No issues associated with inventory, no problems handling shipping – drop shipping sounds like a real live get rich quick scheme. Drop shipping is not all wine and roses, though. It does have some huge advantages, but we want to present you with a comprehensive list of the pros and cons of drop shipping before you jump in with both feet.
So What is Drop Shipping?
Drop shipping is a dual business model that deals with both sourcing and fulfillment. As a retailer using this model, you are more like a middle man who simply offers a product and passes any orders for it to the drop shipping supplier. You can offer product on your own website, an online marketplace or promote it via social media. You don’t stock any product but instead pay for only what you need to cover the orders you receive. The supplier, usually the manufacturer or a wholesaler, then packs and ships the product to your customer. Your profit comes straight from the difference in price that your customer pays minus what you pay your supplier.
Can’t Wait to Hear More!
Drop shipping has been the choice of many smaller retailers because it is a less restrictive option. This model does not require the larger investment and overhead that traditional models demand. It also does not need you to devote resources to managing most business operations.
Get Started Fast
A lot of the time consumed in running a business is spent managing products. When you simply forward your orders to your supplier to pick, pack and fulfill for you, your time input is dramatically reduced. Capital is one big hurdle that delays the launch of many businesses because entrepreneurs need time to put it together. A huge part of your costs as a business owner come from purchasing and warehousing inventory. With drop shipping, there is no inventory to manage and so your startup costs and hence your time is cut drastically.
With such low costs and minimal time commitment, you can set up a drop ship business and start selling in less than half the time it would take with a traditional model.
If you are setting up online, you can start up even faster. An eCommerce business is so much faster to launch because there is no additional burden of a physical store. There is also no need to plan for the various expenses and obvious human resource needs involved in brick and mortar setup. You just drag and drop your store to life and begin offering products from your supplier.
Smaller Capital
So what are the actual costs involved in a drop ship business? Apart from the initial paperwork that you would need to sort out regardless of the model you choose, not much.
Since you are not purchasing any products, you don’t need cash on hand to cover the volume of orders that you receive. You only order product once your customers have paid for it. So you only need enough money – or credit, actually – to settle your bill with your supplier on a weekly or monthly basis, depending on the payment terms you have negotiated. There is not cash out for inventory equipment or software.
You will also not need to stock anything, so you pay only for your store, which is your website or whatever you hand over in fees to your online marketplace. This can be very little or it could add up, depending on what you decide. There are different types of eCommerce website packages and marketplace accounts to choose from. The less you expect from them, the less you pay.
You may or may not also want to spend for good product photos and ads to attract attention and boost your catalog. In any case, your capital investment can be as small as you like. Just don’t go too cheap or you won’t end up selling very much.
Low Overhead
Because you don’t handle anything except taking orders, you don’t have to worry about the costs involved in renting warehouse space and managing it, handling supply orders and maintaining stock levels, picking and packing orders, receiving shipments and shipping product out to customers, tracking inventory, and taking care of returns. You might even be able to turn a bigger profit because your supplier gets huge shipping discounts for the sheer volume of product that they ship out on a regular basis.
You can start and run a successful drop shipping businesses from your sofa or a coffee shop with about a hundred bucks on hand each month. Of course, this depends on what you have contracted to pay in fees and what you have decided to allot to marketing.
Expenses will also increase as you expand, but you are in total control of this. Plus, your expenses will most likely be easily covered by what you make, if you don’t go too fast and end up spreading yourself too thin. All in all, these expenses will still be much less that what you would expect with a physical business based on a traditional model.
Management and Product Flexibility
The drop shipping model is so flexible because it allows you to run your business completely online. This means that you don’t need any sort of office to make it work. You can literally man the store like a pro in your pajamas from your sofa or the corner coffee shop and no one would be the wiser. You might not want to tell your customers that, but you could really do it.
Another part of its flexibility is the ability of drop shippers to change up their offerings at the drop of a hat. Renewed supplier negotiations can’t be avoided if you want to start selling something different, but building rapport with someone new is practically all you need to worry about. You can test out new suppliers and new offerings with very minimal risk since you have no investment other than the time and effort you put into contacting new suppliers and creating new listings.
If you want to stop selling a certain product, you will have to be careful about cutting relations with your current supplier. Your only commitment in this case, however, will be to decency. As a drop shipper, you can offer just about anything you like as long as someone has it and is willing to drop ship it for you.
Scalability
Again, because you don’t have to worry about stocks, order fulfillment or shipping, you are free to focus on growing your business. Drop shipping leaves you with ample time and money to devote to planning and executing strategic expansion. The term might sound funny if you’re listing a few items of clothing or a toy here and there, but you can conceivably build your drop ship business into a million dollar winner by thinking big while you’re small.
Does it Even Have a Down Side?
Unfortunately, yes. But you can most certainly manage the risks involved to create a greatly successful business based on the drop shipping model.
Competition
Drop shipping is so easy and affordable that it is insanely popular. This means that a lot of small and even large businesses are doing it.
To be successful, you need to take your time to carefully research the market. This is no different than if you were going to consider stocking hundreds or thousands of items, however. You need to know how crowded your market is no matter how you plan to sell. Think about your unique value proposition as well so that if things get rough, you can still stand out to consumers and keep their attention and loyalty.
Smaller Profits
If you are unable to negotiate a good price with your supplier, you could end up making a small profit. Your drop shipper will always take a bite out of the wholesale pie. This is still often true if you sell on an online marketplace, however.
You can still make profit enough to scale fast, however, if you are careful to take the price difference into account before you create your listings. With the low startup costs involved, you will also be able to make more overall even if your profit per sale is lower.
Quality Control
You have nothing to do with the myriad of processes involved after you market and sell your listed products. You therefore also are in no way in control of what happens. If you partner with a dishonest or lazy supplier, you are going to get in big trouble. You are all that the customer sees and cares about because they ordered from you and they paid you. When a drop shipper makes a mistake with an order or ships a damaged product, you are the one who has to listen to the complaints and make it right.
Go about building ties with suppliers very carefully and you can avoid getting into bed with the wrong one. First, do your research into each potential contact to learn their track records. Next, enter into supplier negotiations with a clear head so you are not blinded by savvy talk and super low prices. Make sure that you have all your data in front of you before you strike a deal. Then do a test run so that you can personally inspect the product. You might also want to be prepared to hire a product inspector to do a random check now and again, or if you notice unusual activity like a sudden drop in sales. Finally, make sure you fully understand all their policies and shipping methods so that you know what to do if something goes wrong.
Branding
Some suppliers may allow you to put your name on the products that you sell, but most items will still carry other names more than yours. You can’t insert a unique packing slip or ship in personalized boxes. It will be generic ll the way, and you can lose a lot of points this way. Your branding starts and stops at your store for the most part, but there are other ways that you can improve the customer experience to promote your name.
Build the most customer-friendly store you can. This is your main and sometimes your only point of contact with them, so you want to make sure you leave a great impression that will last long after they receive the boring box that has your name somewhere on one of ten slips of paper in 8 point font.
Get involved through social media. You can be available to your customers through your website, but you can make a greater impact if you make an effort to reach out to them where they hang out. It’s not all about the sale this way, and you will make yourself more attractive to new customers as well.
Go the extra mile to ensure that what you sell is premium quality and make up for the power you lack over product branding. If you leave this up to someone else along with everything else, you are the one who will suffer for it.
Still Sounds Good
As a drop shipper, you may have to invest a little more time than most other business owners do – at least when it comes to maintaining relations with your suppliers and your customers. But weighing the pros and cons of drop shipping, there is still a lot of silver lining on a few slightly gray clouds.
It will involve some amount of trial and error to find the right drop shipper that you can work seamlessly with. Once you find this perfect partner, however, you will tend to enjoy a mutually beneficial relationship that you will both want to take good care of.
Your customers are not going to be as easy to handle as most other deer in the headlights. Your brand is not going to be plastered all over the place, but you can still build a loyal following if you focus on providing a great shopping experience and even better after service.
All in all, however, the ease of starting up and scaling your business with minimal risk will be well worth it if you can anticipate and adjust to the bumps along the way. Need some advice before you get started? Free Up Your Business: 50 Secrets to Bootstrap Million Dollar Companies is a book all about how to grow a fruitful business from the perspective of a couple of very successful young drop shippers.
