Drop Shipping is a retail model where the online retailer does not own any inventory directly. When a customer places an order, this order is forwarded by the retailer to a manufacturer, distributor or wholesaler who then packages and ships the item directly to the customer.
Although Drop Shipping eliminates the need for a seller to handle the fulfillment process (receive and ship out products manually), it can cut into their profit margin and have a negative impact on their business.
Let’s take a look at both the pros and cons of this mode of business.
Pros of Drop Shipping
1: Easy to Get Started
When you have no inventory to deal with, running an online business is much easier. Without inventory you don’t have to worry about obtaining and paying for a warehouse, packaging and shipping orders, tracking inventory, receiving inventory, or returns.
2: No Startup Capital
Probably one of the most appealing aspects to sellers new to Drop Shipping is that it requires little or no upfront investment. There is no huge inventory that needs to be purchased and there is very little overhead.
3: Low Risk
When holding on to inventory, there is a lot of pressure to move all of it. Unsold products are lost revenue. The pressure of this risk can cause delays in changing inventory and updating the online store. With drop shipping, the risk factor is eliminated—you only pay for what you sell. Retailers are free to change their inventory at will and keep their store aligned with customers’ demands.
4: Wider Selection of Products
Because you don’t have to pre-buy all of the products you are selling, you can offer your customers a much wider selection of products. If your supplier has an item you want to sell, you can list it for sale on your website at no additional cost.
5: Totally Scalable
Many e-commerce businesses struggle with the concept of scalability. Drop Shipping is easily adjusted to your business’ growth. With more traditional models, when you increase your inventory and customer base, you also increase your workload. Not so with drop shipping. Of course there is more to manage, but relative to what it could be, it’s a very small change in workload.
Cons of Drop Shipping
1: Tight Margins
This is probably the biggest drawback of having a business that uses Drop Shipping. As a result of the ease to get started and the low overhead, there are many, many merchants selling items at low prices. In order to compete, your prices have to be low as well, decreasing your profit margin. You can overcome this by finding a niche that is well-suited for Drop Shipping.
2: Limited Control Over Quality and Branding
Aside from the costs involved, the real killer for some merchants is damage control, by which I mean playing the go-between on product or shipment quality issues. Running between your company and another supplier (or multiple) is not only a lot of extra work for you and your team, but can also cause issues with customer satisfaction, which brings us nicely onto...
3: Satisfying Customers Becomes Harder
Trying to handle customer service issues as an in between can get stressful, as you don’t have full control. Shipping updates can be hard to give, especially if the supplier has a few warehouses scattered around, each shipping a part of the order, arriving at different times, via different couriers.
4: Tracking Inventory Can Be Tough
When stocking your own products, tracking inventory can be really easy with the right software. But as soon as you start introducing multiple warehouses (managed by other companies), keeping an eye on stock can be tough to do. It’s possible to use EDI but this is not always available - what if your supplier doesn’t have this technology in place? In these cases, it’s best to have a really solid relationship with your supplier and regular updates from them so that you know how many items you can sell to your customers, or whether your customers need to wait for more stock to arrive at your suppliers.
5: Complexities With Shipping Can Occur
Fees associated with drop shipping services can make it difficult for sellers with low margins. Additionally, if there is a problem with your order – for example late delivery or returns to seller – it’s the retailers responsibility to handle the issue at hand. Returns can be difficult for a seller if they don’t have any warehouse space or if a drop shipper charges restocking fees.