Are you considering diversifying your product line? Are you trying to launch a new business? Do you want to guarantee that you’ll always have stock?
If you said yes to any of these, you’ll need to invest in new, or more inventory. But, procuring inventory takes a lot of resources including money, time, and proper management.
This can be a big risk for your business. It might be worth it if you didn’t have to buy your inventory upfront and only pay for what you sell. But, is that even possible?
Actually, it is! It’s called drop shipping. In this post, we’ll introduce you to drop shipping. Our introductory drop shipping guide shows you what drop shipping is and how merchants can use it.
Drop shipping 101: What is Drop Shipping?
Drop shipping is a fulfillment process in which merchants buy goods from a vendor who ships them directly to the consumer who bought them from the merchant.
The players usually involved in drop shipping processes are:
Wholesaler, Manufacturer: Manufacturers create products that they then usually sell to wholesalers. Wholesalers buy products in bulk from manufacturers and then mark up the price to sell to merchants in smaller quantities.
Merchants: Merchants sell products directly to consumers at a higher price.
An Introductory Drop Shipping Guide: How Merchants Can Use Drop Shipping
Merchants use drop shipping as an effective fulfillment process when selling to consumers.
Here’s how it works:
- Merchants establish business relationships with vendors that carry products they want to sell. If selling in smaller quantities, merchants buy from wholesalers on an as-need basis. Large merchants can buy directly from manufactures at a lower price if they meet minimum purchase requirements.
- Merchants offer these products either on their webstore or online marketplaces.
- When a customer places an order, the vendor is notified of the purchase and charges you the wholesale price of the product
- The vendor is then responsible for shipping the product to the customer.
The best part of this process is that the vendor is completely invisible to the customer. The product appears to be shipped from the merchant.
The Drop Shipping Difference
Drop shipping differs from traditional fulfillment process in that the merchant doesn’t have to keep inventory on-hand. Instead, the vendor represents your stock of inventory. You only purchase from them when you sell an item.
Drop shipping allows you to sell items without ever actually seeing or shipping the item yourself. This becomes a very easy and attractive fulfillment process for merchants.
The Benefits of Drop Shipping
There are many benefits to drop shipping your products, which include:
Not keeping inventory on-hand: The main advantage of drop shipping is that you only buy inventory from your vendor when you sell something. This means that you don’t have to keep costly inventory on-hand and worry about managing it from day to day.
Low overhead costs: Since you don’t keep inventory on-hand, you don’t have to store it. This means that your business will have little to no overhead costs since you won’t be renting storage space.
Reach more customers: When you store and sell your own inventory, you can be limited to who you sell to by your location. It can be expensive to ship items across the United States. But, with drop shipping, you can strategically pick vendors in different locations. You can easily sell your products to wherever potential customers are.
Diversify your product line: Not only can you reach more customers, but drop shipping also allows you to easily expand your product line. Since you don’t have to purchase stock upfront, you can add different items without any additional costs. This is a great advantage for already established merchants who want to expand their business.
Offer “Endless Aisle”: Endless aisle is the ability to the sell items to customers that are not available in-store or kept in-local inventory. It appears to your customers that you have an “endless aisle” of products available. Drop shipping makes this great customer experience possible.
Start selling right away: If you’re just starting out as a new merchant, drop shipping is a great way to get your business up and running, fast. Without having to invest in inventory and somewhere to store it, you need little money upfront to start. You can also sell wherever you need to with the right vendors. Merchants who drop ship can virtually sell from home with just a computer.
All of these benefits are great. But, before you get ahead of yourself and start drop shipping, you need to know about the complications of this alternative fulfillment process.
The Disadvantages of Drop Shipping
While looking risk-free at the surface level, drop shipping has some considerable complications that you need to consider.
Low margins: As product moves hands from the manufacturer to the consumer, the markup on the price keeps getting higher. It’s how merchants are able to make a profit on what they sell. However, in a competitive market, you have to continually lower your price to compete.
This causes you sell to at very low margins, or even at a loss sometimes! Margins can vary greatly across the type of products that you drop ship.
Picking the right vendor: Finding and establishing good business relationships with the right vendors with the best prices can be difficult. As drop shipping becomes more feasible for more merchants, you’re going to have to scan through a lot of posing wholesalers offering “wholesale” prices.
Unreliable vendors: The best and worst part of drop shipping is that you rely on your vendors to always have in-stock products and to make correct shipments. But, what if they don’t have an item in stock that you just sold? Or, their shipment doesn’t make it to the customer?
They fix it, right? No. It’s your job. The vendor is invisible to your customers, remember? Ultimately, it’s your responsibility to deal with these situations and cover costs when you need to.
Using multiple vendors: Merchants will often use multiple vendors to ensure in-stock products, select the best prices for different products, and ship from the nearest location to customers. But, it’s very complex to manage multiple vendors fulfilling different orders. If you don’t do it right, it can cost you your business.
Shipping costs: Shipping costs can total up quick when you’re using multiple vendors to ship different parts of one order, or product. If not handled strategically, drop shipping isn’t cost-effective for you anymore.
You can overcome these drawbacks of drop shipping, but they need to be considered before making the decision to drop ship. Drop shipping (when done correctly) can have a huge impact on your business and its bottom line. But, if not handled well, it can ruin your business. Don’t let that happen.
What to Do Next
Drop shipping is an effective alternative fulfillment process for all types of merchants. If you’re just starting out, it’s a cost-effective way to get your business up and running without investing large amounts of capital. As an established merchant, drop shipping allows you to expand your customer reach and your product line with little incurred costs.
The benefits of drop shipping make it an attractive fulfillment process. But, there’s also an ugly side of drop shipping that you need to consider.
Ultimately, the decision on whether or not drop shipping is best for you depends on the products you sell and your business model.