme because it represents a significant portion of their business. According to this Census.gov report, more than 20 percent of merchant wholesalers' transactions were e-commerce.
Dropshipping allows you to offer a wider assortment of goods to your customers without increasing your inventory risk one iota. Customers prefer to buy everything they need in one place, even online. Taking this into account, if your retail business offers an extensive list of products consumers need, you're more likely to achieve greater sales online.
On the other hand, if you have a limited list of goods on your website, potential buyers will merely go somewhere else.
Prepare for Problems
However, dropshipping isn't entirely as carefree as it sounds. True, it can greatly expand your online offerings at no extra item cost, but it also means more work listing these products and keeping track of your suppliers' inventory to coordinate your own offerings.
After all, it wouldn't do to continue offering products that your supplier has run out of or discontinued. That would be selling your business online down the drain.
Fulfillment is a major factor in choosing your suppliers for dropshipping products, because as far as the customer is concerned, you are the supplier. If your customer does not receive their item on time (or at all), you'll be the one they blame. If your supplier ships the wrong item or a defective one, guess who has to soothe irate customers?
Choose only suppliers that are vetted and have a reputation for prompt and professional fulfillment, such as those found in our very own SaleHoo Directory.
Dropshipping also comes at a price. You won't get the same discounts as when you buy in bulk because your supplier will have added costs for processing, packaging, and shipping a buyer's order which they'll pass on to you. Your profit margin will be appreciably lower than if you sell stock you have on hand.
Get the Best of Both Worlds
There is no rule that says you can't be both a traditional retailer and a dropshipper. As we have suggested at the start, dropshipping can help expand your retail business. You can keep core products in your own inventory and dropship everything else. That way you can concentrate on your niche market without neglecting the opportunity to sell to the public.
Dropshipping is also a viable option to handle order overflows during peak seasons. For example, 18 percent of all online retailers used dropshipping during the holiday season for 2013.
The big question is: Is it a good idea to use dropshipping to expand your online business? Well, according to this Selz.com article, 71 percent of consumers believe they get a better bargain when they buy online. That's 71 percent of 191 million Americans who buy online, not including buyers outside the US. What do you think?
It is entirely up to you if you want to expand your business without increasing your capital investment through dropshipping. If you do decide it is for you, you can dictate what portion of your online selling business you want to dedicate to dropshipping.
Large retailers dropship about a quarter of their online orders; smaller business can give over up to 90 percent of the business to dropshipping. In any case, you will have more money coming in, and that is a sweet deal indeed.
How has dropshipping been included to augment your business model? Let's hear your stories in the comments!