ENTREPRENEURSHIP / AUG. 27, 2014
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How to Understand the Advantages and Disadvantages of Drop Shipping

Before setting up an online store, you need to figure out where you will source your products from. In addition, you need to decide how the products will be delivered to your customers. Drop shipping is a business model where online merchants don’t have to handle or ship physical products. When they receive an order, it is forwarded to the manufacturer or wholesaler. The goods are then sent directly from the manufacturer or wholesaler to the customer.

Here are some of the benefits of drop shipping:

  • Lower startup cost

Stocking inventory and shipping items can result in a very high startup cost for an ecommerce venture. Since drop shipping does not involve handling physical inventory, online merchants can start selling with a significantly lower investment.

  • Get in business faster

Conventional online merchants have to wait for the manufacturer or wholesaler to ship items to them before they can start selling. This could take days, weeks or even months. With drop shipping however, there is no need to wait. As soon as the product is displayed in your ecommerce site, you can start selling.

  • Diverse product offering

Since there is no need to stock items physically, you can offer a wider range of items through drop shipping. Having a diverse product offering will attract more customers to your online store, thus enhancing your chances of making more sales.

  • Test new products easily

Drop shipping offers a great opportunity to try out new products before adding them to your product line. Without having to spend any money on physical inventory, you can find out if your new products are a good fit for the market

  • Save time

Receiving, storing, packing and shipping goods can be very time-consuming. Drop shipping enables you to save time which can then be invested in the actual marketing of your products.

Despite all these advantages, drop shipping also has some downsides. Here are some of them:

  • Thin profit margins

The best way to enjoy a high profit margin is to buy bulk items at wholesale prices. However, drop shipping mostly involves selling individual items, thus resulting in lower profits. Other costs such as drop shipping fees will also eat into your profits.

  • Too much competition

Since drop shipping has a very low barrier to entry, anyone can easily get on board and sell the same products. As a result, there is intense competition which makes it more difficult to distinguish your business from others.

  • Loss of control

Since the physical product is handled by the manufacturer of wholesaler, you don’t have much control over aspects such as packing, labeling and shipping timelines. If the drop shipper packs the product poorly, labels it incorrectly or delivers it behind schedule, your business will earn a bad reputation with customers. This could in turn cost you return business.

Though it is a cost-effective and convenient tool for any ecommerce business, don’t limit yourself to drop shipping. Instead, it would be advisable to use different sourcing techniques in your overall product sourcing strategy.

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