In Part 1 of our Drop Shipping Series, we outline seven business advantages drop shipping offers
February 17, 2015
This is the first post in our series on drop shipping. Please click here for part 2 of the series.
Drop shipping is a buzzword thrown around loosely and often incorrectly. Knowing that, we thought it would be useful to discuss the pros and cons of drop shipping as a fulfillment method and share some information that e-commerce merchants need in order to make educated business decisions.
In the process, we’ll also shed light on common drop shipping challenges and possible drop ship solutions.
Advantages of drop shipping
You don’t have to look hard to find trending articles about running a business from your mobile device while sipping a tropical drink on a remote beach. Stories about people quitting fancy corporate gigs in favor of running a really successful drop ship e-commerce businesses and becoming their own bosses are not all that uncommon.
When you read about the wonders of successfully executed drop ship strategies, these are the main draws, and they are true:
- Increase your cash flow: Since you don't stock the product, you don't pay for it until it's sold (after you've been paid for it).
- Scalability: Test products and add new ones quickly without bearing the burden of ordering in bulk and having something fail (which ties up valuable time and capital expenditure).
- Increase lifetime value of customers: With the ability to add new and expanded product selections consistently, you can keep your existing customers engaged and returning to see what new items you’ve acquired. Costco stores offer a great example of this concept, and with a drop ship program, you can offer a similar experience online.
- Low starting cost: You can start selling without a lot of early investment because you don’t have to buy wholesale or cover the cost of manufacturing your own products.
- Enable expansion into new markets: Sometimes getting product across international borders can be costly and challenging, but if you partner with strategically located suppliers, you can often access the same or similar product offerings and ship them quickly. This allows you to test the market and validate if a given product is worth importing.
- Reduce costs: Every time you need to touch a product in the supply chain, there is a cost associated. Ocean freight services, Port Operations, LTL and FTL Services, and warehouse employees all get added into the Cost of Goods Sold. Often, you will find that a percentage of your product offering would net a business higher profit margins if it were drop shipped.
- Virtually unlimited inventory: One of the main reasons the drop ship industry exists is to help retailers and suppliers combat inventory distortion: the 800 billion dollar problem of over-stock clearances and out-of-stock shelves. By tapping into inventory further up the supply chain, theoretically you can gain access to virtually unlimited inventory.
What are the challenges around drop shipping?
The fairytale envisioned when people talk about drop shipping from a beach somewhere is a little too good to be true — but in reality, there isn’t really bad news about drop shipping. It can actually work with incredible success.
The “bad news” is that it’s not a one-and-done solution, as the media may have you believe (sensational headlines = great click rates).
As with anything profitable, drop shipping takes work in order to be successful. Setting up a website is potentially an easy thing to do, but establishing relationships, living up to customer expectations, and growing a business is hard to do.
Successful e-commerce retailers have identified challenges and put in the time and energy to overcome common drop ship obstacles that stand in the way of sales and revenue growth. They realize that drop shipping doesn’t follow a traditional supplier-retailer model, but more closely resembles a partnership based around system integrations, service level agreements, and alignment in business goals.