As the number of online merchants continues to grow, so too does the number of dropship programs looking to partner with them. But how do merchants decide which dropship programs to leverage?
From our experience and research, subscription fees are one of the most important factors merchants consider when looking at dropship programs. This doesn’t just refer to whether or not your subscription fees are too high – it also includes how your subscription fees can attract the wrong merchants.
Below is some of the feedback we’ve heard from merchants who dropship.
“I’m less likely to join a dropship program if there is a subscription fee. How am I supposed to get my new business off the ground if I’m drowning in subscription fees?”
“I only want to pay a fixed subscription fee. If I make a lot of sales, charging me commission feels like a punishment for scaling.”
“Why would I use a dropshipping app that has a subscription fee? There are plenty available that are free.”
Understanding these frustrations and how to handle them are key to making your dropship program successful.
Matching subscription models to merchant usage
It’s important to determine which subscription model aligns with your business. In this article, we’ll explore the two most popular subscription models in the dropship community and the pros/cons of each.
Recurring subscription charges
With recurring subscription charges, you charge a merchant on a monthly or annual basis for the services your dropship program provides.
This model is popular among dropship programs and ecommerce software in general. Shopify reports over 90% of paid apps on their app store use a recurring subscription charge.
F13 Works’ dropship automation software supports both monthly and annual subscription models for suppliers interested in adopting this subscription model for their merchants.
Example business model
Many dropship programs leverage this subscription model with pricing tiers. Each tier will offer more features or benefits for the merchant in exchange for a higher subscription price.
Let’s use the example of a hypothetical app called “AliExpress Dropship Solution” that offers an automated dropship program to online merchants. It carries thousands of SKUs from AliExpress that are available to merchants who join the program.
In order to increase the app’s merchant base, we’ll adopt a tiered subscription model.
- First tier: Marketed as a ‘free’ plan. Targeted towards prospective merchants who wish to test out your dropship program before making a commitment. This tier may offer only a portion of the full dropship catalog.
- Second tier: Marketed towards small to medium sized businesses who generate hundreds of orders on a monthly basis. This tier may offer additional dropship products and other services like a marketing consultation call.
- Third tier: Marketed towards high-volume merchants generating thousands of orders a day. This tier will offer the full dropship catalog and potentially a lower wholesale price for merchants.
Usage based charges
Another popular subscription model is a usage based charge. In this model, merchants are charged a commission for every order processed through your dropship program. You’ll often see this model described as a ‘dropship fee’ that is added to every order.
This model can be used in conjunction with a recurring subscription model, but it’s important to make it clear with merchants what they’re being charged and when they’ll be charged.
In the image below, you’ll notice the usage based charge for this dropship program is a 2.5% transaction fee on each order.
If this model suits your dropship program, F13 Works offers a robust dropship automation solution that supports a usage based subscription model.
Example business model
Continuing with the AliExpress dropship app, imagine we’ve determined that merchants under our ‘free’ tier are taking up too much time from the support team. However, we don’t want to eliminate support for these merchants altogether as many do upgrade to higher subscription tiers eventually.
Instead, what we can do is charge a dropship fee on orders for ‘free’ tier merchants. For example, a $2 dropship fee is applied to every order if the merchant is currently on the ‘free’ tier.
This allows merchants to continue receiving dedicated support while keeping the lowest tier cost effective for them. Removing the dropship fee for second and third tier subscribers would also add additional incentive for merchants to upgrade.
Deciding which models fits your dropship program
Both subscription models offer advantages and disadvantages to suppliers running a dropship program, but having your ideal dropship merchant in mind can help ease the decision process.
In our experience, the recurring subscription model offers both suppliers and merchants flexibility. If subscription tiers are adopted, merchants with low order volume are able to select a cost-effective tier that allows them to grow. For suppliers, tiered, recurring subscriptions help allocate resources and support while encouraging merchants to grow long term with the program.
The downside is that oftentimes low-priced dropshipping programs attract merchants with little potential for success. These merchants can also become a timesuck for your support team if they aren’t as tech-savvy or experienced in retail as high-volume merchants typically are.
When pricing your subscriptions, consider a price that will drive away tire-kickers while attracting merchants who see the value in your program.
The usage based subscription model can work well for suppliers as it helps ensure you’re covering the costs of processing and fulfilling dropship orders. From a merchant perspective, this model is appealing to low-volume merchants who may not yet have the resources to pay large subscription fees.
This model offers them room to grow in your program.
Unfortunately, usage based subscription models are often unappealing to high-volume merchants. Let’s take a transaction fee for example. To a smaller merchant, a 2.5% transaction fee may seem fair if they aren’t generating a lot of sales. But high-volume merchants typically avoid usage based fees as it eats away at their profit margins, which can slow their ability to scale.
Take time to consider the right subscription model for your dropship program. If merchants generating thousands of orders a day are your target, consider a fixed, recurring subscription model. Some suppliers may not be ready for that type of volume from the start, so a usage based subscription model may be a more suitable option.
Have more questions about which subscription model fits your dropship program best?
Schedule a call with our dropship experts today!