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Dropshipping’s Golden Era is Just Beginning

In technology, what’s old sometimes becomes new again as innovation breathes life into old business models. At Perk Hero, we watch the market for business strategies that mobile computing could revitalize.

We think drop shipping is a good example of a business model that could use some mobile love. Also known as retail arbitrage, it lets businesses sell online without carrying inventory.

In this model, a retailer creates an eCommerce site that offers products in a certain niche (say, upmarket kitchen goods). Rather than ordering the products themselves and keeping them as inventory, they forward orders from their customers to the wholesaler. The wholesaler then ships directly to the customer on the retailer’s behalf, handling the packaging and logistics.

Drop shipping eliminates the retailer’s inventory risk. They needn’t pay for expensive warehouse facilities or manage the staff to pack and ship the products.

Most importantly, they don’t have to sink investment into products up front, so they minimize their up-front capital expenditure. It also lets them offer time-critical products that quickly fall out of fashion, such as certain types of clothing or electronics.

The retailer puts the time and energy they save on logistics into finding new products to sell, developing their online property, and building a niche. They become adept at marketing, building trust in their brand and creating online followings through social media.

A dropshipping frenzy

Drop shipping was hot five or ten years ago, driven by entrepreneurial gurus like Tim Ferris. A forest of drop shippers grew, attaching themselves to online marketplaces with huge selling power.

With 38% of the US online retail market, Amazon is a go-to property for many. The company insists that the seller handles all product returns and acts as the ‘seller of record’, only allowing their own name on packing slips. In practice, this means many online drop shippers use Amazon’s Fulfilled By Amazon (FBA) fulfilment service to manage product logistics. The wholesaler ships the products to an FBA center, which packages it for the Amazon seller and sends it on to the customer.

Shopify is another company that gives small companies and solopreneurs a chance to create their own drop shipping operations, allowing them to craft their own websites and then hosting them on their behalf.

Dropshipping challenges

There are several dangers for drop shippers who tie themselves to large marketplaces. First, the marketplace can become too powerful, developing predatory practices and mistreating its sellers. This is why Amazon sellers privately complain that the site squeezes them more each year.

There can also simply be too much competition. Analysts fret that Shopify’s marketplace is disproportionately crowded with retail arbitrage sellers all doing the same thing rather than merchants producing their own goods. A whole ecosystem has built up around this model, with tools like Oberlo integrating directly into your Shopify store and offering to find products in minutes.

The other danger in relying exclusively on older, larger marketplaces is that they were developed long before mobile computing became mainstream. At best, they might allow sellers to create responsive websites that look decent on small screens. At worst, they rely on arcane apps that play catch-up with mobile platforms.

Time for a reboot

This doesn’t mean that dropshipping is over. In fact, we see opportunities in enabling opportunities for drop shippers on smaller mobile-native marketplace platforms that were developed with accessibility, location-aware services, and gamification in mind.

We think the mobile drop shipping model can benefit two kinds of seller. The first is the existing online Amazon, Ebay, or Shopify-based seller who wants an omnichannel sales strategy. They’re looking for access to new markets and demographics through smaller, less saturated, mobile-first marketplaces.

The other is the new seller that hasn’t yet dabbled in the dropshipping market. This may be a solopreneur with an interesting product niche, or a retailer that has only sold through a bricks and mortar store. There’s an opportunity for these sellers to establish themselves on mobile-native platforms first.

These platforms offer several benefits for drop shippers. Some, like Perk Hero, have a more intimate relationship with buyers than larger marketplaces do because they already manage their purchases from physical stores. They understand not just what kinds of things customers buy, but which stores they visit and when.

Second, as mobile apps they often target specific demographics. That gives drop shippers a laser-like focus on a particular target market which is harder to achieve on larger marketplace sites.

Third, apps like ours also offer a local focus, connecting sellers with customers in a specific geographical area. That promotes a sense of community and also helps sellers plug into local trends and events, helping to accelerate sales and build a loyal customer base.