Drop shipping is an ecommerce business model that allows you to sell products from your store without investing capital in inventory, warehouse and fulfillment. When a customer buys from your online store, the product is shipped instead from the vendor. You – the retailer – will fulfill the order by letting your vendor or their warehouse know the customer address or preferred delivery address of the customer.
Drop shipping allows you to cut out on the inventory bills, shipping hassles and retail fulfillment issues. As such, it is an attractive ecommerce model for many small and home-based online entrepreneurs.
Below are the advantages and disadvantages of drop shipping:
Advantages of Drop Shipping
The main advantage of drop shipping is that you do not have to stock or touch any product. When a customer orders a $100 pearl necklace from you and your supplier charges you $13, an invoice is sent to your supplier, they charge you $13, and they ship the pearl necklace to your customer. Meanwhile, you collect $100 for a profit of $87.
Some of the advantages of drop shipping are:
- It is easy to get started
- There is no need to manage, stock and organize inventories.
- Assortment expansion
- Easy to Scale up/Down
- Allows you to function on a very low operating budget
- Allows you to have a healthy cash flow, as you don’t have to spend a lot until you start seeing money back
- You don’t need to have a website as you can sell at high-traffic marketplaces such as Amazon.com, eBay.com or other online marketplaces.
- While average margins may be lower compared to other retail stores that stock their own inventory, there is no risk of a “bad buy” that results in over stock issues.
Disadvantages of Drop Shipping
Drop shipping’s ease of entry is a double-edged sword. As more merchants use it, drop shipping can become a rat race to the bottom. Here are the other disadvantages of drop shipping:
- It is not easy to find a good, reliable drop shipper that does not serve thousands of other merchants.
- You don’t control anything except your prices and the products that you “offer”.
- Potential quality control issues
- Risk in offering and selling products that are no longer available from the drop shipper supplier resulting in potential customer service issues
- Reduced margins, or low profit margins especially if you find yourself competing with other online merchants that have set their shop’s prices at rock bottom prices. With competitors making only minimal profits, if you try to match them or compete head on with their low prices you may find that your profits are only pennies.
- Overcrowded market, with the dropshipper supplying the same products as you have to thousands of other drop ship sellers like you
- You may find yourself in a highly competitive drop shipping niche.
- Does not guarantee profits
- Your store is only as good as your ecommerce platform
- Requires basic skills (at least) to manage an online store, including some technical knowledge like uploading products to shopping cart, cropping photos, writing unique product descriptions
- The more drop shipping suppliers you use, the more work you create for yourself
- Shipping costs charged by the drop shipper, which could vary across different drop shippers.
- Paying shipping fees to your drop shipper while you are pressured to offer free shipping to your customer
- Drop shipper can make mistakes, as it is not a guarantee that they fulfill 100% of their orders 100% correctly.
- If selling on huge marketplaces such as Amazon (alongside thousands of other merchants using the same drop shipper), price comparison is easy and you may end up discounting and discounting just to beat everyone else.
Drop shipping is not an automatic path to success. In fact, it is hard work. It is not just setting a system that runs itself, orders come in, manufacturer ships and you pocket the difference. Since you may be just one of the merchant working with the same drop shipper and hustling for the same dollar, you need to make every effort to differentiate your business from the others.