Drop shipping used to be a bit of a buzzword when it was first introduced in the ecommerce world. Today, it’s used by almost a quarter of online businesses as a primary order and fulfillment method.
It’s an order fulfillment method that doesn’t require businesses to keep inventory. Instead, they sell the products and transfer orders to third-party suppliers, who then ship the products ordered to their respective customers.
While this business model sounds easy and lucrative, it isn’t necessarily the right business decision for every entrepreneur. There are several significant tradeoffs to make, but it can solve various problems that online store owners face.
We’re going to look at the pros and cons of drop shipping to help you determine if it’s the right business model for your brand and business.
Low Commencement Cost
Drop shipping eliminates the need for a warehouse and inventory, which would otherwise require a lot of capital to stock and maintain.
It’s also time-consuming to find a warehouse, stock items, take out a lease and employ staff to manage, pick and drop your products.
The advantage with this is that you don’t risk going into debt just to start your business. You can start faster with zero inventory and make money.
You can use the capital to improve your branding, website design, and develop operating systems.
More Business Liberty
The drop shipping business model also lets you scale your operations by just ordering more products and the supplier does all the picking, packing and delivery to the customer. Similarly, if you want to capitalize on seasonal surges and trends in the consumer market, drop shipping opens opportunities for you to change as you want.
The fact that you don’t need a physical store or warehouse also means you can run your business from any location with internet access. This gives you more time to do your personal stuff too, knowing you can get back to your business any time of the day or week as you wish.
No Inventory/Warehousing Costs
Inventory costs are one of the highest for business owners who have warehouses. The challenges that come with this include keeping obsolete inventory, or shortages, which lead to stockouts and revenue losses.
Warehouse costs are a thing of the past with drop shipping as it unloads the burden of inventory from you, and defers it to the supplier and distributor. Drop shipping shields you from such issues so you can focus more on growing your brand and customer base instead.
No Delivery Hassles
For order fulfillment to be effective, a physical warehouse is required, where you can organize, track, label, pick and package items before shipping them to customers.
With drop shipping, you – the business owner – don’t have to do all these things because a third party will handle everything. Your only job is to ensure the customers’ orders are received, while your supplier and distributor fulfill them and deliver to the customers.
Added Time for Marketing
With all the inventory, warehousing, and order fulfillment plus related costs taken care of, you can take the extra time to test new items. You can experiment with new strategies to incite more customers and sales.
You can build your brand identity and ensure customers have a great experience on your website.
Relatively Low Margins
While drop shipping saves you the cost of warehousing and inventory, it has a hidden cost that comes with the low barriers to entry and competitive online shopping space.
Your margins will be much lower and profit potential more limited, as you have to price for lower margins and sell more products to earn a lot of money.
The traditional model of keeping inventory offers discounts for buying in bulk, but drop shipping doesn’t. Instead, the supplier or distributor enjoys the impressive margins while you get less money out.
Thus, you won’t be able to realize big financial gains until your business scales up and you’ve built up customer loyalty such that you can comfortably increase prices and make bigger profits.
Dependency on Suppliers for Order Fulfillment
You may not carry the burden and cost of inventory or warehousing, but you will pay for customer complaints and dissatisfaction.
If the supplier or distributor messes up customers’ orders, customers will complain to you, or ditch your store for the competition because you really don’t control suppliers’ inventory.
Other consequences of this include longer lead times, and worse still lost customers.
Product Quality, Packaging Can’t Be Monitored
Drop shipping doesn’t give you control over the supply chain. Generally, any made-to-order items should be shipped under your watch, even if it means hiring temporary staff to handle additional shipping and returns.
You’re the one to handle customers directly, but even then, you’re more or less at the supplier’s mercy especially where things are beyond your control, or you can’t get the answers in good time.
It’s hard to track inventory levels when you’re not managing them yourself. If your store isn’t synced with your suppliers’ data, your customers can get frustrated and disappointed in the long run, hurting your brand’s reputation over time.
Other issues like late deliveries, damaged goods, delivering the wrong items and more will still come back to you as customers are in direct contact with you, not the suppliers.
Drop shipping can be lucrative, but before you take the plunge, weigh these benefits and tradeoffs carefully. You would then be able to decide whether it’s the right business model for you to invest in or not.
Roberto Garvin is the co-founder of Mofluid