Drop shipping has once again become all the rage for e-Commerce businesses, and there’s no wonder why. Drop shipping is touted as a fast and easy way to make a substantial income and a way to escape the typical 9 to 5 drag in favor of working anywhere. There are several significant advantages to drop shipping, but there are also several disadvantages. Knowing what these different sides are can help you make the best decision about which direction you want to go.
Perhaps one of the biggest draws of drop shipping comes from its very low initial startup costs. Because this business model doesn’t require you to have any inventory on hand, you don’t have the initial cost associated with building that initial inventory. That will greatly reduce the needed capital to start your business.
Additionally, drop shipping means that you can operate your business from anywhere with an internet connection and a power supply. You don’t need a dedicated space for storage because again, you have no physical inventory. Your entire inventory is held by the drop shipper. You also don’t have to invest in an inventory system to keep track of what you have in stock or worry about reordering stock when it gets low. All of these little costs add up to a huge savings, which means that someone with only a few hundred dollars can conceivably enter into the drop shipping arena.
When you sell something, the margin you make on an item is essentially your profit. For example, if you sell something for $19.99, and the wholesale price from your supplier is $9.99 per unit, you might think that your margin is a very respectable $10.00. However, you have to also account for other costs.
First, keep in mind that the lowest costs for items from suppliers are reserved for bulk orders. As a drop ship client, you’re only going to be moving one or two items at a time. That means you’re likely going to pay a higher price. That $9.99 wholesale price can suddenly experience a two to three dollar increase when you’re buying in smaller lots.
Secondly, you’re going to have to pay for any expenses accrued while your product is picked, packed, and shipped. These shipping fees are going to cut into your already slim profits. In most cases, a drop shipping seller will experience a margin of anywhere from 5 to 20 percent.
One of the problems with being a traditional FBA or FBS seller with Amazon or any marketplace is your inventory. Eventually, you’re going to get left holding on to stock that just doesn’t move at a price that’s worth it for you. That means that you either have to take up valuable warehouse space with inventory that isn’t moving or get rid of it at a loss. With drop shipping, you don’t have any inventory on-hand, so you don’t assume any of the risks of holding on to outdated or expired product.
There’s also a great deal of flexibility involved in being a drop shipper. You aren’t tied to one marketplace’s ecosystem. For example, if you’re a traditional FBA seller, your stock and inventory is tied into Amazon. Whatever changes that Amazon makes to their fee structure, for better or for worse, you’re obligated to stick with them. With drop shipping, you can operate from nearly any storefront. Whether it’s eBay, Sears, NewEgg, or Amazon, you can sell and ship your items to any customer.
Because it’s so easy to get into drop shipping, there are a lot of people who are getting into the business. That means a lot of competition from other sellers. That means you have to deal with other stores that will price their goods at prices that can affect your low margin. Instead of relying on pricing to set yourself apart from other sellers, you may end up having to focus more on other methods of gaining conversions.
There are numerous ways for you to stand out from the crowd of your competitors. The most obvious is to focus on your SEO and marketing. This will let you attract new customers and drive traffic to your website, which is a large portion of the battle for customers. The first six months after your initial launch becomes especially important, requiring a large portion of your time to be focused on marketing and SEO.
A great thing about drop shipping is how easy it is to scale your business from 100 customers to 10,000 customers. In a traditional business, if you quadruple your customer base, you’ll be nearly quadrupling your workload. From dealing with extra inventory to the increased picking and packing, you’re going to be extremely busy.
Thankfully, with drop shipping, you don’t have to handle any extra inventory yourself. As you sell more, your drop shippers will maintain their stock and handle the increase in shipping. While you will still need to handle the increase in customer service, you are going to experience fewer aches and pains associated with traditional business growth.
Scalability doesn’t just deal with your customer base either. Drop shipping makes expanding your inventory choice easy as well. Because you don’t have to pre-purchase any inventory, you can list anything that your suppliers have in stock without any risk to your business.
Remember that none of your product is actually ever in your hands when you’re a drop shipper. That means that any mistakes made by the company that actually does the shipping will reflect on you, not them. This can be anything from shipping delays to shipping the completely wrong item. After all, the customer doesn’t see the drop shipper as the company that they are buying stuff from. They only see you.
Another significant issue with suppliers is that if you’re dealing with multiple suppliers. If a customer orders multiple products from you, each item may come from a different drop shipper. And as such, you’re going to pay the shipping fee for each item. Customers are going to react negatively if you pass on that total shipping cost to them, so you’re going to have to deal with losing even more of your already slim margin.
Another given part of running an online store are the returns. According to Invespcro.com, nearly 30% of all purchases made online are returned, as opposed to only roughly 9% of brick-and-mortar store purchases. Handling those returns will be more of an inconvenience for you because you will have to deal with the individual rules from each of your suppliers.
Drop shipping isn’t for everyone. But for sellers who are interested in setting up an online presence immediately with little overhead, this business model offers some attractive options. The sheer number of new products that are available every day makes trying to keep up with the latest fad nearly impossible if you keep your inventory on hand. However, with drop shipping, you can simply negotiate rates with your existing supplier without dealing with the hassle of ordering and storing inventory. As long as you keep in mind the benefits and drawbacks of drop shipping for your business, you can decide if this is the best choice for you.