Drop Shipping is a supply chain management technique where a retailer does not hold stock, instead they transfer customer orders and shipment details to the manufacturer who then fulfills the order and ships the goods directly to the end customer. You as the retailer are essentially selling products you don’t actually own.
Seems like a very effective and low risk business model, however like all business models there are Pro’s and Con’s and you need to consider both.
Drop Shipping – Pro’s:
Low Start Up Costs
You have very low up front costs because you don’t have to buy the inventory prior to selling and incur the holding costs while you are trying to sell the stock. You only buy the products once your customer has made a purchase from your store so you essentially have virtual inventory with very low up front costs.
Lower Risk
Apart from the low start up costs and the benefit of not having to buy the inventory up front you eliminate the risk of holding inventory that may not sell. With drop shipping you can simply remove the item from your website with no expense to your business. When you purchase inventory, it is more expensive to purchase smaller quantities as opposed to getting a cheaper rate on larger orders therefore it can limit what you sell. However with drop shipping, you can basically sell as many different items as you want, at no extra cost.
Savings
Your first saving is not having to ship the goods from your supplier to your location to fulfill orders, this cost is eliminated. The next cost you eliminate is inventory holding costs because you only pay for the inventory when you make a sale. Not having to manage the order fulfillment will save you time, which can be better used to increase sales. Another saving you may encounter is in your shipping costs to your customers, your supplier may be able to offer you cheaper shipping rates than dealing directly with a shipping provider, due to the volume they ship, so it’s worth checking this out with your suppliers.
Location
Drop shipping can provide advantages based on specific geographic locations of your suppliers. For example, if you are located in Australia and ship worldwide but you buy or manufacture your product in China, instead of shipping to Australia to fulfill customer orders it could be more cost effective to ship them directly from your supplier in China to other countries and eliminate not only the shipping costs but possibly customs and other importing costs as well.
Scalability
Drop shipping can allow you to grow quicker with lower risk as the majority of the work will be with the suppliers. If you have a sudden increase in demand you can quickly increase order volume and fulfill customer orders with no extra cost to your business, other than paying for the inventory you sell. It can be a great way to manage your growth however you do need to have quality suppliers who can manage sudden increases in demand effectively.
Drop Shipping – Con’s:
Quality Control
Whilst you have lower risk and start up costs you are now fully reliant on your suppliers to fulfill your customer orders. You lose all of your quality control with drop shipping, whilst you can set the supplier up to pack your orders in a certain way without inspecting it regularly you really don’t know if they are following your guidelines. Irrespective of how good your products are if your customer is let down for any number of reasons like shipping failure, damaged goods, poor presentation etc. it will reflect on your business. This can be frustrating when you are being blamed for something that is not your fault, and the extra work and costs involved in fixing mistakes could outweigh the benefits of drop shipping.
Supplier Dependence
Suppliers manufacture for many different businesses which can be problematic especially if they are hit with sudden spike in demand from all of their customers. You may find you can’t get the inventory to ship to your customers or the supplier is so busy they can’t fulfill your customer orders and this may mean you let your customer down and they buy the stock from a competitor.
Shipping Complexity
You need to understand the cost of shipping before you start drop shipping, especially if you have a large range of products as shipping costs vary greatly depending on the size and weight of your goods as well as your location. Determining the most cost effective shipping method initially is important as there are different options, for instance your supplier may be able to offer shipping and it may be more cost effective than the rates you have because of the volume they ship. You may need to use multiple providers to ship the differing products you have and this will involve some co-ordination. When your products vary it can be difficult to book shipping because you may not have all of the required information from your supplier about the size of the parcels, etc, until they have packed the orders and this may cause some delays. It’s really important to have all of the required information and documentation so you can book your shipping and avoid delays and unnecessary costs, as well as communicate clearly with your customer. A lot can go wrong with shipping especially when you don’t have control over the process, so it’s vital that you stay on top of this to ensure on time delivery of your goods to your valued customers.
Is Drop Shipping worth it?
it certainly has many great advantages but it also has some complications that you must consider first, like anything in business you need to weigh up the Pro’s and Con’s and see what will work best for your business. Talking to an expert is an effective way to identify whether this business model is suitable for your business.