Drop shipping is an increasingly popular online business model that means that businesses do not require to keep the products they sell in stock. Instead, the company sells the product, then hands over supply logistics to a third-party supplier to complete the order. Some of the companies that have utilised this method include Avasam, Spocket and Modalyst.
Drop shipping can be employed by business in a range of sizes, and is often quoted as a means of gaining high returns on investment. about high returns. Many entrepreneurs, particularly startups with minimal funding, are attracted to low barriers to entry that drop shipping offers. However, there are drawbacks to this eTailing method. Day-to-day management of a drop shipping business features a variety of obstacles and drawbacks, and it takes dedication to control and steer the business in the right direction. But if approached with a plan and the right state of mind, you can create a very successful drop shipping business – however if not, it could turn very sour, very quickly.
Drop shipping is only one of many methods that eTailers have tried to make money online, but according to Torchbankz, approximately 27% of online retailers still use drop shipping. In terms of the future, the drop shipping market is projected to reach US$591.77bn by 2027 proving that there is still large amounts of potential with the model. So, could the drop shipping model be an attractive option for you? We look at the pros and cons of drop shipping.
How does drop shipping work?
Drop shipping is a model that starts from the production and progress right through until customer delivery, meaning that it includes the manufacturers, wholesalers, and retailers. Once the customer places an order, the drop shipping partner, who is charge of overseeing the inventory, is alerted. They then prepare the product, package It, and ship it over to the customer. The drop shipping partner then charges the retailer for the service, then the retailer charges the customer.
This method compared to the more traditional retail model doesn’t demand the same level of operational capital. There isn’t the stress of such things as hiring employees, paying expenses or stocking products. For entrepreneurs, the idea of just simply fashioning an online storefront and purchasing from suppliers who have all the necessary parts is considerably better option. So, what are the positives and negatives of this model?
One of the biggest benefits of drop shipping is that it does not take significant effort to launch. There is no need to have business experience or to spent vast amounts of money to set up compared to other business models such as the traditional retail model. There is no need to worry about aspects such as managing a warehouse, preparing and shipping orders, ordering and managing stock levels, keeping an eye on inventory and taking care of inbound shipments are returns. This model allows you to create and build a business quickly and efficiently and is certainly more laid-back to oversee.
Flexibility is another useful benefit that comes with drop shipping. All you need is an internet connection for communication with supplier and customer for you to sufficiently run your drop shipping business. Apart from that, you can manage your business whenever and wherever you feel most comfortable and convenient. At the end of the day, with this model, you have the chance to become your own boss and play by your own rules.
As your drop shipping business grows, you won’t need to worry about working as hard to scale the business compared to a traditional retail model. You will need to concentrate on sales and marketing, however you will not experience a drastic change to your day-by-day routine. For example, when your business does scale, infrastructure costs will not be anywhere near as high as for a traditional model. As a result, you will be left with more money to spend on other areas of the business such as the marketing side. But as with most things in life, when there are benefits there are also disadvantages.
One of the standout negatives that comes with running a drop shipping business is that margins are slim. Since it is simple to kick-start the business and because there aren’t any drastic overhead costs that needs paying, a large number of stores competing with each other will start by selling items at low prices as they attempt to grow. This is not to say that you will not retain any profit, however, to have a chance of growing at a decent rate, you will need to find a niche that will grab customers’ attention and help audiences grow and your business become more successful.
Despite the whole process sounding straightforward, there can be issues regarding the inventory which can lead to complications. If you receive your products from a range of suppliers, it can be challenging to manage them daily. For example, different suppliers may use different shipping methods which can present a problem for yourself and the customer, and it can be difficult to work out which products you have available and which you don’t. Therefore, the whole ordering process may not always be plain sailing.
Even though with this model you can run your enterprise by your own rules, you do not have control over certain parts of the business such as stocking items, shipping, and order fulfilment. There is a heavy reliance on suppliers to deliver their part of the deal without running into any issues themselves. This lack of control and heavy reliance on others despite the model’s flexibility can be off-putting for a few entrepreneurs.
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Is drop shipping a model for you?
Drop shipping is not the business model for everybody but could it be the right option for you today? If your aim is to create something that will provide you with a decent income, then drop shipping could be worth it. If your aim is to make money relatively quickly, then you will need to look elsewhere. Running a business through this model needs time and effort.