Emerging Drop-Shipping Challenges Necessitate More Strategic Ecommerce Branding
There are some ominous predictions about the state of the industry, but it is as strong as ever. However, branding strategies need to evolve with the market.
Dropshipping is a fairly new business concept that is evolving rapidly. The basic premise was developed by mail order businesses in the mid-20th century. However, modern dropshipping companies didn’t emerge until around a decade ago.
Aspiring dropshipping companies should not cave to pessimism. There are some ominous predictions about the state of the industry, but it is as strong as ever. However, branding strategies need to evolve with the market.
State of Modern Dropshipping Industry Practices
The dropshipping industry is facing a period of uncertainty. A number of prominent digital marketing experts that used to praise the concept of dropshipping have started becoming more pessimistic. Some of them have started warning that the industry is gradually dying out. Steve Chou, author of the blog My Wife Quit Her Job, used to be a major proponent of dropshipping. He recently became more pessimistic after confirming a couple major ecommerce brands discontinued dropshipping opportunities.
Claims about the demise of dropshipping are vastly overstated. New data shows that the dropshiping industry is actually growing about as fast as ever. Cloud Ways analyzed interesting dropshipping with Google trends and showed that the number of people searching for terms including dropshipping increased about 1,000% over the past five years in the United States alone. This analysis needs to be taken with a small grain of salt, because the broad search term they monitored is stripped of context. It is difficult to determine whether people are actively looking to make dropshipping purchases or merely inquiring market analysts trying to get a pulse on the state of the industry. However, it is clear that dropshipping is at the front of the minds of many Americans.
The future of dropshipping is even more encouraging in emerging markets. A report by Grandview Research shows the global dropshipping market is growing at a rate of 28.8% a year between 2019 and 2025. In India, the market is growing by 51% a year, which indicates that there are many opportunities in the Asia Pacific region for entrepreneurs looking to expand abroad.
At first glance, this data disputes any claim that it is impossible to thrive in this new, vibrant industry. However, aggregate statistics about growth of the industry as a whole do not invalidate concerns many entrepreneurs have raised.
The industry may be growing, but it is also becoming increasingly competitive. Intense competition is largely driven by the very limited barriers to entry.
Growing competition is particularly concerning, since operating margins have not increased in recent years. Big Commerce reports that the average operating margin for dropshipping is less than 20%, which is less than half that of most companies that sell physical goods.
The low gross margins are a very real concern for dropshipping suppliers that have significant operating costs. One of the biggest costs they face is digital advertising. Advertising costs with Google, Facebook and other advertising networks have risen significantly in recent years. This is one of the many factors that is making it difficult for new dropshipping companies to enter the industry and existing ones to stay ahead of the curve. They also have to cope with changing customer expectations, which means a greater emphasis needs to be placed on UX optimization.
Sound branding strategies are crucial for dropshipping and e-commerce marketers in 2020
The dropshipping industry certainly is not dying. It is changing, though.
In 2010, I spoke with an online entrepreneur that ran a dropshipping business. He had a rather simple, yet effective funnel. He would run PPC ads to his website and get customers to place orders on his site.
His website at the time was very generic. Conversion rates were decent, but not exceptional.
I have not spoken with him in several years. However, I would wager that he had to modernize his business model, because that approach simply doesn’t work anymore. PPC costs have more than tripled in that time period, while the margins on products sold through dropshipping platforms have barely budged.
Few customers would want to place an order through the types of websites that he used to use. His websites were not even optimized for mobile customers, which would be a serious problem today. Most online buyers have made it clear that they would not return to a website that doesn’t provide a good customer experience.
This means that dropshipping companies need to make branding one of their top priorities in the coming year. They need to focus on everything from their packaging strategy to the quality of their website. This is the only way that they can hope to maintain a competitive edge. Here are some reasons that building a strong brand is essential in this business.
Branding is the key to generating strong organic traffic
PPC and Facebook advertising can still be an effective way to drum up business for a dropshipping company. However, rising costs and stricter policies have imposed a new burden on entrepreneurs following this approach. They are going to have difficulty relying exclusively on paid traffic sources. Therefore, dropshipping companies are going to need to use PPC in conjunction with organic marketing strategies.
Generating organic traffic requires a strong brand these days. There are several major reasons for this. The truth is that companies need trust to generate online traction these days. Trust only comes with strong visibility, which takes time to develop.
A strong brand helps lift conversion rates
It is not impossible to get customers to make a purchase from a company during the first interaction. However, it is considerably more difficult than it would be for a company that the customer has already heard of before.
The average customer will not purchase from a company until they have heard about it seven times. If you are running paid traffic to reach people that never heard of your brand before, then you are going to have a more difficult time maintaining profitability.
Online advertising makes a lot more sense for dropshipping companies that have invested the resources necessary to secure a strong brand. Here are a couple of examples that can help illustrate this point:
- A brand-new dropshipping company starts running Google Ads to promote new products. The conversion rate is 2%. The CPC is one dollar and the margin on every sale is $25. This company is losing $25 on every sale, before even factoring for web hosting and other small operating costs.
- A similar company has worked extensively to build its brand promoting the same products. While it is also generating some organic traffic from Google and social media, it is also scaling its marketing strategy with Google ads. The conversion rate on PPC traffic is 10%. This means that the marginal profit on every sale is $15.
The two scenarios listed above show why PPC marketing needs to be complemented with a strong branding strategy. A dropshipping company with an excellent brand image can make a 60% profit margin, instead of a 40% loss.
A strong brand image is vital to modern SEO
A few years ago, dropshipping companies could use relatively simple, yet effective SEO strategies. They were able to rely on rather mundane linkbuilding strategies, such as syndicating articles to article directories like Ezine Articles or commenting on various blogs. These strategies could get their sites ranking well within three months.
These antiquated offsite SEO strategies have all but died out. Google wiped out a lot of sites that allowed companies to manipulate their page rank by building links this way. If you look at old lists of article directories that people used to submit content to, you will see that almost all of them are now defunct. The same can be said about the majority of general link directories. Most of the higher-quality sites have started adding the “nofollow” tag to prevent unethical link building practices.
Dropshipping companies that are trying to scale their presents on google have to up the ante to earn the links they need to boost their SERPs. This is difficult if they aren’t developing a strong brand at the same time.
Major publishers and other branding partners are going to be reluctant to offer back links to companies that have not invested in their branding. Companies with generic, keywords stuffed domain names and thin content won’t get the trust they need to earn quality back links. They also won’t partner with companies that are treating their partnerships purely as link building opportunities, instead of holistic branding partnerships.
Branding is Vital to the Modern Dropshipping Business
The dropshipping industry is not dying out. In fact, it is as strong and vibrant as ever.
However, dropshipping companies are going to need to change their practices. There is little room for companies that follow low effort strategies these days. They are going to need to invest the time and resources to build a strong brand.
New dropshippers may need more time to create profitable business models these days. However, they are going to find that the investment is well worth it, since they should find greater stability than ever before after securing a strong brand image.