What is drop shipping?
Drop shipping is essentially nothing but supply chain supervision in which the seller does not physically stock the goods but transfers the orders from the customers as well as shipment details to the manufacturer, wholesaler or another retailer who is then responsible for shipping the goods straight to customers. The retailer makes its profits based on the difference in margin between the retail prices and the wholesale price. There are some retailers out there who have agreed percentage of commission on the sales which is paid by wholesaler to retailer.
Understanding drop shipping
If you are one of those who can’t afford to invest significant funds in products as well as storage requirements and additionally you don’t want to deal with the ultra-competitive online retail business or multi-level business then the drop shipping is the perfect option for you. There are multiple advantages of drop shipping that make it an attractive option of business. However it also has a few disadvantages and cons that are worth having a look. Let us begin with the advantages.
Limited funds required: First and foremost you don’t have to deal with the issues of packaging, warehousing and shipping. Additionally you don’t need to tie down the limited resources or funds on inventory. The retailers who operate the traditional trading or selling business have to invest huge amount of funds on inventory. The drop shipping is different as the retailer does not need to purchase the product unless that specific product has already been purchased by customer and you have been paid the price. Thus it is quite feasible in commercial terms and you can initiate an efficient drop shipping business even with little funds at your disposal.
Convenient to start: Operating the ecommerce business is extremely simple and convenient when you as a retailer don’t have to manage and deal with the physical products. If you adopt drop shipping as your business model then you don’t need to concern yourself with : paying for or managing the warehouse, Packing as well as shipping the order to the customers, Keeping track of the inventory for the accounting purposes, handling inbound shipments and returns, managing the level of stock and constantly ordering products. Thus the drop shipping business is very convenient to operate as it gets rid of a huge amount of the logistics that are very complicated to handle over a period of time.
Low amount of overhead: As the drop shipping business involves very low amount of logistics like managing the warehouse or purchasing an inventory, the overhead expenses and costs are extremely low. As a result the drop shipping business can be initiated and successfully operated at very low costs efficiently. For example a lot of the successful and efficient drop shipping businesses around are operated from the home office and involves just a single laptop with monthly costs of less than $100. But gradually as your drop shipping business grows, these costs are likely to increase however still they will be minimal and extremely low in comparison to the traditional businesses that are around.
Flexibility of the location: One of the biggest advantages of the drop shipping business is the fact that you can operate the business from almost anywhere convenient. There are no specific restrictions in terms of where the office should be located. Any place is fine as long as you are able to communicate with the customers and the suppliers easily. Thus you have amazing flexibility when it comes to the location of the office from which you want to operate the drop shipping business.
Wide range of products: Since the retailers don’t have to pre-purchase or pre-order the items that they sell, they can offer a wide range of products to the prospective customers. As long as the suppliers stock the specific item, the drop shipping retailer is able to list it for sale to the customers for no added cost.
Feasible scalability: The drop shipping business is extremely feasible and easily scalable. For instance with the traditional business if you receive more business order you would need to work that much harder and deal with all the complications of the logistics that arrive with it. However if you are leveraging the drop shipping suppliers then the majority of work needed to process the extra orders will be carried out by suppliers thus allowing the drop shipping retailers to expand their business without any additional work or complications. The growth in sales will always bring added work and responsibility however those who are able to utilize the drop shipping model are able to scale the business efficiently.
With all the advantages, there are a few bottlenecks and disadvantages to the drop shipping business as well. The disadvantages include low margin of profits, complexities related to shipping, supplier errors and inventory issues amongst few others.