Drop shipping is a fulfillment method in which the retailers do not keep stock of goods rather they transfer the orders of the customers along with the shipping details either to the manufacturer, wholesaler or to another retailer. The products are then shipped directly to the customers by the third party with whom the customer’s order and shipment details are shared.
Drop shipping is not a new concept. It was started back in 1999 by Zappos. However, its importance is felt more in the past few years. Big players such as Amazon use this model of business. Drop shipping is not limited to big players, even the small-scale business use this business model as it eliminates the requirement for inventory management. No inventory to hold results into a low upfront investment.
Around 33% of the whole e-commerce industry’s primary inventory management model is drop shipping. With drop shipping, the merchant doesn’t see or handle the products that are delivered against the customers’ orders.
Benefits of Using Drop Shipping
The drop shipping supply chain management model has the following benefits:
Less capital is needed
Launching an e-commerce store without investing a huge sum of money in purchasing inventory is perhaps on the main advantage of drop shipping model. With drop shipping, you can start a business with a low capital as you don’t have purchase products until you made the sale and receive the money from the customers.
Easy to start a business
With dropping you don’t have to worry about things such as managing or paying for a warehouse, packaging your orders, tracking inventory for accounting purpose, handling returns and inbound shipments, managing stock level continuously etc.
No worry about shipping
When you use drop shipping model, you don’t have to worry about the shipping. The third-party supplier who will is responsible to provide the products will deliver them as well.
When you have no inventory, it means there is no leftover. If the products you sell become outdated, untrendy or obsolete suddenly, you don’t have to worry about the stocks of those products. It means you don’t have to face any loss as you’re not the one who has invested in the inventory.
You can run a drop shipping business from anywhere. As long as you have a stable internet connection, and communicate with customers and suppliers properly, you can run and manage your online store from anywhere you want.
Offer plethora of products
As you don’t have to pre-purchase the products you sell on your online store, you can offer your customers a plethora of products making your customers choose from a wide option. You can list the products which your suppliers have in stock without paying any additional money.
Easy to scale
As most of the work processes are borne by the suppliers, it allows you to invest your time on other important works such as driving new customers.
Disadvantages of Drop Shipping
Unfortunately, drop shipping model is not a bed of roses. Here are some drawbacks of using drop shipping:
Operating in a competitive drop shipping niche gives you a low margin which is one of the disadvantages of drop shipping. As customers compare prices of products, there is a higher chance of your customers moving to another online store if your listed products have higher price tags. It affects the profit margin.
When you have your own inventory, keeping a track of available and out of stock is easier. But with drop shipping, you have to source products from multiple suppliers who also provide products to other merchants. In such case, inventory changes daily.
When you deal with multiple suppliers as most drop shippers do, it complicates the cost of shipping. The shipping charges of different items placed in a single order may be different when each item is fulfilled by different suppliers. Your customers may not like to pay different shipping charges for each item placed in a single order.
While fulfilling orders, the suppliers may make mistakes such as low-quality packaging, botched shipments, missing items etc. In such cases, you have to take the responsibility and apologise to the customers for the mistakes made by the suppliers as it can affect your company’s reputation.
But the good thing is that you can take steps to overcome issues related to drop shipping.
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