Drop Shipping 101- What Is It and How Does It Work?Last Updated:
Drop shipping is definitely not a new concept, but it may be unheard of to those who are more accustomed to the traditional method of retail business, where a merchant has to acquire their own set of products from a supplier, manage inventory through their own warehouse or any other physical storage space, and hire personnel for brick-and-mortar store operations.
The concept of drop shipping removes the need for each merchant to have their own inventory, leaving it to each supplier. Shipping the items from the source warehouses to each respective customer is also carried out by the suppliers. Moreover, since orders come in online, there is no need to lease and build a physical store — a simple website will do perfectly. This means your only role in the process is to gather orders from customers and relay them to the corresponding partner suppliers.
All of this sounds pretty enticing to make you drop everything and build your own online store, right? But don’t do anything hasty just yet without looking into the nitty-gritty of the whole process. In this article, we will take a closer look at drop shipping, so you can be more informed and be able to weigh things out before deciding to give it a try.
From A to Z
To give a clearer view of how drop shipping works, let’s take a look at the whole process from beginning to end. While there may be a few procedural variances from company to company, this is pretty much how the general flow of drop shipping goes:
- Customer browses items via the online store and places an order
for the ones he/she would like to purchase.
- The order details are forwarded to each item’s respective suppliers.
- The supplier prepares the package and ships it directly to the customer.
- The online store informs the customer about the tracking details.
- The process is completed once the customer receives the item.
As for pricing, the ones reflected on the storefront are entirely dependent on the store owner. Meanwhile, the supplier bills the store for the wholesale price of the item plus shipping or any other relevant fees, which the store can pass on to the customers. The income generated comes from the difference between the store price and the wholesale price of the item, and since the latter is usually marked down by a large margin, store owners can offer a cheaper price to customers while still maintaining a substantial profit.
For example, let’s say you run an online toy store named awesometoys.com. On your online shop, all of the available toys from your supplier will be available for browsing and purchase by the customer. You know exactly how much each toy costs coming from the supplier’s warehouse rates, and it’s up to you to decide how much mark up you will add before it hits your shop. Let’s say card games cost you $15 each. You might decide to sell them for $30 each. When a customer orders a card game from your shop and pays you $30, you then send the order details plus $15 to the drop shipping supplier- and your job is finished. It’s up to the supplier to deliver the card game to the customer while you keep the $15 difference.
Why It Is a Smart Move
Affordable Capital: Instead of purchasing items in bulk from a supplier, which instantly translates to a heavy amount upfront, the only expenses that you need to consider are your online store fees (which is typically around a couple of bucks to $30 a month) and the subscription fees for the drop shipping companies that you choose to partner with (usually ranging from $25 to $50 per month). Since the wholesale supplier’s bill is dependent on the customer’s orders, you can just pay it with what the customer has paid you — there’s no need to allot a revolving fund for each order.
Minimal Losses: Any business has its risks, so having the least chances of losing your money in the process is your safest bet. Once again, since drop shipping does not require paying an exorbitant amount of money upfront, you don’t have to fear that you won’t gain back your capital investment. Moreover, since there aren’t any items that you purchased, there aren’t any losses if a specific product is not ordered at all.
Larger Item Selection: Since you are not restricted to offering only the physical goods that you have on hand, your store can carry a wider range of products. You can offer every single product that the supplier carries under their roof, giving your customers more freedom to choose.
Anytime, Anywhere: You don’t have to be physically present in one place to manage your business- all you need is a computer or a mobile device and an internet connection and you’re all set. You can also work within your own schedule since all you need to do is check communication with the customers and the suppliers.
Why It May Not Work For Everyone
Stiff Competition: A lot of individuals already started their businesses using drop shippers, and many more are doing so as you are reading this article, so newcomers will face fierce competition should they finally decide to join the drop shipping business club.
The Business Is Not Entirely Within Your Control: Since you only offer the products and the corresponding varieties available from your supplier, you can’t really do anything for item requests. For example, if customers want a specific product but would like it to come in a different color, you don’t have any power to make that happen.
Possible Problems with Inventory Stock: Since the supplier is the one responsible for inventory management, certain issues can occur especially if the supplier is the source for several other stores. In worse cases, an item may appear available but is actually out of stock from their warehouse if inventory has not been accounted for or synced to your store properly.
Supplier Error Becomes Your Error: Taking responsibility for a mistake that you didn’t make is a big burden to carry, especially if you are faced with an irate customer. In this case, the drop shipper is absolutely invisible in the customer’s eyes, and because everything carries your brand, your supplier’s error is automatically your store’s error, and you cannot pass the blame.
Is It Time To Drop Everything for Drop shipping?
Drop shipping is a viable option for those who are looking to start their own business but have little financial resources. The risks are minimal, since the supplier is in charge of stocking and shipping orders, you only pay for items that were ordered in your store, and you can run it from virtually anywhere. That said, given how easy it is to apply for a drop shipping service, you will most likely be facing a stiff competition who have established their presence months, or even years, earlier. Also, though you may not be responsible for the inventory of the items, you will have to shoulder the blame for any mistakes made by the supplier. All in all, dropshipping may present some challenges, and can particularly test your patience, but if you think you can deliver a satisfactory customer service experience, then it can be worth a shot. If this seems like it’s right for you, check out our favorite drop shipping companies.