2015-08-14 11:15:00Online Store and RetailEnglishDrop shipping is when a retailer has a third party fulfill orders of products. Learn about the pros & cons of drop shipping to see if it's...https://quickbooks.intuit.com/r/us_qrc/uploads/2015/08/2015_8_4-small-am-whats_drop_shipping_and_is_it_right_for_your_business.jpghttps://quickbooks.intuit.com/r/online-store-and-retail/whats-drop-shipping-and-is-it-right-for-your-business/What’s Drop Shipping and Is It Right for Your Business?

What’s Drop Shipping, and Is It Right for Your Business?

5 min read

As an entrepreneur, you know that starting your own business is absolutely the right choice for you. But if you haven’t invented something new or sell specific services to clients, you might be floundering to find something you actually can sell. One option for you would be to conduct your business via drop shipments.

Drop shipping is the practice by which a retailer works with a third party wholesaler and/or drop shipment vendor to sell products. Customers order products from you or your website, and that product request is then passed along to the drop shipment vendor for fulfillment.

This might seem like an overcomplicated way to conduct a simple transaction, but drop shipping as a business model has its uses. Below we’ll examine the benefits and the drawbacks to this type of business, and discuss what types of businesses benefit most from the practice.

The Benefits of Drop Shipping

1. Less Upfront Costs to Get Started

If you’re using drop shipment to fulfill your orders, then you can start your business with as little as a single e-commerce site to sell and market from. You will not need to rent a storefront or purchase inventory to get your business started.

2. Location Doesn’t Really Matter

Because a third party ships your products and your inventory listings are online, your location doesn’t matter as much as it would with a physical location. In truth, you can run your business out of a home office using a laptop and a decent high-speed internet connection.

3. Wide Product Selection

Again, because you do not need to purchase inventory to display products for customers to view, you can sell as many products on your site as you want. While adding images and descriptions to your e-commerce site takes time, that investment is minuscule compared to the benefit of having more than one or two products for sale.

4. Easy Scalability

Whether your business is a trickle or a flood, the amount of required work remains pretty much the same. While you will need to make sure your website provider can keep up with the number of transactions on your site, you will not need to worry about packing and shipping more product or waiting for product to come in. It should be noted that if demand outpaces the supply you’re selling, it could mean that the wholesaler has unresolved supply issues, which can become a customer service issue if unchecked.

Drawbacks to Drop Shipping

1. Lower Margins

Because the barriers to entry are so low and there is very little capital needed upfront, drop shipping-backed e-commerce sites are highly common, which increases competition. Because these retailers have not had to invest any money upfront, they are often willing to sell their products for cheap prices in order to build a following and revenue base. This high level of competition can make it challenging for businesses that drop ship to be profitable.

Also, keep in mind that retail giants like eBay and Amazon use drop shipping as part of their business, and may be difficult to compete with on certain items. What often sets good retailers apart from bad ones is website quality and customer service. Many discount e-commerce sites fail to pay attention to either of these, which can hurt them in the long run.

2. Customer Satisfaction Is Beyond Your Control

The drop ship vendors you work with are responsible for a very important part of your business: your customers’ happiness. If the supplier sends the wrong product or damages it due to inadequate packaging, you could find yourself with unhappy customers. This means that selecting your fulfillment vendor is an essential part to the drop ship process.

3. Inventory Issues

When you are in charge of ordering and storing your inventory, knowing what’s on hand and available for sale is easy. When you’re relying on a third party vendor that is more than likely also serving as a supplier for other retailers, however, it’s hard to know exactly what is available at any given moment.

Is Drop Shipping Right For You?

If you are looking to start a business yet don’t have a lot of capital to invest, drop shipping might be a good option. Here are some reasons that you and your business might benefit from drop shipping:

  • You live in a remote location where maintaining a brick-and-mortar location would be unsustainable.
  • You are interested in starting a business, but don’t want to give up your day job yet.
  • You need to work from home.
  • You cannot afford to purchase tens of thousands of dollars in merchandise and then wait for it to sell.

As with any other type of business, drop shipping can be as successful as you are willing to make it. It will take time and dedication to grow your drop shipment business and more than likely will not make you a fortune overnight. But with attention to customer service, a well-vetted drop ship vendor and a strong website, you can make the drop ship model work for you.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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