What is Drop Shipping?

Dropshipping / Drop ShippingWhat does drop shipping mean?

A strategy by which a retailer does not make an inventory of this shipped product, passing the shipping address to the distributor or manufacturer for direct shipping to the customer. Drop shipping cuts out the workload of the retailer, allowing products to be delivered more quickly to the customer.

When ordering a product online, you may often find the option to have the product drop shipped. This service will incur a fee, but as you are buying the product directly from the manufacturer without it having to pass via a distributor you will receive the goods on a much faster timescale. The retailer will also pay a fee to the manufacturer for the drop shipping service.

There are a number of good reasons to consider drop shipping if you are a merchant, but there are also some drawbacks. We’ll look more closely at both benefits and drawbacks below.

Drop Shipping Benefits

Minimum Capital Requirements – One of the biggest advantages that cause merchants to choose drop shipping is the extremely low capital requirements. With drop shipping you can start on online business for almost nothing, since there’s no need to purchase thousands of dollars worth of inventory. You simply take customer orders and instruct your drop ship company where to ship the goods.

Quick and Easy Start-up – Ecommerce businesses are already pretty easy to get started, but they’re even easier if you don’t have to stock any inventory, or worry about packaging and shipping orders. Drop shipping eliminates the cost of storing inventory, the hassle of packaging and shipping, the need to track inventory for accounting and tax reasons, worrying about how to handle returns and incoming shipments, and managing inventory levels.

Extremely Low Overhead – Because you have no inventory, you can run a dropshipping business from your home office. You might pay even less than $100 a month to run your business, with the only real expense being your internet connection and the initial cost of your laptop.

Location Independence – You can run a drop shipping business from anywhere you have an internet connection. As long as you’re able to communicate with your suppliers and customers, you can run your business.

Product Selection – Because you don’t have to worry about inventory costs you can offer a much wider selection of products to your customers. As long as a drop shipper lists the item for sale, you can also list it for sale on your website for no out of pocket cost to yourself.

Ease of Scaling – With a traditional business model, if you receive twice as many orders you’ll also need to do nearly twice as much work. With the drop shipping model, increased orders don’t translate to increased work for you, just increased profits. The drop shipping suppliers will bear the brunt of most of the additional work, making it quite easy to scale a drop shipping business, even when compared with other ecommerce business types.

These benefits can make drop shipping sound like the ideal ecommerce solution, but not everything about drop shipping is ideal. There are drawbacks as well, and we need to have a look at these.

Drop Shipping Disadvantages

Low Profit Margins – The largest disadvantage to drop shipping is the very thin profit margins due to operating in what is an extremely competitive niche. The fact that it’s easy to get started means many merchants will set up an online shop to offer drop shipped products at the lowest prices possible to try and jumpstart the business. Because they have a minimal investment in the business, and minimal operating costs, they are able to work with the smallest of profit margins.

While it is true that these merchants often have poor websites and non-existent customer service, it doesn’t stop customers from ordering from them, or at least using their prices as a comparison to yours. When merchants begin competing aggressively on price it isn’t long until profit margins drop nearly to zero. The best way to avoid this is to choose a niche that is well-suited to drop shipping.

Inventory Management – While it might not be exactly easy to manage inventory when you’re stocking all your own products, at least you know at the end of the day what your stock levels are. This isn’t true of a drop shipping business, where you might be sourcing from multiple vendors and warehouses all across the globe, with inventory changing on a daily, if not hourly basis. There are ways to synch inventory levels with those of your vendors, but not all vendors support these solutions, which can lead to situations where you can’t actually deliver products ordered.

Shipping Issues – If you have several different vendors supplying your drop shipped products you add complexity to your shipping picture which can complicate your shipping costs. In some cases you may need to ship items from multiple warehouses to satisfy a single order. You’ll be responsible for the shipping costs from all the warehouses, but you can’t pass all of these costs along to the customer because they’ll think you’re grossly overcharging for shipping!

Supplier Mistakes – Are you able to accept responsibility for mistakes that weren’t yours? If you’re start a drop shipping business you may have to. Even the best drop shippers will make mistakes, and when this happens you’ll need to take responsibility for the mistakes, and apologize to your customers, likely providing some compensation to offset the error. And if you’re dealing with a low quality drop shipping company you could quickly become overwhelmed with frustration over missing items, botched shipments and low-quality packing, which can damage your business's reputation.

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