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24Apr, 2014

Drop shipping: An emerging trend and new way to sell online

Author Dennis Category

Drop shipping is an order fulfillment strategy wherein you don’t have to keep your products in inventory. Instead, when a store sells a product, it purchases the item from a third party (manufacturer, wholesaler, etc.) and has it shipped directly to the customer. When used correctly, a drop-shipping strategy can reduce distribution and fulfillment costs and even improve service levels significantly within the supply chain.

From a business point of view, drop shipping has online retailers marketing products, while manufacturers and distributors fulfill orders, shipping directly to customers. The ultimate aim of merchants is to give consumers a variety of options to choose from without having the burden of inventorying every possible size and color from a product line.

    This business model has numerous benefits:

  • Less Capital –One of the biggest advantages of drop shipping is you don’t have to invest significant amount of money in inventory up front. You can easily set up an e-commerce store and start selling online. Drop shipping makes it easy for retailers to quickly get started selling online by offering thousands of items to your customers
  • Easy to Start: Running an e-commerce store is much easier, especially when you don’t have to deal with the inventory. With drop shipping you don’t have to worry about things like managing or maintaining a separate warehouse, packing and shipping customers’ orders, tracking inventory for accounting purposes, handling returns and finally reordering the products while maintaining a stock level
  • Wider Assortments – Drop shipping strategy enables wider assortments of merchandise without incurring the associated cost and risk of carrying the inventory in-house. Further agreements with vendors can improve the service levels to customers. Let’s say, for example, the vendor may be able to fulfill a backorder on the retailer’s behalf rather than having to wait for replenishment back in the retailer’s network
  • Saves Time – Organizing your stock levels and preparing it for delivery can often be a time-consuming nightmare. Using a third party to ship items saves handling, labeling, packing, shipping etc., leaving you time to focus on growing your business in different areas
  • Highly Scalable – In a traditional business, if you receive three times as much business, you’ll usually need to do three times as much work.  By leveraging drop shipping suppliers, most of the work to process additional orders will be done by the suppliers, allowing you to expand with fewer growing pains and less incremental work.  Sales growth will always bring additional work – especially related to customer service – but businesses that utilizes drop shipping scale particularly well relative to traditional e-commerce businesses
  • Some of the disadvantages of drop shipping are:

  • Stiff Competition & Lower Margins-Lower margins are one of the biggest disadvantages while operating in highly competitive drop shipping niche. Because it is easy to get started and overhead costs are minimal, many retailers will set up online stores and sell items at rock-bottom prices in an attempt to increase their revenue. This increased competition will quickly destroy the profit margin in a niche
  • Can Lead to Out of Stock Items-When you stock products in your own inventory, it is relatively easy to keep track of which items are in stock. But whenever you source from multiple warehouses – which also fulfill orders for other retailers – inventory changes on a daily basis. While there are ways you can better sync your store’s inventory with your suppliers’, these solutions don’t always work seamlessly, and suppliers don’t always support the technology required
  • Supplier Errors – If you work with multiple suppliers – as most of the drop shippers do – the products on your website will be sourced through a number of different drop shippers. This complicates your shipping costs. Imagine if a customer places an order for three items, all of which are available, but from separate suppliers. You’ll incur three different shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer, as they will think that you’re grossly overcharging for shipping! And even if you did want to pass these charges along, automating these calculations can be very difficult

In a nutshell, we can say that drop shipping is not a sure way to achieve success overnight. As with any successful online store, you’ll need to invest in a quality website, marketing, and customer service. While drop shipping does provide an easy way to get started, it only becomes most effective when your e-commerce is synchronized with your suppliers’ inventory and shipping. Only then can it lift your business to the next level without displeasing your customers or sacrificing too much margin.

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Drop shipping: An emerging trend and new way to sell online