Drop shipping has become a popular logistics approach with today’s online retailers.
The main reason? It eliminates the need for warehousing — an expensive and tedious endeavor that calls for careful inventory stocking, not to mention a whole host of other manual tasks, like picking, packing, shipping and more.
But drop shipping isn’t for everyone — nor is it necessarily easy.
Trying to determine if a drop shipping business model is right for your brand? Let’s look at the pros and cons now.
What is Drop Shipping?
First, let’s cover the very basics: what exactly is drop shipping?
At its simplest, drop shipping is a fulfillment method that allows a retailer to forgo buying, stocking and storing inventory. Instead, when a customer purchases a product, the retailer purchases that item from their supplier, who then ships it directly to the customer on their behalf.
Benefits of Drop Shipping
Buying, stocking and storing inventory is one of the most expensive parts of being a retailer, and drop shipping? It lets you skip right over all that.
You don’t have to invest thousands into products, nor do you have to pay to rent warehouse space to store it.
“Especially around the holiday season, drop shipping can allow you to focus on selling, promoting, and marketing your business,” according to Joey Blanco, Content Manager at Shipstation.
Other advantages of drop shipping include:
● Less risk – You don’t have tons of money tied up in inventory that potentially might not sell. You only buy a product if a customer has already purchased it, in which case, you’re already guaranteed some sort of profit margin.
● Very little overhead cost – Without warehouse costs or the need to stock inventory, drop ship businesses have very little overhead. Many owners are even able to run their business from out of a home office, using only a laptop.
● A faster start-up – There’s a lot of work in stocking inventory, finding a warehouse, taking out a lease and hiring people to manage, pick and pick your products. Without all those steps, retailers can get their businesses off the ground much more quickly.
● Scalable – It’s super easy to scale a drop ship operation, as the majority of the extra work falls on your suppliers — not you or your own team. When you do more business, you simply have to order more products. The supplier is the one who has to pick it, pack it and get it from point A to point B for the customer.
Finally, drop shipping also opens the door to a wide and ever-changing array of products. This can be good if you want to capitalize on trends or seasonal surges in consumer activity.
Cons of Drop Shipping
Obviously, there are disadvantages to drop shipping. The largest one is that you’re at the whim of whichever drop shipping companies you choose to work with.
That means if they mess up, you mess up. If they change their pricing, you change yours, too.
You essentially have less control over your business, and therefore less control over your customer satisfaction as well.
Other downsides of drop shipping include:
● Low-profit margins – Because of the low barriers to entry and the competitive space of online shopping, drop shipping businesses are often forced to price for very low profit margins. It’s not until they’ve really scaled their business and built up customer loyalty that they can increase prices enough to see big financial gains.
● Lots of inventory issues – It’s very hard to keep track of inventory levels when you’re not in charge of them yourself. And if your store isn’t in sync with the latest inventory data from your suppliers? That means a customer could order out-of-stock items, resulting in frustration, and disappointment that will probably hurt your reputation in the long haul.
● Shipping is complicated – Shipping is pretty complex with drop shipping, as it depends on which supplier the product comes from, where the customer is located, the weight of the product, etc. If a customer buys three products all from different suppliers, that means you’re hit with three different shipping rates. You’re forced to either eat some of those costs or charge sky-high costs and risk losing the customer. Neither’s an ideal option.
“Dropshipping, especially around the holiday season, can allow you to focus on selling, promoting, and marketing your business,” says Blanco.
“But dropshipping—and delegating in general—is dependent on your specific situation.”
As a general rule of thumb, handcrafted made-to-order products are best shipped under your watchful eyes, and not with a drop shipper–even if that means adding temporary hires to deal with additional shipping and returns.
The key, according to Blanco, is to test your drop shipper during a low season.
“A little experimenting before implementation can be the difference between a quality shipping experience and disaster,” says Blanco.
For more information on drop shipping, email [email protected].