Dropshipping is not something traditional retailers and e-commerce disruptors can afford to ignore.
Not long ago, shopping malls were the most disruptive force in retail, a time when speciality stores, department stores, and big box mass merchants proliferated and thrived across suburban America and replaced the majority of local retailers. Local retailers went from the backbone of the consumer experience to a relic of Americana. Fast forward to today, and malls are dying having been rapidly disrupted by e-commerce marketplaces. Amazon has disrupted mid to mass market retail; Wayfair, 1st Dibs, and Houzz have disrupted home goods; and Farfetch has disrupted luxury fashion.
The retail apocalypse is widely documented. The consensus is for traditional retailers to survive they will find ways to adapt in the age of e-commerce. The question is, what is the right e-commerce strategy?
While marketplaces created endless aisles of products for consumers to choose from, retailers treated their e-commerce businesses just like their physical stores – purchasing inventory wholesale; stocking merchandise in their own distribution center or third party warehouse; and shipping each e-commerce order direct to consumers.
Marketplaces are winning in part because they have no inventory risk nor warehousing constraints. Wayfair, for example, sells 14 million products, while the average traditional home goods retailer owns 15,000 products which they buy wholesale and stock in their warehouses. If you look deeper, what the marketplaces have done so effectively is they’ve removed the friction of scaling the products they offer to consumers and removed the risks associated with buying products wholesale and stocking them in their own warehouses.
For traditional retailers all hope is not lost, by embracing dropshipping, traditional retailers can fight back. With a successful dropship program, retailers can create new revenue streams in many cases exceeding $100 million in 18 to 24 months after launching a program. Dropshipping enables retailers to worry a lot less about inventory and warehousing, the most costly aspect of their business, and focus more on their consumers.
Welcome to the age of frictionless commerce.
We’ve Seen This Before: How Frictionless Disrupted Advertising
In broad terms, the digital transformation has been the most disruptive commercial force the world has ever seen. Over the past 40 years, some industries have felt the disruption more than others– but no two industries have felt the impact thus far quite as much as publishing and retail. On one hand, you can count on both of these industries to continue to exist in some form… pretty much always. People will always need and want to consume editorial content and information, just as there will always be a need for buying things.
But even so, the ‘old guard’ in each of these industries were unprepared for what was coming. Consider the retail apocalypse and how countless traditional brick-and-mortar merchants have been shuttered over the last couple of decades. Consumers understandably gravitated to the flexibility and the freedom of choice offered by e-commerce.
Similarly, newspaper industry revenue fell off a cliff due in large part to the way the advertising models changed. Print circulation was at its highest about 30 years ago, while advertising revenue for newspapers peaked in the early 2000s before dropping precipitously. It comes as a shock to no one that advertisements in the Sunday newspaper doesn’t get the same results that they once did.
But in an age when information is shared widely and freely, new advertising models offered publishers a lifeline. Digital ad tech companies like the Rubicon Project (which I helped guide from a few dozen employees to its IPO) changed the game. Frictionless advertising generated more revenue for publishers and gave them the opportunity to see better insights on the kind of consumers advertisers coveted. This gave them the intelligence to monetize content that is optimized for every visitor.
Automating online advertising created an environment that was truly ‘frictionless’: Visitors now see ads that offer them the best possible experience, while publishers enjoy a more lucrative advertising strategy: There was far more demand for every ad that publishers were selling. Technology made it easier for advertisers to reach the right consumer at the right time , which inherently made every ad impression more valuable.
Dropshipping Unlocks Frictionless Commerce Between Brands and Retailers
Dropshipping offers retailers the ability to market and sell products that are delivered to consumers directly from the manufacturer or brand. The retailer, in fact, never touches the product itself. Retailers can offer as many new products as they want. As noted above, Wayfair sells 14 million products from over 11,000 manufacturers and owns little to no inventory. If 20% of a traditional home goods retailer’s consumer reach overlaps with Wayfair, that would mean the retailer should carry 2.8 million products.
But for the retailer, this isn’t necessarily an invitation to sell anything it pleases. A retailer like Foot Locker would see negative results if it suddenly started selling kitchen appliances. On the other hand, if it offered its customers the option to purchase via dropshipping more active apparel, training gear, athleisure products, and potentially even equipment, it would likely be a billion dollar revenue stream and a boon to its business. It also gives the specialty retailer a massive platform through which it can form deeper relationships with existing and new customers.
We’re already seeing how retailers are adding a remarkable level of curation and depth to the products they offer. Companies like J. Crew are selling products that fit with their own brand and product offerings. There’s new value created for every customer who shops at J.Crew, fostering a greater sense of loyalty and doing so without taking on any inventory or warehousing risk. With literally zero new inventory, J.Crew, Target, and countless others are exponentially expanding the number of products they offer in a strategic way. The results speak for themselves: Some brands are racking in upwards of $90 million of new revenues–sometimes less than a year after going frictionless.
It’s easy to see how frictionless commerce is not just a great opportunity for retailers. Deciding whether or not to do so or not will probably become tantamount to choosing to survive or perish.