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What Is Drop Shipping? And What You Need To Know
Whether you are an experienced e-commerce entrepreneur or a newcomer to the business, the term “drop ship” might come across often. Recent data indicate that the shopping trend of consumers show a stark rise in online sales as opposed to purchasing from a brick and mortar store.
Therefore, with Amazon and other competitors vying for dominance in the industry, the ability to conduct an online retail store with precision shipping, organized inventory and excellent customer service becomes crucial for business survival. In order to maximize your chances of success, understanding how drop shipping works and applying it to your own business can make the true difference in profits.
What is drop shipping? To start, drop shipping is a type of business model that enables a company to function without maintaining physical inventory, owning a warehouse to store products, or shipping the product themselves in any capacity. As the retailer, one would negotiate with a drop ship supplier of a given product. The supplier then packages and ships the orders directly to the customer on the retailer’s behalf.
It is important to note that businesses who own a warehouse or a brick and mortar store often utilize a drop ship method for some of their products, as it provides more space to maintain a diverse inventory at their own properties. The benefits of a drop ship method varies depending on the nature of your business and how committed you are in being involved.
“Success seems to be connected with action. Successful people keep moving. They make mistakes but they don’t quit.” – Conrad Hilton
As mentioned earlier, the use of drop shipping will come with pros and cons, depending on the needs of all parties. Retailers must consider the type of products they wish to sell and how it will affect their business negotiations with suppliers. Multiple suppliers are often needed in order to attract more customers and provide the best shopping experience for them.
What are the benefits?
- Low startup costs and no physical inventory provides flexibility for any individual to enter the industry
- Independent business location
- Easy to build a varied inventory to sell
- No Inventory Shrinkage
- Low financial risk
Starting any business requires startup capital to begin operations and often most businesses fail to get off the ground due to the high costs. The high barrier of entry due to financial constraints is what limits most people. Drop shipping can alleviate this problem by passing the inventory costs along to the supplier. Focusing on shipping rates while expanding your available inventory allows for a drop ship business to flourish under the right command.
What are the disadvantages?
- Lower profit margins
- Failure to build your own brand
- High level of competition due to lower barrier of entry
- Inventory requires frequent management and can be difficult to maintain without a professional warehouse management system
There is no business model free from negative consequences, and drop shipping has its detriments. Firstly, due to the products not being owned or produced by the retailer, they’re at the mercy of the price points offered by the supplier to properly sell items at a profit. Due to rising shipping costs and inventory, understanding what you sell is critical in a drop-ship business, as your profits operate under strict margins.
Another disadvantage to remember is the double-edged sword of the barrier to entry in the drop ship business model. The logic is simple: if more people can enter a given industry, the higher the competition.
Finally, due to the inventory of products being stored and maintained in a 3rd party location, inventory management can be tricky. If orders arrive faster than what the supplier’s inventory allows, you might find yourself with an angry customer being told that their order cannot be fulfilled, which is a major problem for any business.
Is dropshipping right for me?
Adding drop shipping to your business operations will come with added benefits and certain obstacles to overcome. If you’re looking to build your brand of a product, dropshipping may not be the best route to take as the supplier is in charge of shipping the product. A business operating under a drop-ship model solely does not have the full control to ensure that every order carries a sense of personality that makes a brand unique.
However, if you’re a budget entrepreneur or someone who is first wading into the waters of e-commerce, you might find drop shipping beneficial to start up while you continue to build your business. For more information on how to integrate dropshipping into your business model or for any other logistics management questions, please contact us.
