What is drop shipping?
Drop shipping is a logistics management option that allows e-commerce companies to outsource the processes of purchasing, storing, and shipping products to a third party, typically a vendor.
This logistics management model typically appeals to entrepreneurs looking for efficiency and low overhead, but it can come at a cost, especially when it comes to customer experience. This guide explains what drop shipping is and how this method of fulfillment can work. We’ll also discuss some dropshipping alternatives that can save you time, reduce overhead, or simplify your business.
What is a drop shipping business model?
In a drop shipping business model, you promote the products and provide a virtual storefront. When a customer places an order, you send them to the drop shipping service and let customers know that the products are on the way.
The rest of the physical logistics management process is out of your hands. In some drop shipping arrangements, you may also handle customer service, while the drop shipping service manages the physical goods and fulfillment .
How does drop shipping work?
The exact logistics of drop shipping depend on your agreement, but typically the drop shipping process follows this general sequence:
- The seller signs an agreement with the carrier.
- The customer places an order online.
- The seller receives the order.
- The customer receives an order confirmation.
- The seller forwards the order to the carrier.
- The direct carrier ships the order.
- The customer receives his product.
Drop shipping can attract entrepreneurs looking to sell off-the-shelf products, but it can limit opportunities for branding and product differentiation. Businesses that use the drop shipping service may end up competing on price, leading to low margins.
professional advice
Consider Fulfillment by Amazon
If you have drop shipping in mind for your e-commerce business , be sure to weigh the potential pros and cons, including some variants and alternatives, like Fulfillment by Amazon , that offer similar benefits.
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Key Participants of the Drop Shipping Model
Let’s take a closer look at some of the key players and their roles, from the seller of record, i.e. your company.
registered seller
The drop shipping process starts with you. As a seller of record, you are the person who identified himself as the seller of the product to the end customer. You set the price, record the purchase as income, and assume tax liability on the sale of a specific one. Even when items are stored and shipped by a third party, you are the seller of record because you own the items before they are shipped to the customer.
For Amazon sellers, Amazon’s drop shipping policy generally allows you to use a drop shipping service, as long as you are the seller of record and identify yourself as such.
Manufacturers
Manufacturers make products to sell to wholesalers and retailers. You can buy products from manufacturers, but the bulk purchase quantities they may require could be a barrier to starting or expanding your business. Some manufacturers may offer drop shipping services to the customer.
wholesalers
In a typical product supply chain, wholesalers buy from manufacturers and sell to retailers at a slight markup. They function as intermediaries. They typically do not sell to end consumers, but may offer shipping services to retailers.
Determine which drop shipping providers may be the best fit for you based on your business model, fulfillment requirements, and other factors .
Potential Advantages and Disadvantages of Drop Shipping
In e-commerce, as in life, there are advantages and disadvantages associated with any logistics management approach. Whether the gains are worth it depends largely on your objectives and situation of your company. Here are potential pros and cons to consider when deciding if drop shipping is right for your business.
The advantages offered by the drop shipping service include the following:
- Overhead – Since you don’t store or ship the products, drop shipping has the potential to reduce overhead costs, such as maintaining a warehouse or shipping products to customers.
- Start-up Costs: Businesses looking to start a business with minimal investment can turn to drop shipping as they do not need to invest in facilities or resources to process orders.
- Reduced risk: Since you don’t have to pay for inventory, there’s less risk of losing money due to lost merchandise or overorders.
- Multi-Channel Selling: You can use drop shipping for your business while selling on your own domain, through a store like Amazon or social media channels, or all of the above.
- Operating Location: Drop shipping allows you to fulfill orders regardless of your operating location, opening up the ability to work from anywhere.
- Expandability – Leveraging suppliers can make it possible to accept more orders without increasing the inventory you store, pack, and ship.
- Wide Product Variety: Depending on your deal, you may not have to pre-purchase inventory, so you can sell a wide range of products and increase your profit potential.
- Flexibility: Not sure what products to sell? Drop shipping allows you to test different products to see what sells best , without having to worry about losing your investment.
Potential limitations for drop shipping include:
- Competitiveness – Given the low cost and investment to get started, drop shipping service is a highly competitive field.
- Product quality: Drop shipping reduces your involvement in the order fulfillment process, limiting your ability to control and ensure product quality.
- Branding: Because the products you sell may not be unique or distinguishable from similar offerings from other sellers, you may have trouble differentiating your offering.
- Profit margins: The lack of product differentiators means your business may have to compete more aggressively on price. Selling at lower prices can affect your profit margin.
- Fulfillment schedule: When a drop shipping service performs the fulfillment process, you have no control over order picking, packaging, or shipping.
- Inventory management: Available products may not be able to be updated to the minute. If a customer places an order and finds it’s out of stock, this bad experience can discourage future orders and hurt your brand.
- Offer range: Since you don’t manage the fulfillment of orders, you may have a limit on the special offers and promotions you can offer, such as packages or free shipping.
- Supplier Errors: Poor quality carriers can make mistakes when handling customer orders. This could lead to failed orders, poor quality packaging, and lost items.
- Complex customer service: With drop shipping, you’re still responsible for your reputation and keeping your customers happy. If there are any problems with the fulfillment process, customer service management may be your responsibility.
For some companies, the drop shipping limitations are not worth the potential benefits. Fortunately, if you want to reduce inventory management and order fulfillment costs , a service like Fulfillment by Amazon may be an option. For some sellers, FBA is a medium that offers many of the benefits of drop shipping without the drawbacks.