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.
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