What is Drop Shipping?

Drop Shipping Benefits, Disadvantages & Alternatives for the Online Retailer

Drop shipping is a supply chain management method where a store does not stock or own the product it sells. Instead, when a store sells a product, it purchases the item straight from the manufacturer, a wholesaler or a third party and has them ship it directly to the customer. The drop shipping merchant doesn’t see or physically handle the product and is only charged a price per shipped item.

A drop shipper can alleviate much of the logistical headache, in particular for the starting online retailer. However, drop shipping also comes with certain disadvantages that need to be considered when deciding on how to set up your supply chain. There are fulfilment alternatives that may better suit your business. Let’s summarize the benefits, the disadvantages and the alternatives to drop shipping.

Drop Ship Benefits

What are the 5 Benefits of Drop Shipping?
  1. Easy to get started – Online retailers can easily and quickly get their store up and running, using existing IT and infrastructure and without a lot of expertise.
  2. Lower Financial Investment– No investment in inventory (stock), warehouse space, racking, fork lifts, WMS (warehouse management system), barcode scanners, personnel, insurance and all the other necessary equipment and resources.
  3. Unlimited Product Portfolio – Instant access to a wide selection of products, from a broad range of manufacturers, wholesalers and other retailers that are all setup to work with drop ship.
  4. No Stock Risk – Not actually owning the stock also means that you are not concerned with products being damaged or going out of date. You cannot buy too little or too much and do not have to loose sleep over how to get rid of unpopular unsold items.
  5. Scalability – Seasonal peaks and faster growth than planned are not your problem. Personnel fluctuations, holidays, sick leave, hiring and firing are the responsibility of the drop shipper.
dropshipping

Drop Shipper Disadvantages

What are the known disadvantages of drop shipping?
  1. Low margins – With typical drop ship profit margins around 5%-10% on gadgets and other electronics for instance, you must sell in high volume to make a decent bottom line. This also means that you’re under higher pressure to perform with online marketing campaigns, because each bump in the road has bigger consequences.
  2. Mass competition – Online retail is already very competitive, yet when you choose to operate in the drop ship arena, this becomes a real challenge. The low barrier to entry holds true for everyone; drop shipped products become commodities and competition is significant.
  3. Inventory complexities – The wider your portfolio becomes, the more difficult it gets to keep track of the multiple warehouses of multiple vendors. Store inventories need to be synced across multiple suppliers’ systems. Technology and support may not always be available at required levels.
  4. Shipping issues – Determining shipping cost for one client order that includes items from different suppliers, each with their respective conditions, can be cumbersome. Integrating this in an automated process is often costly and difficult to achieve.
  5. Supplier Errors – Supplier errors grow with the number of suppliers involved and dealing with this can become a full-time job for one or more customer service reps. It’s great to create jobs, but painful when you end up paying for your suppliers’ mistakes.
  6. Quality Control – You have limited control over the manufacturer’s or wholesaler’s ability to deliver at the quality you require, and your customers expect. Quality issues will have a negative impact on your brand value.

Alternatives to Drop Shipping

What are the alternatives to drop shipping and what drop ship disadvantages do they solve?

The first and obvious alternative is running your own warehouse, but the hassle and investment involved was exactly why drop shipping initially seemed like the perfect solution. There is another way of controlling your eCommerce logistics, that is positioned right in the middle between doing everything yourself and touching no product at all. Third Party Logistics (3PL) also known as Order Fulfilment, Online fulfillment or eCommerce fulfillment, is the model that allows you to outsource logistics, but still be in control. Below are 5 important points to consider.

  1. Increase Your Margins – When comparing 5%-10% profit margins with drop shipping to 100%-150% for low-priced, high volume articles that you can import yourself in bulk, the picture is clear. Obviously now you have to pay the 3PL provider a fee per pick, pack and dispatch, but these fees fade in comparison to the extra profit margins you can generate. If you have a clear picture of your daily order volume, number of SKUs, types of product and the countries you’re selling to, you can request a quotation.
  2. Avoid Mass Competition – Online retail is already very competitive, yet when you choose to operate in the drop ship arena, that may double. The low barrier to entry is true for everyone and competition is fierce. The online retailers making decent money in this game are highly likely to use companies like Feedvisor, that offer automated repricing engines so you can still win the buy box. A different strategy is to try and avoid mass competition by building your own niche, or setting up private label brands.
  3. Add Value – Where drop shipping is generally considered the entry level, 3PL supports a more mature online retailer looking to add more value and to offer a better buying experience. Branded packaging, adding marketing material to the package and offering more and better shipping options can make your customers feel that little bit more special.
  4. Reduce Cost & Complexity – To keep a handle on operational cost, you must always aim for simplicity. If your portfolio has 25 different wholesalers with different drop shippers and shipping methods, you need a solution that hooks into your eCommerce platform. Selling stock that you don’t have and cannot claim because it wasn’t yours to begin with, can spell disaster for business continuity and customer satisfaction. Increased complexity equals high integration cost. Coupled with low margins this is often not a healthy business model.
  5. Optimize for Growth – Growing your online business by expanding onto multiple different marketplaces (Amazon, Ebay, Groupon, CDiscount and many others) also known as Multi-Channel or Omnichannel, is a proven strategy for growth. Some marketplaces have stringent demands regarding the fulfilment that are hard to meet, or even impossible, with a drop shipper. An e-logistics company with a fit for purpose warehouse management system can hook up to multiple platforms, often at no added cost for the online retailer. An order fulfilment company with multiple warehouses in different locations can also support your growth strategies in different regions and continents.

 

Freight Services

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Customer Service & Support

As your partner, we offer outstanding customer support. Happy customers is what makes us tick.

Inventory Management

Stock checks, expiry date management, replenishment and goods in routines with real time data through our systems.

End-to-end Services

Our service can be modular or span from Freight to Last Mile Delivery with every step in between.

Order Processing

Whether through a simple spreadsheet, FTP or an API, we will keep you in touch with the status of your orders.

Consulting Services

10 years of experience in the Global eCommerce Fulfilment business is a value you can benefit from.

Courier & Delivery Management

We work with most of the UK’s and Europe’s biggest postal operators and courriers. This means we can focus on speed and flexibility.

4PL Services

We offer full service for Brick-and-Mortar businesses that are ready to go online, or take it to the next level.

Address:

Woburn Road Industrial Estate Kempston

Email:

info@profulfilment.com

We are open:

Mn-Fr: 8AM-8PM

Address:

Woburn Road Industrial Estate Kempston

Phone:

+44 (0)20 3581 7944

Email:

info@profulfilment.com

We are open:

Mn-Fr: 8AM-8PM

Address:

Woburn Road Industrial Estate Kempston

Phone:

+44 (0)20 3581 7944

Email:

info@profulfilment.com

We are open:

Mn-Fr: 8AM-8PM