What is drop shipping?
It’s essentially a fulfilment model where, instead of a store stocking its own products, customers who pay for a product have it shipped directly from the store’s wholesaler.
The merchant never sees – or even handles – the product. Because of this, the business in question doesn’t have any inventory; instead purchasing from a third party (a wholesaler or a manufacturer) when orders have been placed.
Our Cloud ERP is ideally placed to help you take advantage of drop shipping. Read on to learn more about the advantages - and disadvantages - to this methodology.
The Advantages of Drop Shipping
There are many benefits to the drop shipping model. Here are just some of them:
Greater Degree of Flexibility
Drop shipping businesses can be run from pretty much anywhere in the world – or at least, anywhere that has internet connection.
This allows for more flexibility, if you choose to move whilst your business is up and running. Changing locations – whether that’s to a different city or a different country – is relatively simple. You just need to ensure that you can easily stay in touch with customers and suppliers, and manage your business effectively.
Whereas traditional businesses need to store their stock in a warehouse; drop shipping businesses won’t need to buy or rent this extra space, significantly reducing overhead costs. In fact, location is an area where you can really cut costs, because all you realistically need is a laptop and a phone.
Wider Variety of Products
Because you don’t have an inventory, you can commit to offering a wide variety of products, without too many consequences.
This would be a risky strategy if your business had its own inventory; as the uncertainty as to whether stock will sell can be very costly.
However, because drop shipping companies only purchase products once a sale has been made, that risk is eliminated. If your supplier stocks an item, you can list it on your site and wait for a sale at no extra cost.
Less Revenue is Needed
If you choose to go down the drop shipping route, you won’t need as much money to get started than if you were to pick the more traditional model. The reason for this, is you won’t need to invest thousands of pounds in your inventory.
When launching an online business, all you’ll need to pay for is your domain, hosting, and investment in marketing channels.
When you contact a supplier to ship an item, it’s because a sale has been made, so that revenue will soon come to you.
Easy to Launch
Not needing this large amount of finance upfront makes launching a drop shipping business much easier, when compared to a more traditional model.
Not having to deal with physical products brings about many additional benefits, including:
- Packing and shipping orders
- Handling returns and exchanges
- Paying for warehouse space
- Tracking and monitoring your inventory
- Constantly ordering products and managing stock
This weight off your shoulders means you can spend your time on other aspects of the business, such as implementing your marketing strategy.
Easier to Scale
With a traditional model, if you received twice as many orders, you would need to do twice as much work to fulfil them.
Drop shipping eliminates this, because all additional work is passed over to the suppliers, as it’s them who will ship goods to the customer.
This means that there is more potential for your business to expand quickly, as you won’t have the implications associated with a traditional model.
The Disadvantages of Drop Shipping
With advantages, comes disadvantages. It’s important to weigh up both sides, before deciding if drop shipping is right for your business.
As drop shipping is so competitive, it means that margins are low; which is perhaps the biggest disadvantage to the model.
Whilst the fact you don’t need much money to start your business be a benefit; it means that the floodgates are open for entrepreneurs launching their own business. This competitiveness results in many businesses selling products at rock-bottom prices in an attempt to increase their revenue.
Standing out from the crowd can be difficult, and if you want to compete, you’ll need a USP; such as excellent customer service.
Complicated Shipping Procedures
Most drop shipping companies will have multiple suppliers, rather than just relying on one. Whilst the ability to stock a wide variety of products is beneficial; this becomes complex when a customer makes one order with multiple products, that are all from different suppliers.
This will have a direct effect on your shipping costs. For example, if a customer were to order five items from five different suppliers, you will be the one who has to pay five separate shipping charges.
Whilst you could charge the customer, they’ll think you’re overcharging them, and may complain. And why wouldn’t they? As far as they’re aware, you’re the one shipping the items to them.
If you have your own inventory, then it’s relatively simple to keep track of stock available for sale – provided you have cloud-based ERP software, of course.
However, if you’re a drop shipping company, your suppliers will be managing the inventory. Whilst that has its advantages, there is a flipside too. You won’t be the only business they’re fulfilling orders for, so it can be complicated for them to keep track of their inventory.
Mistakes may be made, and you’ll need to rely on your suppliers to correctly keep track, and provide you with updates.
When you make a mistake, you apologise. However, it can be frustrating when you’re blamed for something that isn’t your fault, but you have to take responsibility and say sorry.
This is an inevitable part of drop shipping. No matter how great a supplier is, mistakes will always be made. From the customer’s point of view, they aren’t aware of your business model, so if mistakes are made then it’s your fault. That means you’ll need to accept the blame.
Unfortunately, it can be a case of trial and error when figuring out which suppliers are best. There will be suppliers out there who are unreliable, with items going missing, wrong orders shipped and low-quality packing. You need to avoid these suppliers, as it could damage your business’ reputation.
Lack of Control
Ultimately, despite all the benefits, you need to accept that if you opt for drop shipping, the only aspects of your business you’ll have control over are the products you sell, and your pricing strategy.
Yet, from the eyes of your customer, they won’t see this. You need to think hard about how much control you want to have over your business.
Is Drop Shipping Worth It?
As with anything, drop shipping has its advantages and disadvantages. It’s all a case of weighing up the options and deciding what is best for you.
If capital is the only thing holding you back, then drop shipping may be ideal, so that you can start your business sooner rather than later.
However, if you want to retain control, and have a strong focus on excellent customer service, then drop shipping may not be ideal.