Are you looking to create a high-profit, low-investment business? As online shopping continues to grow in popularity, more and more entrepreneurs are looking to e-commerce for these kinds of opportunities. This 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.”
Drop shipping is when you sell products you don’t actually own. You can set up an online store, include a mark-up price, and sell products to clients. You just need to forward that order to your supplier. In return, they ship the product on behalf of your company.
Here are a few benefits and disadvantages of this business model:
Benefits of Drop Shipping
- Low Investment – One of the biggest appeals of drop shipping is that launching a store without investing thousands of dollars in advance is possible. Physical storefronts need large amounts of money to purchase inventory before even opening their doors. But with this method, you wait to buy the product until a customer has made a purchase. This means low start-up costs and reduced risk.
- Save Time and Money – Starting a business is much easier when you don’t have to manage a physical store. You won’t need to find, manage, or pay a warehouse for storage, pack and ship your orders, monitor stock levels, track inventory, and so on. As a result, you’ll save time and money.
- Flexible Location – You can base your business anywhere. As long as you have an internet connection, a good relationship with your suppliers, and can communicate with customers, you have the freedom of the open road.
- Diversity – Generally, it’s easier and cheaper to buy fewer items in larger quantities when purchasing inventory. But, with drop shipping, you can sell as many different items as you want at no extra cost. If you have the time to list them on your site, you can sell them.
- Scalability – Most of the work falls onto the suppliers with drop shipping. While getting those sales requires work, if your business unexpectedly doubled, your workload wouldn’t. This means less growing pains for you as you scale your business.
The drop shipping model isn’t perfect. However, convenience, flexibility, and price are all great attractions. When considering opening a drop shipping business, it’s also essential to consider its shortcomings.
Disadvantages of Drop Shipping
- Low Profit Margins – Many online retailers are taking advantage of the low overhead costs and selling their products at low prices to quickly grow their client base and revenue. Although you may offer a better quality website and level of customer service, clients will ultimately compare prices and likely opt for the cheaper option.
- Reliance on Suppliers – It’s harder to track inventory because you’re selling items you haven’t purchased yet. You may use multiple suppliers who fulfill orders from other businesses, causing inventory to change daily. Even though there are systems to track inventory, they don’t always work flawlessly.
- Shipping Complications – If you’re using multiple suppliers, you can incur multiple shipping costs if a customer purchases items from each of them in one order. In that scenario, you’d need to absorb those charges. It also means that the customer will receive goods in different packages at different times, which may not create the best image for your business.
- Quality Control – Adding a third party to the sales process will inevitably leave room for error. Whether it’s issues with shipping, missing items, low quality or damaged products, it’s your responsibility as the merchant to rectify mistakes. It can be frustrating when you’re blamed for something that isn’t your fault, but you must maintain a good reputation.
Is It Worth It?
Like with any business model, drop shipping isn’t perfect. It has some definite advantages but also comes with some complications you should address before starting.
To learn more, check out our article, An Introduction to Drop Shipping.
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