Imagine launching an online store without spending thousands of dollars on having your stock ready. Aside from cutting your upfront costs, this also saves you an incredible amount of time. You can open your store to the public as soon as you’re done designing your website and setting up payment options. You’ll be surprised to hear that this is possible – and this business method is called drop shipping. In fact, it is so popular that around 30% of the entire e-commerce industry is using it.
So, what exactly is drop shipping? Are there any disadvantages you need to consider? If you are seeking answers to these question, you’ve come to the right place. In this helpful guide, we’ll tell you everything you need to know about drop shipping.
What is Drop Shipping?
Small-scale e-commerce website owners use drop shipping to cut their costs and simplify their logistics. Since there’s no inventory to hold, there’s no need for a warehouse. Besides, there’s no need for packaging and preparing your items for shipping. Instead, you forward your customers’ orders to wholesalers who send the products on their own.
To simplify, let’s take a look at how the traditional business models work as well as how drop shipping works.
When it comes to traditional shipping, here are the steps it includes:
You keep track of your (locally stored) inventory and order products from a supplier when needed;
You keep those products stored until you receive a customer’s order;
To fulfill an order, you’re in charge of sending the product which includes packaging and shipping it yourself.
On the other hand, here are the steps that drop shipping includes:
You wait for a customer’s order without having a product stored locally;
Upon receiving the order, you forward it to your drop shipper;
The drop shipper then prepares the product and ships it to the customer’s front door.
As you can see, the most obvious benefit of this business model is that you never see the products you’re selling. Besides, you don’t need a physical location to store them. In other words, you don’t need a lot of money to buy, store, and maintain your stock. Sounds good? Then continue reading to learn more.
Benefits of Drop Shipping
Budget-Friendly – When starting your store, you have to think about leasing a warehouse to store your products. It’s easy to see that this takes a lot of effort, including time, labor, and significant costs. Any experienced online store owner will tell you that you need to keep your initial costs as low as possible. This is why drop shipping is an attractive and viable alternative. It allows you to control your finances and avoid up-front costs.
Open Your Store in Less Time – Aside from saving you a lot of money, drop shipping saves you a lot of time as well. This is because you don’t need to wait for products to arrive at your warehouse. Also, you don’t have to prepare your physical location for packaging and preparation for shipping. Instead, you focus on building a relationship with your drop shipper and setting up the terms of cooperation.
Low Overhead – Most e-commerce stores start with a small warehouse. However, even a small storage space can be a serious monthly cost. By eliminating physical products, you’re also lowering your business’ monthly costs. In fact, numerous online stores started out as home-based businesses with monthly costs under $100.
Lower Business Risks – Risks are something that every new business carries. After all, you’re investing your money in a strategy that might not work. However, there’s a lot you can do to lower those risks. By eliminating physical products and the money needed to acquire them, you’ll make a huge step toward minimizing the risks.
Incredible Selection of Products – It’s important to know that drop shipping doesn’t limit you in any way. No matter if you want to sell clothes, toys, smartphones, garden equipment, or home décor products, you’re in luck. It’s almost impossible not to find a group of goods that drop shippers still don’t offer. You’ll be amazed by the huge selection of available products.
Scalability – It’s always a good idea to start small. You need a lot of effort, dedication, and time to create a seamless business operation. This includes everything from your store’s design, the way you handle orders, customer support, and communication with your suppliers. Drop shipping allows you to transfer some of that workload to another party. Instead, you can focus on providing your customers with the best possible shopping experience. When it’s time to scale up, drop shipping making this process incredibly easy.
Disadvantages of Drop Shipping
Lower Margins – The most obvious disadvantage in comparison to wholesale sourcing are lower margins. Drop shipping allowed almost anyone to set up an online store and start selling online. Due to low initial costs, they introduced lower margins in an effort battle traditional (and online) stores. Besides, many drop shippers charge higher prices for their work. After all, they help you deal with your store’s products, and they ship them to your customers. However, they’re also after profits, which is why their services have a certain price. However, even when this expense is included, drop shipping is still ahead traditional wholesale sourcing.
Fierce Competition – Due to its numerous benefits, drop shipping managed to find its way to thousands of online stores. Naturally, this translates to a lot of tough competition. Still, you can find a way to avoid this. For example, you can go an extra mile when finding a drop shipper. Negotiating product prices and shipping costs can be your competitive edge. In general, drop shippers are willing to lower their prices if possible, making some room for negotiations.
Inventory Issues – Since you don’t have any control over your drop shipper’s inventory, this could lead towards potential issues. For example, your drop shipper might fail to inform you that a specific product is no longer in stock. This can force you to lose track of your inventory and cancel your customers’ orders. However, this can be minimized by negotiating with your drop shipper. Since this can be a serious problem for the both parties, there are some solutions. One of them includes using software to keep track of inventory.
Shipping Issues – Very often you’ll find yourself working with different drop shippers that supply different kinds of products to your customers. Each of them comes with their shipping costs. Now, let’s say that someone orders two products from two different sources. You have to pay for shipping costs individually and make sure to do a proper calculation. You can also transfer your costs to your customers, even though this will most probably lead to lower conversion rates.
Lack of Control – Even though the best thing about drop shipping is that you don’t care about inventory or shipping, this can also be a bad thing. You can’t be sure that products will be properly packaged, you can’t apply your company’s branding, or include freebies.
Now that you know the most important benefits of disadvantages of this business model let’s take a look at additional tips and pieces of advice. We’ll uncover who might benefit the most by using drop shipping, as well as when it’s not a good idea to utilize it.
Is Drop Shipping for You?
We’ll list categories of potential users who might find that drop shipping is an excellent idea. All of the following types of users are perfect candidates for using this business model.
Inexperienced, First-Time Owners – Building, opening, and running your first online store is a challenging task. Unlike other types of websites, e-commerce websites come with certain costs and business risks. Since drop shipping lowers those risks, it can be an excellent choice for inexperienced and first-time sellers. If you don’t want to deal with a warehouse and shipping, you’re in for a treat.
Testing the Market – Let’s say that you already run a successful online store. From time to time, you’ll want to expand it by including new products. However, it can be challenging to pick the product that your customers need. This is why drop shipping is ideal for testing the market. You can offer new products without a lot of risks and see how they perform.
Scaling Your Store – You can easily combine a traditional business model with drop shipping. Expanding your online store often includes finding a bigger warehouse. However, you can opt for drop shipping in the meantime. This is an excellent way to increase your product offerings, make your customers more satisfied, and potentially increase your profits.
Drop Shipping: Who Shouldn’t Use It?
Now, let’s take a look at when drop shipping isn’t a good idea. We’ll show you several different scenarios where you’re better off with the traditional business model.
Businesses with Strict Branding Rules – Marketing and branding are intertwined on several different levels. You’ll often hear from marketers that you should push your branding as hard as you can. This includes a specific packaging with your company’s name on it, as well as freebies and personalized messages. None of these things are achievable using drop shipping.
Businesses Looking for The Best Margins – This is a common problem among businesses that use drop shipping. You simply have to accept that you’ll give up on the best margins since you’re not in full control over your products. If you’re seeking a way to increase your profits, you shouldn’t use an intermediary. Instead, go straight to the source.
Some Quick Tips & Tricks
In case you’re interested in using drop shipping, we’d like to provide you with additional tips and tricks. These can hopefully save you some time and money, and push you towards bigger profits.
It’s imperative that you develop a healthy business relationship with your drop shipper. Just because you don’t physically handle your products, this doesn’t mean that you shouldn’t have any control over them. Many drop shippers are willing to listen to you and provide ways to include you. After all, they are as successful as their clients – which is you.
When searching for a drop shipper, make sure to double-check different product offerings. Think about creating bundles or individual sale items. Instead of offering single products, you can come up with creative ways to combine them by using a single drop shipper.
Be strict with your drop shipper. If something’s not right, make sure to tell them. You don’t want your customers to suffer. Instead, you want your product to be nicely packaged and shipped on time. If your supplier regularly makes mistakes even after you inform them, find a more responsible one.
It is often said that marketing is the most powerful tool a business can use. Make sure to run promotions, optimize your website’s SEO, and invest in advertising. Both Google and Facebook offer budget-friendly ad campaigns that can reach a lot of people. Introduce yourself to online marketing tools and use them.
Drop shipping is a fantastic business model – and don’t let anyone tell you differently. However, just like with any other business model, you need to reshape it and adapt to your own needs. Whether you’re building a brand-new store or expand an existing one, drop shipping can of tremendous help.
We hope that now that you know the basics, you’ll develop your drop shipping business plan and use it wisely. Don’t rush into things and make sure to negotiate the best possible offer with your supplier. You can be running a successful online store in no time!