What is Drop Shipping? And What are the Benefits?
Article

What is Drop Shipping? And What are the Benefits?

As online shopping continues to grow in popularity, entrepreneurs are increasingly looking to ecommerce to create a high profit, low investment businesses. Which is where drop shipping comes into play. 

What is Drop Shipping?

Wikipedia defines drop shipping as, “a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly”.

The main concept is that you’re selling products you don’t actually own. It means that you can set up an online store, include a mark-up price, and sell products to clients and forward the order to your supplier. They in return, ship the product to your customer on behalf of your company. There are many benefits and drawbacks to this business model, here are just a few:

Benefits of Drop Shipping

Low Investment. One of the biggest attractions to drop shipping is that it’s possible to launch a store without having to invest thousands of dollars in inventory in advance. Physical storefronts need large amounts of money before even opening their doors to purchase inventory, however with the drop shipping method; you do not buy the product, until a customer has made a purchase. This means low start-up costs and reduced risk.

Saving Time and Money. When you do not have to deal with a physical storefront, it’s easier to start your business. You do not have to find, manage and pay for a warehouse to store your products. You do no need to pack and ship your orders. There is no need to monitor and maintain stock levels. You do not need to handle returns or track inventory. Each of these things will save you time and money.

Flexible Location. Your business can be based anywhere. Your dining table. A pool in Cabo. A tent in Squamish. As long as you have an internet connection, a good relationship with your suppliers and are able to communicate with your customers then you have the freedom of the open road.

Diversity. When you purchase inventory it is easier and cheaper to buy a small number of items in larger quantities, however with drop shipping you can ultimately sell as many different items as you want, at no extra cost. If you have the time to list them on your site, you have the ability to sell them.

Scalability. With drop shipping the majority of the work falls on the suppliers. Yes to get those sales will require work, but if your business unexpectedly doubles, your workload will not.  Meaning less growing pains for you as you scale your business.

The drop shipping model is not perfect however. Convenience, flexibility and price are all great attractions, but you must also consider the shortcomings of this method.

Disadvantages of Drop Shipping

Low Profit Margins. You are not the only person looking at taking this route. There are many online retailers who are taking advantage of the low overhead costs and are selling their products at rock-bottom prices to grow their client base and revenue quickly. Although you may offer a better quality website and a better level of customer service, customers ultimately compare prices and go with the cheaper option. Unless you find a niche who must consider that your margins will be low.

Reliance on Suppliers. Because you are not selling items that you have already bought, it is harder to track your inventory. It may be that you use multiple suppliers, who are fulfilling orders of other businesses, causing the inventory to change on a daily basis. Although there are systems to track these track your inventory with your suppliers, these don’t always work faultlessly. 

Complications in Shipping. If you’re using multiple suppliers, you can suffer multiple shipping costs from those suppliers, if a customer makes a purchase from each of them in one order. It’s foolish to pass those charges on to the customer, so you will need to absorb those charges. It will also mean that the customer receive goods in different packages at different times, which may not create a good image of your business.

Quality Control. Adding a third party to the sales process will inevitably leave room to errors to arise. Whether it’s issues with shipping, missing items, low quality or damaged products, as the merchant it will your responsibility to rectify the mistake in order to manage or rectify your businesses reputation. This can be frustrating when you are being blamed for omething that is not your fault.

So Is It Worth It?

Like with any business model, drop shipping isn't perfect. It has some definite advantages but it also comes with a number of complications that you'll need to address before starting your business.  

 

About Small Business BC

When you find yourself asking "How do I...?" Give us a call. We'd be happy to help.