Is Dropshipping Worth It? What You Need To Know

Is Dropshipping Still Worth It?

Yes, dropshipping is worth it because it drives revenue growth and increases profitability for retailers and vendors. But in today’s challenging times, businesses need a strong, multi-pronged strategy that lowers risks and works for all parties involved. 

As the Merchandising and Dropship Strategy Lead at fabric, I often talk to retailers and suppliers about the pros and cons of dropshipping. More specifically, companies want to know if dropshipping is good for business, especially with all the uncertainty surrounding the economy in 2023.

But even when times are tough, a successful dropshipping program can produce great results. It can allow retail businesses to:

• Lower costs
• Reduce inventory risks
• Increase product and or category offerings
• Create new revenue streams
• Test new product categories
• Reduce fulfillment responsibilities
• Free up resources
• And scale operations

Suppliers and vendors can also access new markets, increase their customer bases, gain better flexibility to allocate inventory and generate more revenue.

In fact, dropshipping is becoming more popular because of its strong potential to boost top and bottom lines. The dropshipping market is expected to grow at a CAGR of 32% and reach a value of $476.1 billion globally by 2026. That’s an increase of $347.5 billion from 2020.

Why dropshipping is profitable and attractive

Customer expectations and shopping habits are changing. In response, retail companies are transforming how they operate and fulfill orders. Dropshipping is great for altering the value chain and streamlining logistics for retailers and vendors.

It also lets retailers and brands scale without a lot of investment. Rather than maintaining and processing inventory (for retailers) or depending on a cycle of large one-off orders (for vendors), businesses may use dropshipping to diversify product lines and partnerships.

But dropshipping isn’t without its challenges, nor does it guarantee increased growth and profitability. Retailers and vendors must carefully develop a strategy for dropshipping before diving in. The tips below can help streamline the process to determine if — and how — dropshipping is worth it for your business.

What Makes Dropshipping Worth It?

The tumultuous years of 2020, 2021, and 2022 are finally behind us. Is dropshipping still profitable and worth it in today’s marketplace? The answer is a resounding yes, but businesses must overcome the complexities and difficulties of dropshipping as they mature and evolve.

Given the increase in market size, it’s not surprising that dropshipping is becoming more popular. It makes for a lucrative and viable alternative or supplement to the traditional retail model and does not have the same capital expense. According to Raj De Datta, CEO of Bloomreach, the traditional “burnt turkey” retail model is not going to work anymore.

Changes to the retail calendar have also created different approaches to fulfillment, inventory, and product allocation. The changes in retail also contribute to why retailers like Crate & Barrel have embraced dropshipping as a strategic retail expansion model. They launched a highly-curated dropshipping marketplace in 2016.

Other retailers have entered the dropshipping space too, which is now dominated by five major product categories:

• Toys, hobbies, and DIY
• Furniture and appliances
• Fashion
• Food and beauty
• Electronics and media

In 2019, at least 40% of retailers used dropshipping, with many saying they want to compete with Amazon. Some retailers and vendors have even moved to a marketplace model, which combines the benefits of dropshipping with the reach and versatility of a retail marketplace.

By tapping into a growing market, shifting away from the traditional retail model, launching a highly-curated dropshipping marketplace, and expanding product assortment into high-demand categories, retailers can still reap the benefits of dropshipping in 2023. However, there are also some potential downsides that companies should be aware of.

What Is the Downside of Dropshipping?

Dropshipping, while it has many benefits, can also have downsides. For example, ceding control of inventory management and order fulfillment to vendors and suppliers can potentially lead to issues such as stockouts, shipping delays, and even product quality issues.

That’s why creating a tailor-made dropshipping vendor agreement is a critical step to starting a dropshipping business. This legally binding contract covers the financial terms of the arrangement and it establishes the business relationship conditions and details each party’s contractual obligations. At a minimum, the policies and procedures should cover:

• How orders are fulfilled
• If there are special packaging requirements
• How returns are handled
• What the testing requirements for products are
• Rules regarding cost breaks and allowances
• Rules for inventory management and fulfillment

Another potential downside is the financial viability of dropshipping. While it’s true that retailers and brands can shift the costs of storing, managing, and distributing inventory to suppliers, there are many other costs to consider that may affect a company’s decision to dropship.

Software, personnel, onboarding, and the chosen cost/compensation model will determine the financial feasibility of launching a program. Developing a financial plan and incorporating the numbers into your vendor agreement will help lay out the financial terms of the dropshipping partnerships.

To learn more, check out these guides:

• How To Dropship: A Step-by-Step Guide for Mid-Market Brands
• How To Start An Effective Dropshipping Business

How Much Profit Does Dropshipping Make On Average?

Profits from dropshipping depend on many factors and can vary widely. No two businesses are alike, so it is very difficult to estimate how much profit a dropshipping business can make without information about a company’s specific operations.

With that being said, our data indicates that there is a range of gross margins that retailers can achieve for different industries. Gross margin is the difference between sales and cost of goods sold (COGS), divided by revenue, and it is one way to gauge the potential profitability of a dropshipping program.

Here are some estimates of the gross margins for some common dropshipping categories:

• Home decor, lighting = ~50%-60%
• Furniture = ~45%-50%
• Toy and Baby = ~40%-50%
• Fashion = ~30%-50%
• Electronics = ~20%

Is Dropshipping Worth It For Retailers?

Many retailers find dropshipping a worthy endeavor — it’s not a method specific to small businesses or large enterprises. What matters most is a retailer’s approach to and purpose for dropshipping.

In many cases, retailers can excel via dropshipping by focusing on curating their product assortment vs. offering everything but the kitchen sink. To accomplish this, retailers may want to consider emulating aspects of brands such as The Citizenry, which carefully and purposely curates its product assortment based on country of origin, style, and quality.

Retailers can also cultivate an expansive vendor network. This is the path taken by Overstock.com, which leverages relations with more than 3,000 vendors to dropship about 90% of its products.

Dropshipping doesn’t need to make up the entirety of a retailer’s business model, either. Consider Joybird, which used dropshipping to pair its bread and butter — the design, manufacturing, and distribution of its own branded products — with complementary products that fulfilled customers’ preferred aesthetic and needs.

This mimics the path taken by retailers, such as Foot Locker, Nike, Nordstrom, Caraway and Gravity Products. Reinforcing the traditional inventory and fulfillment model with the expansive assortment provided by dropshipping can eliminate some of the risks from stocking inventory while maximizing revenue potential.

Tips for making dropshipping profitable for retailers

Maximize your dropshipping revenue by implementing the following tips for your brand.

• Identify your partners: Partner with vendors and suppliers that fit into, complement, and expand your product assortment, as exemplified by retailers like Crate & Barrel and Joybird.
• Attend trade shows: Strive to attend a variety of trade shows — big and small — and make an effort to visit areas off the beaten path, including temporary booths or areas dedicated to new or emerging suppliers.
• Vet vendors and their products in person: Meet with potential vendors and have personalized conversations with them to understand their business, products, market, and fulfillment capabilities.
• Partner with a sourcing platform or sourcing agent: Maximize your time and investment by partnering with a platform like fabric Dropship that can help you identify and connect with relevant vendors, speeding up your growth and minimizing leg work.

Is Dropshipping Worth It For Vendors or Suppliers?

Dropshipping isn’t just a benefit to retailers. Vendors are in the sales business as well, even if their buyers are more often brands rather than end consumers. Naturally, this echoes many of the same challenges and difficulties faced by retailers in that vendors must maintain inventory, fulfill orders, and market their products.

But the limitations of each can result in vendors sitting on inventory — which affects their spoilage rate — and makes it difficult for vendors to respond to consumer trends or introduce new products to their assortment.

Dropshipping can help vendors mitigate these risks. By developing strong dropshipping relationships with retailers, vendors can move more inventory faster and test new products since multiple retailers are selling the vendor’s products, rather than the vendor relying on large-scale orders from a limited number of retailers. In this way, vendors fulfill a third-party logistics (3PL) role.

Cuisinart implemented this model through a multi-pronged approach. It sells its products directly to consumers through its e-commerce site, makes its products available to retailers via dropshipping, and lists its products on marketplaces like Amazon and Walmart.

Other vendors have fused dropshipping and marketplaces, too. RevolutionParts, a vendor that sells OEM vehicle parts from its network of dealers and manufacturers, is partnering with Walmart to begin dropshipping products through the retailer’s marketplace, expanding its base to reach more customers — or those already comfortable with Walmart’s existing marketplace.

Additionally, successful logistics companies are interested in expanding their fulfillment capabilities and reach by acquiring vendors with established dropshipping networks and processes, as was the case with Amware Fulfillment’s early 2021 acquisition of Moulton Logistics.

Tips for making dropshipping profitable for vendors

Dropshipping is highly successful for vendors that leverage their existing capabilities and fulfillment networks by following these tips.

• Partner with retailers who are already dropshipping or have an established customer base: Building a relationship with a retailer already familiar with dropshipping or that has an established e-commerce customer base lets you move inventory faster, increasing profitability and reducing the likelihood of sitting on dead stock.
• Use dropshipping to experiment: Dropshipping doesn’t require a large amount of inventory, so it’s an excellent avenue to test new categories and styles of products. Leverage your connections with retailers to introduce and gauge interest in new products without requiring significant amounts of inventory.
• Get listed on a sourcing platform or work with sourcing agents: Help retailers discover your business by adding it to relevant sourcing platforms and databases and connecting with sourcing agents.
• Mix selling capabilities to expand your reach and customer profile: Maximize your dropshipping profitability by exploring D2C, working with dropshipping retailers, and listing products on a marketplace platform like fabric Dropship.

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