On the face of it, drop shipping seems like the low-cost holy grail of eCommerce stores. When used well, and for the right businesses, it can indeed deliver some great results. That being said, there are many pitfalls to fulfillment models such as these and it pays to figure out first if it’s the right model for your business.
So what is drop shipping?
Effectively, drop shopping is when a business neither owns nor stores certain items in their inventory. Instead, when an item is ordered by a customer, the business places an order with their supplier and has the item shipped directly to the customer.
The upside – lower overheads
The biggest benefit of drop shipping is the, often significant, reduction in a business’s overheads. Freed from the need to maintain an inventory on site, businesses can open and trade with a limited or non-existent shop space. This is one of the key reasons that eCommerce stores can open and start selling products with limited cash flow and no physical storage.
Without the need to pre-purchase, many businesses using drop shipping are able to have a large and varied inventory, considerably bigger than they would have otherwise. While large businesses can afford to maintain inventory on site and employ people to process it, many modern eCommerce stores begin on a shoestring. It’s not uncommon to have only one or two people running all aspects of a drop shipping business themselves when they first start out.
While there are many businesses using management software that allows for off-site access to the workings of their business, drop shipping likely offers the most portability and independence around. For many eCommerce businesses, the action of selling from their online store can be done almost anywhere. All you need is an Internet connection.
The downside – reduced margins
Easily one of the biggest problems with drop shipping is the potential for smaller margins. Competition in eCommerce retail can be fierce, sometimes undercutting prices to a large degree. In order for some businesses to survive in a competitive climate, they have to sell large quantities of products to make a profit.
While drop shipping provides a lot of freedom and cost cutting for eCommerce businesses, the flip side to this is inconsistencies with suppliers. Ordering from a variety of suppliers can sound easy (provided you are not using Excel to manage them), but sometimes it is anything but. When an order is placed, the business must not only order the item from a supplier but they must work within that supplier’s parameters. Some take longer than others to ship, some don’t have accurate stock lists, and some will not offer tracking. With much that can go wrong, eventually, something will. This is an often-overlooked area by eCommerce start-ups.
Shifting of power
Traditionally, businesses are the ones who ship their products to their customers as well as field any customer service issues. A huge problem area with drop shipping is the intentional or unintentional shifting of power from the business to the supplier.
Usually, there is a balance of power between the two; the supplier wants the continuing sales and the business wants the products on time and at a fair price. While businesses that carry a large inventory onsite often have leveraging power to ensure the supplier meets certain conditions, many drop shipping businesses lack this power. This can end up meaning that orders are slow to arrive to the customer, creating an unsatisfactory customer experience.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.