Drop shipping is a retail fulfillment method where a vendor fulfills orders from a third party. Products are then shipped directly to customers by the third party. This means that, unlike in a standard retail model, the vendor does not keep inventory in stock. Instead, drop shipping retailers make purchases of inventory as needed from wholesalers or manufacturers.
Drop shipping is becoming an increasingly critical component of many eCommerce businesses. It is a powerful tool that can increase flexibility. It also reduces the upfront costs associated with starting a new business or moving into a new product line. However, there are also potential downsides. Having a comprehensive understanding of the pros and cons is crucial to using this fulfillment method. Here, we’ll outline everything you need to know about drop shipping. This will help you to decide whether it is the right model for your business.
Advantages of Drop Shipping
Drop shipping provides a number of unique advantages to eCommerce retailers. Perhaps the biggest benefit is that it reduces upfront costs and has low overhead. This makes it less costly to start and run an eCommerce business than a retail store.
Drop shipping requires less upfront capital because an entrepreneur does not have to invest thousands of dollars in inventory before making that first sale. Businesses have traditionally operated this way, tying up significant amounts of capital in initial inventory purchases, which also represents a significant risk. If the business model doesn’t work out, the business owner is stuck with a lot of unsold inventory.
Following the drop shipping model, you don’t have to purchase a product until the sale has already been made and you’ve received payment from the customer. Additionally, you do not need to worry about issues such as packing and shipping orders. You also do not need to handle managing a warehouse and overseeing stock levels. Because all these tasks require significant time and expertise, the upfront costs of launching an eCommerce business are further reduced.
Further, because you do not need to manage a warehouse or deal with purchasing inventory, overhead expenses are low. You can operate a small drop shipping business on a streamlined basis, with few employees, and from a home office. As the business grows, overhead costs are likely to increase, but they will continue to be lower than those of a standard model eCommerce business or a brick-and-mortar retail store.
Drop shipping also offers greater flexibility in terms of both product selection and scaling. Because the retailer doesn’t need to keep inventory on hand, it is possible to offer a wider array of products and to add products to the online store at no additional cost.
With a traditional business model, growing and scaling up creates significantly more work, because it involves managing more inventory. However, in the drop shipping model, the additional work will be borne by and large by the suppliers rather than the retailer. You may have to add employees to deal with issues such as customer service as you scale your eCommerce business. However, with the drop shipping model, the marginal costs of growing your business are much smaller than those of traditional businesses.
Disadvantages of Drop Shipping
While drop shipping offers a number of clear advantages over the typical retail fulfillment model, it can come with significant downsides. You should carefully consider the cons as well as the pros before moving toward this model.
Perhaps most importantly, the benefits of drop shipping ironically also make markets more competitive. Because the startup costs are low, there are relatively few barriers to entry. This means you will have to reduce the profit margin on each product sold to stay competitive.
Additionally, larger businesses can offer reduced markups, meaning small companies might struggle to compete with large drop shipping businesses. Merchants might also start out by offering a product at a rock-bottom price to build a brand and attract customers. All of this means you will have to work that much harder to turn a profit.
It can also be difficult to operate a retail business when you do not have physical access to each of the products you sell. While you can order the product yourself to see its overall quality, you lose quality control over individual products. This means you have less control over potential errors, and you are essentially at the mercy of your suppliers. Choosing a good supplier is, therefore, critical to the success of your business, but it can be difficult to evaluate the quality of a supplier before you go into business with it.
Working with suppliers and wholesalers might also generate problems with inventory and shipping. It’s more complicated to keep track of which items are in stock at which warehouse locations. This is because you are not stocking and tracking your own items. Additionally, most drop shipping businesses will need to work with multiple suppliers and warehouses.
Your shipping costs might also be more complex when customers place one order that requires shipments from multiple suppliers. This would result in products shipping from multiple locations. This might raise your costs because it is difficult to pass through the expenses of shipping to consumers without losing business. Automating the calculations necessary to determine shipping costs at checkout can also become much more complicated with this model.
Fortunately, understanding both the advantages and disadvantages of the drop shipping model can help you understand the steps you will need to take to operate a successful drop shipping business.
Vet Your Suppliers
Finding the right suppliers is critical to the success of any drop shipping business because suppliers are at the core of this fulfillment model. There are a number of ways to find legitimate wholesalers to work with. Once you know the product you would like to sell, contact the manufacturer and request a list of suppliers, then contact the suppliers to see if they drop ship.
Attending trade shows allows you to speak with wholesalers and interact with their products in person. If you have the time and resources to attend a trade show, it’s a great way to build out your contacts and identify the leading wholesalers in particular markets.
Several supplier directories exist that are organized around markets or particular products or services. They typically use a screening process to make sure the suppliers on that list are genuine wholesalers. However, most directories charge a fee for access. Directories can be helpful tools, but they are not necessary if you already know the product you want to sell. This is because you should be able to identify wholesalers by calling the manufacturer and attending trade shows. You may still want to use directories to browse large numbers of products and to identify potential items to add to your online store.
Because you will need to work with multiple drop shipping suppliers to ensure continuity of supply, all three of these methods may be useful in identifying and comparing suppliers.
There are also several questions you should ask of potential wholesalers to vet them. Most importantly, make sure they have a high-quality customer sales team in place. Good wholesalers should assign you to an individual sales representative who can take care of any issues that arise by working with you directly. This will help you solve any customer issues in a timely manner. It will also give you someone to hold accountable if anything goes wrong.
It can be difficult to get a complete picture of what it’ll be like to work with a particular wholesaler. However, placing a couple of test orders can give you a good sense of the customer experience. A test order will show you how long the supplier takes to ship and how it handles the order process. It will also show the quality of packing when the product arrives.
Build a Shipping System
Because drop shippers typically work with multiple suppliers, the shipping system can quickly become complex. Your eCommerce platform can offer shipping solutions to help you design a streamlined shipping system. For example, Magento offers Magento Shipping, which streamlines shipping logistics, tracks fulfillment, and more.
Calculating shipping rates for customers can also be complicated when multiple products are being shipped to one customer from different locations. There are three types of shipping rates you can consider:
- Real-time rates: A customer’s cart automatically calculates the weight of all the products purchased and takes into account the buyer’s destination to generate a real-time quote with this method. Real-time rates are the most accurate and help reduce the shipping costs that fall to you, but can be complicated to calculate on the spot.
- Per-type rates: This method sets a flat shipping rate for categories of product. For example, all small products might fall into one flat shipping rate while all large products get placed into a higher flat rate.
- Flat-rate shipping: The flat-rate shipping method charges the same rate for all shipments, regardless of the product’s type or size. This could also mean simply making all shipping free and building some of your shipping costs into the pricing structure instead.
Regardless of your preferred shipping rate, your eCommerce platform can help you build the price of shipping into the checkout process.
Provide Superlative Customer Support
Managing your customers’ needs is even more critical for drop shipping businesses. You will need to communicate with suppliers quickly and efficiently to resolve any issues that might arise. Additionally, because drop shipping markets tend to be saturated, you will have more competition. Providing superior customer service will give your business an extra edge.
Adding several methods of reaching your customer service team to your eCommerce site will help make sure customers feel supported and can reach you in a timely manner. Magento’s extensions allow you to add customer service chatbots, as well as email and phone links to customer service.
Using an Excel spreadsheet or email inbox to track customer issues may be sufficient as you start out. However, as your business grows, you will need a more sophisticated system. This will allow you to manage multiple, in-house team members and customer service contacts.
Implementing a help desk is the most important thing you can do to ensure that your customers receive top-quality service. Help desk software will help you manage customer correspondence and to assign team members to different issues as they arise. It will also allow you to maintain communication between your company and the supplier as well as the customer, and track issues through resolution.
Find a Niche
Because markets are so competitive, the most successful drop shipping businesses tend to be those that are able to find a specific product niche. While some business owners believe instinctively that narrowing their customer base will lower their sales, the opposite is actually true. The more you can specialize, the more you will be able to attract loyal customers and stand out from other brands. This will allow you to charge premium prices for your products or services.
Specialization will also help you to identify potential customers and market your products to them more effectively. You don’t just want to sell cameras, for example; you want to sell the perfect lightweight camera for budget-conscious travelers. This kind of micro-specialization is a hallmark of the most successful drop shipping eCommerce businesses.
If you’re launching a new business or adding a new product line, you may not be able to identify the segment of customers you need to focus on right away. This is workable because you will be able to experiment as you go. It will allow you to find the customer segment that adds the most value and is most profitable for you. Try experimenting with different marketing tools to find your niche.
IronPlane is a full-service, U.S.-based agency offering custom eCommerce solutions. Contact our award-winning team to set up a free consultation and learn more about the services we can provide for your drop shipping business.