Drop-Shipping
a distribution strategy for your e-commerce business
Drop-shipping is a type of distribution strategy mainly used by small to medium sized companies, a retail fulfillment method where retailers do not store products themselves. If retailers sell products to end customers, they purchase it from the manufacturer directly or from distributors and let it ship straight away to the customer. As consequence, the retailer does not see nor handle the products himself.
Benefits
Retailers do not store products themselves hence they don’t need to invest in inventory, avoiding dead capital from unsold products. While having less money spent on inventory, they can launch an e-commerce store even faster. In addition to that, retailers don’t need to purchase the product unless they already made the sale and have been paid by the customer. That keeps them financially independent.
If retailers don’t have to deal with physical products, they can run an e-commerce business much easier as they don’t need to worry about the management of and investment in warehouses, the packing and shipping of orders, the handling of returns, and the continuous ordering of products and managing stock level. The use of drop-shipping enables retailers to have more free capital, because having no inventory and no need to manage warehouse themselves which means the overhead expenses are quite low.
The retail fulfillment method drop-shipping allows retailers to choose any location to run their business, it simply needs an internet connection and that enables them to communicate easily with suppliers and customers. Retailers have a wider selection of products. As mentioned before, retailers are not urged to invest in inventory hence they don’t have to pre-purchase any items, simply select any product and offer it to potential customers. By leveraging drop-shipping, most of the work is conducted by the suppliers. That means, retailers need roughly three times less work as traditional methods require and hence they can focus on marketing.
Disadvantages
Benefits come along with disadvantages. By leveraging drop-shipping, retailers don’t need to invest in inventory but have to pay for the fulfillment service instead. Drop-shipping is a highly competitive niche hence margins are low. It is easy to get started with, overhead costs are minimal which results in many retailers setting up a shop and sell the items at low prices in an attempt to grow revenue. Most retailers who use drop-shipping, have many suppliers hence the stock changes on a daily basis. That actually requires better synchronization with suppliers and warehouses but not all of them support the technology that is required to do so.
If retailers offer various products from different suppliers on their website, it complicates shipping costs because a customer might order several items coming from different suppliers. The customer won’t be content paying several shipping charges for one order. In addition to that, retailers are responsible for any occurring errors, even though it’s the supplier’s fault. Even the best drop-shipping supplier does make mistakes fulfilling orders. Low quality products, missing items, insufficient packing might damage the retailer’s reputation, too.
In the end, it all depends on your business model. The distribution strategy „drop-shipping“ could be a safe start for those who want to enter the e-commerce business but don’t have sufficient investments nor resources. Advanced business men who aim at high margins, growing an sustainable business might shift to a different distribution strategy.