One of the innovations used to support merchants is drop shipping. It offers a convenient way to access potential clients, and then deliver their purchases safely. The success of drop shipping depends on the particular business model that you have selected as well as your preferences.
Businesses that are just starting out can benefit from all that drop shipping has to offer. For starters, it is one of the most effective ways of ensuring that you have sufficiently diversified your product listings to meet consumer needs. This article acts as a guide to any entrepreneur or business manager looking to add drop shipping to their arsenal of tools.
What Is Drop Shipping Fulfillment?
The essence of drop shipping is the ability to sell items even when you do not legally own them. You may not even have physical custody of those items. As the third-party coordinator, your role is to ensure that the order is received and delivered to the right people. In this manner, drop shipping involves linking manufacturers to buyers or customers.
The business model for you is making a profit between the price you pay to the manufacturer (wholesale price) and the price you get from the buyer (retail price). The drop shipper is the company that fulfills the agreement or order. The items are typically shipped under the name of the company or store that is doing the drop shipping rather than the manufacturer
How Does It Work?
There are three essential steps that you have to go through to complete a drop shipping transaction successfully:
- A customer who is interested in a particular product will contact your team via an online platform. Some customers prefer to make the order by phone or using a catalog order. Remember that you set up a price that includes all of your costs. The platform displays the item, but you have no inventory to deal with. All that you are doing is advertising a product on your platform.
- You accept the order via the platform, and then process the appropriate payment. At this point, you are obliged to forward the order to the manufacturer. You will already have certain arrangements with that manufacturer in terms of delivery times, deposits and final payments. The money that the customer has paid may be placed in escrow until the order is delivered.
- The manufacturer takes their payment, packs the order and sends it directly to the customer. At this point, the order is complete, and you are free to make use of the money.
As an example, say a customer orders a television set for $750. The manufacturer may deliver it at a cost of $400 plus $50 in shipping costs. That means that you make a profit of $200 by linking the two sides of the business transaction.
Benefits of Working With a Drop Shipper
There are a number of benefits that are associated with the drop shipping business:
- It is simple to operate: This business model is popular because it requires few technical details, a smaller workforce and less effort. For example, you don’t have to engage in large-scale inventory management. The model even removes the need for storage, handling and packing.
- Better control of overhead: Although you have additional expenses for each unit using this business model since you are not buying in bulk, you also benefit from the fact that you only pay for the inventory that you have sold. The final cost is complete, and you do not have to deal with additional overhead that might affect your profitability.
- Wider product range: Drop shipping does not require you to be a specialist in any given product. You can expand your sales targets depending on which products are moving well. Indeed, some people work with multiple drop shippers to satisfy their customers.
- Great geographical spread: Drop shipping is shopping without borders. You can sell, store and buy from any location of your choosing. That means that people can work from home and continue working even when they are away from home. It is possible to find states and localities that have favorable business policies so that you can increase your efficiency.
- Control of business scale: This business model does not require you to start big or small. You can choose the size of your sales operation without worrying about your staffing levels or product diversity. Your shipping partner is responsible for handling the issues of scale and capacity.
What Are the Disadvantages?
Although drop shipping is excellent when you are starting out, things can become a bit more complicated when you start expanding and becoming successful. At this point, you may have to contend with a few issues, including:
- Standardized profit margins: Because dropshipping has a standardized profit margin of about 20 percent, you have very limited flexibility to increase those margins when the costs of maintaining your platform go up. Making 10 television sales in a month with a potential profit margin of $200 might sound good. However, that can change if you have orders of 500 televisions, which means you have to hire staff, do customer service and deal with platform issues. Then, those become semi-variable costs that call for the kind of flexibility that drop shipping does not offer easily.
- Fickle customers: There are bound to be problems as you grow bigger. You may be working with a manufacturer that does not care about customers. That means that you are left dealing with issues that could affect your reputation if the product that is delivered is not acceptable.
- Swimming in a sea of mediocrity: It’s easy to become a “me too” business when you start dropshipping. If you’re not differentiating your product, all you can compete on is price. That can become a problem if any big-name retailer starts selling the same items.
- Inventory is beyond you: You have limited control of your inventory. You do not control its quantity, quality or location. This is particularly true when you are working with multiple drop shipping partners.
- Costs start getting in the way: As your customer numbers and diversity increases, you end up absorbing those costs that are associated with each order. That is not a problem if you are dealing with a dozen orders a week. Things start getting hectic when you are hitting 100 orders, and those marginal costs start adding up.
When Drop Shipping Is Not a Great Idea
You need to review your drop shipping business if any of the following apply to you:
- If your brand is getting hits or bad reviews due to poor delivery systems and low-quality output
- You are doing customized products, which require a very close relationship with your clients
- Your customers are buying an experience rather than a product
- Your business is very sensitive to marginal costs and revenues
- Your sales depend on the ability to offer a range of samples
Above all, stop drop shipping if you cannot find a partner that understands you, your goals and your business.
Why Drop Shipping Continues to Be Popular
The secret to drop shipping success is identifying an area of potential but untapped growth which can be expanded very quickly without having to engage in any upfront, large-scale investment. You could, for example, do highly specialized spare parts for guitars without having to go through all the processes of specializing in that niche.
Even if your niche is very specialized and you have few customers, this business model works well. You can have one or two orders every week but also be the market leader. There are no worries about having to offload unwanted stock or the overhead costs for manufacturing a few specialty items.
Advice for Shippers
Engaging in drop shipping can be a terrific business approach as long as it ties in with your growth plan. This solution might help you to deal with a number of problems, including delayed deliveries and an abundance of customers.
Drop shipping is an excellent option for those whose main competitive advantage is price. It means that you can standardize many things and forget about the bureaucracy of delivering the item to your customers. Whatever you do, ensure that the customer experience is always enhanced and that you can meet expectations.