Drop shipping is a business strategy and fulfilment method that minimises the cost of storing and transporting inventory for merchants. When a customer places an order from the merchant:
- The merchant orders the product from the manufacturer.
- The manufacturer ships directly to the consumer.
- Inventory overheads are lower, but delivery times can be longer.
How Does Drop Shipping Work?
If you run an online retail business, drop shipping can simplify your logistics, because orders are filled and shipped directly to the consumer from the manufacturer. Merchants benefit by not having to pay for inventory storage. You can also eliminate the risk and cost of having unsold inventory. It can be a lower-risk way to test the sales potential of a particular product in a particular market.
As orders are placed, you forward them to your supplier, essentially purchasing items only when they’ve already been sold. Then your supplier will take care of actually packing and shipping the order to your customer. Provided that you factor in a high enough profit margin on every sale, you can use this method to save money that you otherwise would have spent on a warehouse, packing supplies, and shipping costs.
Drop shipping suppliers are usually manufacturers or wholesalers, and because they are the ones that will store and ship your products, you will not handle your inventory at all. Therefore, it is best to purchase items for yourself before actually listing them for sale in your online shop. In this way, you can really see the quality of every product and get to know exactly what you are selling to your customers.
What Are the Benefits of Drop Shipping?
Using the drop shipping model has become extremely popular in the world of online selling for several reasons:
- Start selling sooner. If you’re new to running an ecommerce business and you aren’t ready to manage and pay for inventory, drop shipping could be a good way to get your feet wet. Your supplier will pack sold items and ship them on your behalf, while also handling returns. Plus, there’s no need to continue ordering products to keep your inventory stocked, so there’s less to worry about overall. As your company grows, you’ll acquire the assets to get your own warehouse, and that will give you greater quality control, while also allowing you to ship products more efficiently.
- Spend less but offer more. Beyond saving money on overhead, you may be able to offer a wider range of products because you won’t be restricted by warehouse space. Instantly adding new products to your store and testing them out on your audience is often easier when you take the drop shipping route.
- Work from home. If you’ve dreamt of being your own boss and working from home, drop shipping can facilitate your transition to a new lifestyle by mitigating the risks involved starting a new online retail business. It can also be a good option to test a new foreign market for your existing product range.
- Diversify your range. To ensure your business will never be interrupted by a supplier who raises its prices or goes out of business, you can sign contracts with multiple drop shipping suppliers. This also allows you to offer an even greater variety of products in your shop and could assist in maintaining quality control.
- Focus more on building and marketing your brand. This type of business model is easier to scale than other e-commerce models. Because you won’t necessarily have to hire new employees to fulfill increasing orders, you can focus more of your time on building your brand and marketing your products to your target audience. You can focus on keeping your customers happy with outstanding customer service, too. With less to juggle, you can collect and analyse data, and test new ways to make your business stand out so that it can continue to grow.
A Few Things to Consider About Drop Shipping
If drop shipping sounds like the online business model that would work best for your expectations and needs, there are a few things that you need to consider before you get started:
- Carefully evaluate every supplier. Regardless of how many suppliers you are planning to work with, evaluate each one before signing any contracts. Place test orders so you can receive a few different products in the mail and see not only the items themselves, but also how they were packaged, how long it took for them to arrive at your door, and how they were shipped. Placing these test orders on a regular basis is also a good idea, as you will be alerted to any changes in the supplier’s process right away and you’ll be able to take appropriate steps before your business is affected.
- Know how to work with manufacturers and distributors. If you can arrange drop shipping directly with a manufacturer, you can have fewer middlemen and increase your profit margins, but if you are unable to find a manufacturer willing to drop ship, you can work with a distributor who works for that manufacturer instead. Just be sure to find out what wholesale prices they are willing to offer you. Also ask them if they will charge you an extra handling fee, how they will ship the products, how they will bill you, and how they will respond to product returns.
- Stick with a niche. Rather than selling anything and everything in your store, focus on a niche that you are passionate and knowledgeable about. In this way, you won’t be competing with giants like Amazon and you can really differentiate yourself as a seller who specializes in something special.
- Develop a strategy to optimise delivery times. Online shoppers want their purchases immediately. Delivery times should always be a primary consideration for your business.
Save Money When Selling Internationally
There are several different ways that you can sell online. If drop shipping is not exactly right for your business niche, using Amazon FBA to fulfill orders is an alternative strategy that many Online Sellers employ.
Whether paying overseas suppliers, or bringing your money home from sales overseas, OFX can make a big difference to your bottom line by delivering more competitive exchange rates than a bank or online marketplace.
Give Drop Shipping a Try
With careful planning and an understanding of its pros and cons, drop shipping could be what you need to start an online shop with minimal investment. As you scale your company, always be prepared to take an objective step back and evaluate your drop shipping suppliers, so you can continue providing value to your customers.
Ready to sell more overseas? Get in touch with one of our online selling specialists who can help you take you business to the next level.
*Average savings based on a sample of published transaction fees for cross border payments provided by Amazon and PayPal dated 8.24.16. Quoted savings are not indicative of future savings. Third party intermediary fees may apply.
IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.