Benefits and Disadvantages of Drop Shipping

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Drop shipping. What is it? And should you be doing it?

ECommerce businesses have a lot to consider when they’re setting up. What will they sell? What platform(s) will they use? How will they market their store? How will they receive payments? How will they maintain security? And how will they get their wares to their customers?

The last point should not be overlooked. Fulfilment is an incredibly important part of eCommerce, and can be decisive when it comes to getting repeat custom and growing your business. To learn more about fulfilment read 5 Tips for Fulfilment and Shipping for Ecommerce.

Drop Shipping is a supply chain and fulfilment management technique. Rather than storing products themselves, drop shippers pass along customer orders and delivery details to a third-party – such as a manufacturer, another retailer, or a wholesaler. It is then up to the third-party to ship the goods to the customer, with the drop shipper making a profit on the difference between the wholesale and retail price.

It may seem odd that any third-party would be willing to enter such an agreement. After all, the retailer has effectively delegated a large part of their fulfilment work to them. But drop shipping has benefits for the relevant third-parties too.

  • It encourages retailers to list more of the third-party’s products (since they are more likely to market new or less popular items if they don’t have to purchase and store them first).
  • The retailer often retains responsibility for dealing with complaints and returns.
  • The third-party benefits from free increased exposure and advertising.
  • And the third-party will often charge a small fee to pack and ship on demand, meaning that they’re won’t lose money doing extra work.

But is drop shipping good for eCommerce store owners? Well – sometimes. It really depends on the type of business you want to run.

To help you find out whether drop shipping is for you, we’ve listed some of the practice’s benefits and disadvantages.

Benefits for eCommerce Owners

1. Lower Start Up Costs and Less Risk

Lower Start Up Costs and Less Risk

Usually, setting up a store (eCommerce or “real world”) requires you to dedicate a large portion of your capital to stock and storage. But drop shipping allows you to reduce these costs either completely or substantially (depending how many of your goods will be sold on a drop ship basis).

Usually, a number of goods you choose to stock is based on, at worst, hunches and guesswork, at best, last year’s figures and data-based predictions.

But drop shipping allows you to sell items on a piecemeal basis, as and when orders come in.

This means you won’t have to rely on your own forecasts, freeing you from one of the traditional risks of starting a business.

2. Stock a Wide Range of Products Instantly

Stock a Wide Range of Products Instantly

With drop shipping, you won’t have to order stock and wait for it to be delivered before you’re able to list it on your store.

As soon as a product comes on the market, or starts increasing in popularity, you will be able to list it on your site – making it possible to benefit from seasonal and fad products, as well as more risky new ones.

And drop shipping also means that you can offer a wide range of products and product variations (colour, size, etc.) without too much hassle or stress.

3. Develop Your Business with Time Saved

Develop Your Business with Time Saved

Previously we’ve written about every eCommerce store owner’s worst nightmare: fulfilment and packing. It’s often a time-consuming, messy, and frustrating process. But it’s also essential to your business’s survival.

However, drop shipping allows you to pretty much sidestep the whole process, leaving you with more time to focus on developing your business. With a big smile on your face, you can simply pass all of that handling, labelling, packing, and shipping, to your supplier.

Disadvantages for eCommerce Owners

1. High Competition

competition

As with all markets with low barriers to entry, there are lots of people running or starting up drop shipping stores.

And, since not all third-parties offer drop shipping services, this means that the market is likely to become increasingly saturated with the goods from those that do. Great for the third-parties, not so great for you…

One-off, vintage, or highly specialised products may not lend themselves to drop shipping. But these products can often have very good margins, and those who purchase, store, and re-sell them can make a lot of money without processing tons of orders (as even a successful drop shipping operation demands). Which leads us on to…

2. Low Margins

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Low margins are perhaps the biggest disadvantage of drop shipping.

The phrase “low margins” should make any good entrepreneur’s heart sink. And quite rightly!

Low margins mean more work. More processing. More marketing. More work looking for alternative streams of revenue (such as advertising). More accounting. More difficult tax forms. And so on.

All of this should be setting off alarm bells. Many who venture into eCommerce do so for an easier life and more money. Unfortunately, whilst drop shipping is easy to get into, it isn’t likely to provide you these things.

As we’ve said before, up-and-coming niche markets may be the best option for aspiring internet entrepreneurs.

3. Loss of Control

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Most eCommerce store owners are proud of what they’ve achieved, and of the processes and systems they’ve developed. Handing over control for such an important part of your operation entails a substantial loss of control – and how heartbreaking it would be to lose a client due to your supplier’s mistakes.

Although fulfilment can be annoying, at least when you do it yourself, you can be sure to do it exactly in the way you want.

Additionally, with your own stock, you’re not relying on someone else’s inventory. Doing so may lead to a situation in which you place a large order only to find out the item is sold out. This can cause longer-than-normal delivery times and, ultimately, unhappy customers. Bad times!

Are you drop shipping? Do you agree with our list? Or did we leave something out? Let us know with a comment.

 

 

 

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