The pros and cons of Drop Shipping
Updated: Oct 19, 2020
An attractive model for the e-commerce entrepreneur.
Drop Shipping, put succinctly, is an order fulfilment channel used by online retailers. This type of business model enables a retailer to operate without maintaining inventory, owning a warehouse to stock items, or having to ship their products to their customers themselves. Basically, the retailer partners with a drop ship supplier that manufactures and/or warehouses products, packages the products, and ships then them directly to the retailer’s customer, on behalf of the retailer. The seller doesn’t need to handle the product directly.
The main difference between drop shipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. The seller purchases inventory as required from a third party, such as a wholesaler or manufacturer to fulfil orders.
This kind of business model is obviously extremely attractive as it eliminates the need for the retailer to have a physical store or warehouse - all that’s needed is a laptop and an internet connection.
Pros of Drop Shipping
This business model has some major benefits to the potential e-commerce entrepreneur.
1. Less capital investment
Drop shipping’s greatest advantage lies in the fact that it’s possible to launch an online store without needing to invest heavily in inventory. With this model, the purchase is made after the sale and upfront payment by the customer. Budget can therefore be directed at advertising and running a website (hosting, theme, apps, etc.)
Because there is no commitment to sell off inventory as in traditional retail, there is less risk associated with drop shipping for the entrepreneur.
2. Easy to start
Relatively easy to understand and implement, a drop shipping business can be established in three basic steps:
Find a supplier
Set up a website
Start selling the product
Without inventory there is no need to handle:
Tracking, ordering and management of inventory stock levels
Packaging and shipping
3. Lower overheads
Overheads are low as the need to purchase inventory and pay for warehousing is eliminated. As stated earlier, all that’s required is a laptop, internet connectivity, website and advertising expenses. These businesses are often run from home obviating the costs of traditional retailers with a physical store.
4. Location independent
Free from a physical store, warehouse and employees, drop shipping e-commerce can be run from anywhere in the world with an internet connection.
All that is required is to be able to communicate with suppliers and customers.
5. Variety of products to sell
As there is no need to purchase products upfront, its possible to offer a wide array of trending products online. Or one great niche product! Items for sale can be added to the store at no additional cost.
6. Testing the market
A useful method for launching an e-commerce business it is also beneficial in testing consumer demand for a new product or range of products. Drop shipping allows for the listing and selling of products before investing in inventory.
Businesses using drop shipping scale well in comparison to traditional e-commerce businesses. Increases in sales generally mean incremental work in traditional retail, however this is carried by suppliers using the drop shipping model.
Cons of Drop Shipping
The above advantages make drop shipping an attractive model but there are disadvantages to consider.
1. Low margins
Low margins are the major disadvantage in the drop shipping model. Huge competition due to ease of starting and low overheads means sellers are prepared to operate on minuscule margins.
However excellent customer service and a good website may mitigate lower prices for the cost conscious consumer.
2. Inventory issues
Problems can arise with inventory stock as the result of sourcing from multiple suppliers and warehouses which are concomitantly fulfilling orders for other businesses. Fortunately, these days, there’s an app for that! Drop shippers can see in real time if the supplier has inventory stock.
3. Complexities with shipping
Multiple products in an online store will require sourcing from multiple suppliers complicating shipping costs. Different suppliers levy different shipping costs depending on location, size and type of products. Should a customer order multiple products which ship from various suppliers, the retailer will have to work out and pay the shipping costs separately. Calculating these charges may be difficult and transferring them on to the customer counterproductive.
It’s incredibly important to select the right supplier. The customer purchases from the retailer’s website and if the supplier makes a fulfilment error, it remains the retailer’s fault as the brand is the face of the retail process. In this business model poor quality suppliers can damage your reputation through missing items, incorrect shipping, damaged product and substandard packaging.
5. Lower control over branding
The drop shipping model rarely allows retailers control over how their brand is presented through the fulfilment/delivery process as it is the supplier who ships the products. Some suppliers are willing to accommodate the online stores product changes, up to a point, but this usually involves a minimum order which can be costly.
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