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Should your Business Invest in Drop-Shipping?

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According to Freight Center, "Drop-Shipping is a supply chain process used when a retailer doesn't house its goods. Instead, they're housed by a manufacturer or wholesaler." Many successful e-commerce companies will utilize drop-shipping to fulfill their online orders quickly.


Steps to Drop-shipping:

  1. Your customer places an order from your online store.

  2. Your store automatically sends the order to your dropshipping supplier.

  3. Your drop-shipping supplier prepares your customer's demand.

  4. Your drop-shipping supplier ships the order directly to your customer.


Drop-shipping essentially takes the last part of the supply chain and outsources it to a dropshipping retailer. The selling merchant, in this case, does not stock or own inventory. Drop-Shipping fulfillment companies are virtually invisible, meaning the consumer (usually) is unaware of the use of a drop-shipping company.


Benefits of Drop-shipping:


Less capital required

When you start a traditional e-commerce business, you need a lot of capital to get started. You have to design, order, package, and ship all of your products and generally need to pay an enormous price to get a certain amount of products or orders fulfilled. When you work with a drop-shipping company, you send the orders to them to already have the goods. Your costs immensely decrease when you are not fronting the bill for your inventory.


Easy to start

It is as simple as finding a drop-shipping company with whom you would like to partner. Once you have decided on the product to sell, they essentially take care of most supply chain management.


Low Overhead

Overhead, such as storing inventory, paying for freight with every new order restock, or paying for inventory orders, can add up when it comes to shipping out of your warehouses. Drop-shipping helps free up time and money if you need to stick to a tight budget.


Flexible Locations

Half of the costs associated with shipping and managing orders are dependent on your business and warehouse location. When you work with a drop-shipping company, they tend to have more than one warehouse site, which helps reduce the cost of shipping for your business and consumer.


Selection of Products

Since drop-shipping reduces the stress of pre-purchasing products or holding inventory, you can offer your potential customers many products. This reduction also allows you to pivot quickly as new trends arise. If your drop-shipping supplier has a stock of the item, you can list it on your e-commerce store.


Easier to Test

Drop-shipping helps eliminate the fear of dead inventory and lost money by creating a low-risk solution for retailers who aren't sure if a new product will sell. When you work with a drop-shipping company, their on-hand inventory is utilized, allowing companies to test new product lines with current customers and target markets without the risk of paying for inventory upfront.


Easier to Scale

When opening a retail business, if you receive three times the number of orders, you'll usually need to do three times as much work. On top of that, you will have to spend three times as much money. Your scalability becomes quick and painless with the right infrastructure already built out when hiring a drop-shipping company. This allows you to work on other things that pertain to your company's growth.


Disadvantages of Drop-shipping:


Low Margins

Drop-shipping companies work similarly to wholesalers. Though you might be pricing your products on your site for $13, the drop-shipping company could be selling you the product at $11. That price does not include the cost for the drop shipping service or the costs to market your products and get consumers in the door. Low margins are the most significant disadvantage to operating in a highly competitive drop-shipping vertical. When other companies are working with the same products yet offering them lower prices, it can take much maneuvering to position your business above these other companies. Competing low margins won't affect every business, but you will have to invest in marketing to set yourself apart.


Inventory Issues

Traditionally if you are in charge of your sellable products, it can be relatively simple to track and manage your inventory. Multiple warehouses usually sell the same product to various companies when working with a drop-shipping company, so stock can be slow to update and continually change. When the inventory is sporadic, then it can be hard to update your customer. The best way to remedy this problem is to work with a drop-shipping warehouse that uses inventory management systems so you and your customers can stay up to date.


Shipping Complexities

As mentioned above, drop-shipping companies are shipping the same product from multiple locations. At times, a consumer could order three of the same item, but they would be shipped and sent from three separate areas because of inventory storage. That shipping cost is now something that your company directly incurred. This method could confuse customers and add to your shipping costs, saving you from the costs and stress of storing your inventory. It's all about weighing your options.


Supplier Errors

Supplier errors are bound to happen, but it is up to the retailer to remedy the situation regardless of fault. It can be extremely frustrating when a drop-shipping company makes a mistake, especially when your company can't control the issue from happening—vetting your drop-shipping options before agreeing to work with one will reduce the number of errors you'll have to encounter.


Limited Customization and Branding

For a retail company utilizing a drop-shipping supplier, the product's size, color, construction, and even fabric are predetermined due to products already being on hand; you are just marketing and selling the items. It is an excellent option for many companies, but drop-shipping companies won't fit many larger brands' trajectories. For a partnership to work, the product sold must be viable and affordable for the manufacturer and drop shipper supplier. It makes sense to control the inventory, but it is not always best for the retailer, primarily if an item sells well and there is no option to reorder.


How Do Drop-shippers Make Money?

A drop-shipping company's main job is to find, design, and curate products for specific markets. They generally have a sales team to market their services. Still, they are not incurring any of the costs associated with marketing and selling the products themselves. They are more or less unloading part of the business costs on other companies.


Drop-shippers mark up products in exchange for distribution. They give exclusive deals to companies that usually would not purchase or produce those products themselves. The highest cost a drop-shipper must account for is how much it costs to acquire a customer and price your products accordingly.

For many companies, drop-shipping is the ideal company structure. The fulfillment model is one used by multiple global retailers. Though there are many benefits to starting a business using dropshipping, it is backbreaking work. Drop-shipping tends to be successful for large international companies with capital to invest and can handle small margins. The other companies that thrive with this type of business model have a niche market or product line. We cannot tell you whether you should start a business using drop-shipping or not, but you can discover what works best for your business with time and research.


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