Dropshipping has been one of the most lucrative business practices in recent years, and this trend is growing further. Dropshipping is a retail approach in which a vendor provides products to the buyers by being a middleman between the wholesaler and a client (Kim, Montreuil, & Klibi, 2022).
Since the retailer is not required to disclose engaging in such a model, it allows many companies to join the industry and popularize their services among diverse markets.
Nonetheless, even this approach faces multiple challenges for beginners and long-term players. The active yet fluctuating environment, shipping issues, and constant competitiveness create difficulties for the firms that may adversely affect customer satisfaction and business stability.
Digital Revolution: A Contributing Factor
The growth of information technology and digital commerce became the triggering factor for the dropshipping business model. The COVID-19 pandemic showed the potential of e-commerce and its possible ability to maintain high selling rates without the need for customers to visit physical stores.
Such cases fostered many retailers to seek a dropshipping model, essentially abandoning storage and even production costs. At the same time, coronavirus affected multiple supply chains, indicating that digital business is dependent on channels that are not necessarily available.
However, the diversification of current chains and the increase in online stores demonstrates the further growth of e-commerce. With globalization and the ability of businesses to reach across different countries, the need for dropshipping will grow.
No-Inventory Benefit
Since a wholesaler is responsible for providing the products for the buyer, the retailer has significant benefits that enable them to operate faster and at a lower cost.
Since dropshipping does not involve the company having any inventory, it serves two purposes at the same time: it decreases investment fees and expenditures on physical locations (G. Singh, Kaur, & A. Singh, 2018). Occasionally, retailers choose to provide physical stores to display some of their products to attract customers, but the main interactions occur in the digital format.
Similarly, the companies face fewer risks because they do not invest in product production that may not attract the desired demand among the target market. It significantly reduces the cost of business conduct and makes it easier for companies to experiment with different suppliers.
Low Entry Market
The low entry barriers enable most businesses to emerge without additional resources. In spite of the potential disadvantages of this factor, it leads to the diversification of the market and may serve as a positive economic supporter of the state’s economy.
Even firms with a small budget and scale have a chance to participate in the selling process without too much risk because the other enterprises may use the same suppliers, distribution channels, and pricing strategies (Winiarski & Marcinkowski, 2020).
Nonetheless, dropshipping allows the firms to focus on the service and experience they provide to the client, combined with the different products from several wholesalers, where they may put their primary brand value.
Accessible Business Model
The ease of building and starting one’s business with the application of dropshipping attracts beginning business owners due to the simplicity of initiating a project without significant resource exploitation.
Because a significant share of customer service depends on suppliers, not retailers, the primary objective for an emerging brand is to find the most profitable products, define one’s target market, and ensure an effective contract with the suppliers.
Due to the increase in popularity of the smaller shops with the products aimed at specific customer groups, the market observed a dramatic growth of the online shops adapting the dropshipping model: “If the E-commerce market is compared across the globe of any country we are hardly able to see any decline in its growth. As the number of users over the Internet is increasing day by day with
at the same pace the market for E-commerce is increasing” (G. Singh, Kaur, & A. Singh, 2018, p. 7). Even if not all brands are able to deliver a high-quality service, they often have an even level with the other rivals.
High-Risk Model
Simultaneously with the increase in dropshipping companies, both customers and companies faced a developing challenge of unfair trade or even scamming. Because the existing legal framework does not require the brands to disclose their dropshipping contracts and the sources of their products, it creates an unequal price distribution among different companies.
The lack of control of the prices in small-scale businesses when they are engaged in the following strategy gives them a possibility to add significant value to the fee for the client compared with the base price without the buyers’ awareness about it.
At the same time, dropshipping became among the starting fraud schemes for the beginning Internet criminals. For example, some “retailers” lie to their clients about the product and never deliver it.
Alternatively, access to a network of suppliers is sold to the starting business people without any actual benefit. Dropshipping also became associated with scam models that offer people to gain money fast, and this phenomenon is spreading (Collier, 2022). Therefore, the existing regulations make dropshipping a potentially dangerous retail model.
Competition Increases
Although low level entry is a beneficial element of dropshipping, it causes high competition that many beginning brands are currently struggling with.
Because of the dependence on the wholesalers that will inherently propose similar products in every business field, many businesses will have few options to distinguish themselves from their rivals (Winiarski & Marcinkowski, 2020).
Furthermore, dropshipping also causes competition for the suppliers: each of them has a limited supply of goods, and securing a particular number guaranteed to a brand can be challenging, especially for emerging firms.
Even supply chains will be interesting for most brands offering comparable goods. That is why if the company stays unable to secure a needed supply based on its clients’ demands or achieve brand recognition, it may fail.
Lack of Control
Lastly, dropshipping’s primary challenge today stems from the nature of the retail strategy itself: the firm has little to no control over the quality, delivery deadlines, and even the availability of the products. Because the wholesaler is responsible for delivering the goods to the buyers, a retailer cannot control whether the product they promised will deliver the promised goods or not (Kim, Montreuil, & Klibi, 2022).
Even if the customers complain about the quality and receive a substitute, the initial impression can already damage the relationship with some buyers, hurting the firm’s reputation and customer loyalty. Currently, the inability to ensure that the supply chain will function properly and that the producer will have the desired supply of goods presents a noticeable challenge for this business model.
Future Directions
In the future, dropshipping may face additional challenges due to the growing resistance to globalization, disruption of supply chains, and growing legal and technological threats to e-commerce. The government should focus on creating a legal framework that will account for the potential problems and manage the existing fraud in the industry.
The retailers should concentrate on addressing the underlying supply chain problems and diversification among the wholesalers. Even with the growing challenges of a fluctuating Internet environment, using its advantages and security measures may help prevent brands from collapsing. The future dropshipping approach may need to incorporate online-and-offline store combinations more to increase business reliability and attract more customers.
References
Collier, B. (2022). A “sophisticated attack”? Innovation, technical sophistication, and creativity in the cybercrime ecosystem. WEIS.
Kim, N., Montreuil, B., & Klibi, W. (2022). Inventory availability commitment under uncertainty in a dropshipping supply chain. European Journal of Operational Research. https://doi.org/10.1016/j.ejor.2022.02.007
Singh, G., Kaur, H., & Singh, A. (2018). Dropshipping in E-Commerce: A Perspective. ICEME. https://doi.org/10.1145/3271972.3271993
Winiarski, J., & Marcinkowski, B. (2020). E-commerce websites and the phenomenon of dropshipping: Evaluation criteria and model. European, Mediterranean, and Middle Eastern Conference on Information Systems. https://doi.org/10.1007/978-3-030-63396-7_19
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