Ohkay, so you have made up your mind to start your online business and have finally zeroed down on a product category. What next?
One of the most crucial decisions that you have to make is how do you acquire your product. Not a complex problem, with four simple alternatives –
But the alternative that you choose has direct impact & repercussions on your business operations and profitability.
So let us take a look at one of the modern day alternatives – Drop Shipping.
The main idea of dropshipping is selling products that you don’t actually own.
To explain it in an easier manner lets take a very simple example.
A certain Mr.C (Customer) wants a particular typre of terracotta pots but has no idea of who makes them. You happen to know Mr. M (Manufacturer/Distributor) of Terracotta Pots. So you take the order and payment of Rs.Y from Mr. C and pass it on to Mr. M.
Mr.M on recieveing the order from you makes it and ships it to Mr. C and charges you Rs. X for it. The Difference between Rs.Y and X is your profit.
As you can see from the above example drop shipping partners not only help in product acquisition but also includes product fulfillment. The process is simple. You take orders from your online business and forward them to your drop ship partner. They, in turn, ship the product to your customer on behalf of your company.
The key to making money with drop shipping is making a profit on the price difference between what you charge and what your dropshipping partners charge you.
Now since we are clear with the concept let us probe into more detail and find the pro’s and cons of the same.
What are the advantages of Drop Shipping?
Lower Capital Requirement – One thing is clear, drop shipping needs minimal capital to start with when compared to other options available. As you don’t need to but inventory, you don’t have block your capital for the same. Without major up-front inventory investments, it’s possible to start a successful drop shipping business with very little money.
Without major up-front inventory investments, it’s possible to start a successful drop shipping business with very little money.
Wider Product Selection: You can make let’s 10 different products with a particular technology/machine, with increment in cost with every new product line. That is not the case with Drop Shipping. You can list as many different types of products you want with drop shipping model of business without any significant extra cost.
Reduced Risk: As you do not pre-stock products/inventory, you carry virtually zero risk of ending up with unsold goods. You do not need to even have storage space- warehouse/ godown for inventory. You can make product based decisions quickly without worrying about financial risks.
Location Independence:You can virtually sell anything everywhere sitting from your home. Since you do not have to worry about inventory and shipping/ order fulfillment you can sell to any location.
Highly Scalable: It is relatively easy to scale up a business based on drop shipping model. No
What are the Disadvantages of Drop Shipping?
Low Margins – Since the cost of entering the market via drop shipping is minimal, it is highly competitive. You will find many sellers using drop shipping and selling at extremely low prices to get more orders and revenue. Profit margins will vary greatly depending on the products you sell. For expensive electronics, margins are thin and will likely be in the 5% to 10% range.
Inventory Issues – If you stock all your own items, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory changes on a daily basis. While there are ways you can better sync your store’s inventory with your suppliers’, these solutions don’t always work seamlessly, and suppliers don’t always support the technology required.
Shipping Complexities & Supplier Errors –
If you work with multiple suppliers – as most drop shippers do – the products on your website will be sourced through a number of different drop shippers. This complicates your shipping costs.
Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer, as they’ll think you’re grossly overcharging for shipping! And even if you did want to pass these charges along, automating these calculations can be difficult.
Even the best dropshipping suppliers make mistakes fulfilling orders – mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business’s reputation