If you're interested in entering eCommerce and are exploring your options, you've most likely come across the drop shipping business model.
If you haven't, drop shipping allows you to set up an eCommerce store without having to maintain inventory at all. But how is that possible?
Good question! It's possible by becoming a middleman for a supplier.
How drop shipping works
First, you set up your online store. Once a customer places an order with you, you pass this order on to your supplier, who will carry out the delivery on your behalf. All you have to do is stay on top of inventory management by updating numbers, ensuring you don't oversell.
Since you don’t have to own or store the inventory yourself, there is a chance that you'll never see the actual product you sell to your customer. And, you only pay your suppliers after you receive the payments from your customers… amounting to zero risk from outdated/unsold inventory.
At this point, you may be viewing drop shipping with heart eyes. But, as attractive as it seems to be a good ‘start’ for your first online business, it might not be the best if you're interested in growth, as suppliers can get in the way of your profit margins.
To be successful in drop shipping, you need to have solid connections and effective conversations with both suppliers and customers. Note there are many chances for things to go wrong in this process if you aren’t extremely cautious!
The players in the drop shipping model
Let’s begin by explaining who's involved in this particular supply chain:
- Manufacturers - They create the product and most do not sell directly to the public. While buying you'll probably get the cheapest price if you buy directly from them, most have minimum purchase requirements which might require you to find storage. Working directly with them might not be the most feasible option for your drop shipping business.
- Wholesalers - They purchase in bulk from manufacturers and if they do have any minimum purchase requirements, they are much lower than those of manufacturers. They operate for specific industries and can help your drop shipping business serve its specific niche.
- Retailers - They sell directly to the public at a markup, and this is YOU in the drop shipping model.
The pros of drop shipping
Now that you know how drop shipping works, let's take a look at the pros of this business model.
- Low overhead - No purchase, or bare minimum purchase of inventory means you can run an online store from home with less than $100 per month. These costs might grow as you grow, but not not to the point where it becomes unmanageable. If you like to stay risk-averse, even if you lose out, you won’t end up losing out much.
- Flexible location - All you need is an internet connection. The more global the world gets, the better for you… No need to relocate; just source from suppliers and ship to customers around the world.
- Wide selection of products - Since you work with wholesalers, it'll be easier to offer your customers wider variety: products with different models, in different colors, and more product types within a product category. From a marketing standpoint, you can highlight in your communications that you cater to your customers’ wants with an array of different products.
- Easy business scaling - Since you don't have to maintain stock, you only have to focus on the creative side of the business. This is perfect if you are a marketing enthusiast or a sales enthusiast who loves to sell products you believe in.
Considering the pros, drop shipping may be appealing to the following:
- Newcomers in eCommerce
- Entrepreneurs who want to test what sells well to their target group before making a bigger investment
- Entrepreneurs who follow a breadth of product policy and cut down on purchasing inventory upfront.
The cons of drop shipping
It's not all rainbows and butterflies with drop shipping. Here's a list of cons we have identified:
- Massive competition - Due to the ease of setting up a drop shipping business, there are many players who are trying to make it big all at once. Many retailers are also offering much lower prices, increasing price competition and hindering visibility of your business to customers.
- Inventory issues - Imagine if your customer places an order, you send the order to your supplier and realize that the product is out of stock and can’t be shipped to your customer. Many inventory management softwares can help solve this problem, but how tech compatible are they with your supplier systems and management process?
- Shipping complexities - Most drop shipping businesses deal with multiple suppliers. You may have customers ordering products from more than one supplier. You might have to give thought to how these deliveries arrive to your customer – together as a parcel or separately? Does that alter your customers’ satisfaction levels?
- Supplier mistakes can cost you - Any mistakes in shipping in terms of damaged goods, wrong products delivered, delays and other tracking errors, would result in customers contacting you and increased need for customer support on your end.
- Hidden costs - Since shipping a single order on your behalf is costlier for manufacturers and wholesalers, they may charge you a per order fee. It's also common for them to want you to order the minimum order size in the beginning, to establish yourself as a legitimate retailer in their eyes.
- Problems of selling through your own website or on a marketplace - Setting up your own website requires investment in paid advertising, online, and offline marketing. Selling on a marketplace is a good alternative but listing fees can cost you, and there is less opportunity for long term connection with customers and branding.
- Complex network of customers and suppliers - The broader your network, the better you will be at drop shipping. But this network can easily get unmanageable, leading to unhappy suppliers and customers.
- Security and fraud issues - As with any eCommerce business, the possibility of security breaches and fraudulent orders are things you need to prepare for.
- Not so straightforward returns – As a middleman between wholesaler and customer, you'll have to be responsible for handling returns and reimbursing customers. This can take up a lot of your time.
- Mistake of underestimating customer support service – The more customers you acquire and the more repeat purchasing you push, the higher chances the that you’d have to scale your customer support to answer their queries.
Considering the cons, drop shipping may not be for you if:
- Margins are important to you
- Marketing doesn't interest you
- You want to have more control over the operations of your business
The cons of shipping in drop shipping
As mentioned above, your wholesaler will be responsible for shipping the product to your customer, which means you have no control over the fulfillment of your products.
Although a mistake in a customer's order or a snag in delivery is out of your control in drop shipping, you customer will still hold you responsible and expect that you solve the issue on their behalf.
You also won't have the flexibility to provide a variety of shipping options that better suit your customer based on their location.
Drop shipping can be a good way to test the waters in eCommerce, especially if you're comfortable solely focusing on sales and marketing.
However, if you're looking to have more control over certain aspects of your business, the traditional eCommerce route might be best for you.
And, if you're looking to avoid the shipping issues that can occur with drop shipping with your traditional eCommerce business, the Easyship platform is here to help! You can:
- Use our Rates at Checkout plugin to show full pricing, delivery time frame, and courier visibility to your customers
- Get access to multiple couriers and services, providing more flexible delivery options to your customers - all without having to open a courier account on your own
- Tap into our vetted network of over 20+ 3PL warehouses who can professionally handle your shipments if you're interested in outsourcing your fulfillment
Sound like a plan? If so, don't be shy - contact our sales team for more information!