Drop shipping is a retail fulfilment method where a store does not physically keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.
The biggest difference between this and the standard retail model is that the selling merchant does not stock or own inventory. Instead, the merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfil orders.
Benefits of drop shipping
There are a number of benefits to the drop shipping model.
Much less capital is required: With drop shipping, retailers do not have to purchase a product unless a sale has already been made and paid for by a customer. This means there is no requirement to invest large sums in inventory up front.
It is easy to get started: It is much easier to run an e-commerce business when you do not have to deal with physical products. It eliminates the need to manage or pay for warehouse space, packing and shipping orders, track inventory, and handle returns and inbound shipments.
Flexible Location: A drop shipping business can be run from anywhere with an internet connection.
Low Overhead: As there is no need to handle or store physical goods, a drop shipping business can be run with minimal overhead.
Wide Product Selection: Because a retailer does not have to pre-purchase items, they can offer an array of products o potential customers. If suppliers stock an item, it can be listed for sale on your website at no additional cost.
Easy to scale: With a traditional business, if sales suddenly increase you will have to do a lot of extra work. With drop shipping, much of this additional burden will be borne by suppliers.
Disadvantages of drop shipping
There are, however, a number of downsides associated with the methodology.
Low margins: The biggest disadvantage of all is that drop shipping is very competitive, so margins are very thin. Because it is so easy to get started – and the overhead costs are so minimal – many merchants will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. They have invested so little in getting the business started, they can afford to operate on minuscule margins.
Keeping Track of Inventory: If you stock all your own items, then it is relatively easy to track the movement of goods, both in and out of stock. However, when you are sourcing from multiple warehouses, which are also fulfilling orders for other merchants, it is much harder, especially as some suppliers do not adequately support the technology required.
Shipping Costs: It can be difficult to calculate shipping costs when you work with multiple suppliers, which means that products on your website will be sourced from different places.
Supplier Errors: If you are a drop shipping retailer, you have to take responsibility for supplier errors, even if they are not your fault. Mediocre and low-quality suppliers can cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business’s reputation.
Drop shipping on Amazon
Drop shipping is allowed by Amazon as long as a retailer fulfils the following conditions. They must:
- Be the seller of record of their products;
- Identify themselves as the seller of their products on all packing slips and other information included, or provided in connection with them;
- Be responsible for accepting and processing customer returns of their products; and
- Comply with all other terms of their seller agreement and applicable Amazon policies.
Failure to comply with these requirements may result in the removal of their selling privileges.
Drop shipping on Amazon: Pros and Cons
Amazon’s reputation: With Amazon people are dealing with a hugely recognisable brand. Amazon is a household name across the world and retailers do not have to waste any time explaining to people just how the marketplace works. Plus, because it is so big, there is no need to worry about things like advertising, marketing, SEO, relationship building and problem-solving.
Extensive product range: Retailers can greatly expand on the “virtual inventory” that they offer buyers. Because they do not have a physical inventory to worry about, they can go ahead and list a far greater breadth and variety of products than they ordinarily would if they were not drop shipping.
Listing Fees: Amazon offers two selling plans. The Professional selling plan is available for a $39.99 monthly subscription fee plus per-item selling fees, which vary by category.
If you plan to sell fewer than 40 items a month, there is no monthly subscription fee. Instead, Individuals pay $0.99 per item sold plus other selling fees, which vary by category. (Note, however, that drop shipping is a volume business, and you cannot expect to make any money with this level of transactions).
Additional fees apply when you use Fulfilment by Amazon to pick, pack, ship, and provide customer service for your products.
Need to keep on top of suppliers: As far as buyers on Amazon care, inventory availability is very important. Products are coming from somewhere and all a buyer cares about is that when they click buy they will get an item. Therefore, it is essential for a retailer to have open lines of communication with their suppliers, so that if they are getting low on a certain item, they will inform them so the retailer can adjust their listings accordingly. Failure to control this can lead to a suspended or closed account on Amazon.
Drop shipping on eBay
Drop shipping is allowed on eBay, provided the seller guarantees delivery within 30 days of the end of the listing. Although the shipping time and item quality are not directly in the seller’s control, eBay places full responsibility in their hands.
Anyone with an eBay seller account can start drop shipping on the platform. They just need to decide what products to sell, and to source those products from a wholesaler or other supplier that can guarantee quick and reliable shipping.
As with any drop shipping business, it should be noted that the returns per sale are minimal. Most drop shippers only net a few dollars per sale. The key to success is volume.
Factors such as pricing, marketing efforts, and timing can make or break a drop shipping strategy. Once a reliable supplier has been sourced for order fulfilment, the retailer has to simply create their eBay listings, and decide when to post, how to market, and at what price point they think will get them a high volume of sales and earn a profit.
Drop shipping on eBay: Pros and Cons.
As with Amazon, there are pros and cons to drop shipping on eBay.
It is easy: Drop shipping on eBay is as easy as making an account and setting up the first listing.
Less Need for Marketing: eBay lists will be placed in front of millions of online buyers, saving time and money on marketing, SEO, and paid traffic.
More Traffic for Less Effort: The large audience can help you make sales easily and get the best prices for products.
Listing Fees: eBay charges a small fee per listing (the first 50 listings are free) as well as up to 10% of the total sale price (known as a “final value fee”). Given the already-slim profit margins to be made through drop shipping, these fees can quickly add up.
Less customisation: Selling products on eBay is a very good way to start an online business, but fewer customisation options for you and your listings can make it more difficult to stand apart from your competitors.
Frequent Monitoring Needed: Retailers need to stay on top of their listings if they want to maintain the volume need to make money through eBay sales.
The key to success in running a drop shipping business is to find the right products at the right prices, and market and distribute them efficiently and effectively. Retailers need to build their brand and promote and market their products online, and aim to build the trust of their customers by providing value adding customer services.
The biggest risk to success is that because “middleman sources” or third party suppliers are involved, the retailer has less control over their inventory, and therefore, needs to exercise much greater degree of control over them than they might expect.
Drop shipping on Amazon or eBay provides retailers with access to a much greater pool of consumers than if they attempted to sell through an e-commerce store, and removes the need to spend extensively on marketing, promotion and SEO activities. However, both platforms place responsibility for supply directly at the drop shipper’s door, so they must put in place procedures to rigorously monitor their third party suppliers. Get it right, and the drop shipper can begin to build the types of business volumes critical for success – get it wrong and they face suspension or de-listing, as well as financial loss.