What is Drop Shipping?
Drop shipping is a relatively new method of retail order fulfillment. The process of drop shipping allows the retailer to not hold minimal inventory. Instead of going through the normal distribution channels as the retailer, having to order enough volume to keep prices low and needing to manage the logistics of getting your products, you typically will go third party. This mean going through the manufacturer, wholesaler, or another retailer. Drop shipping could be revolutionary for you if you are a new startup company with minimal capital to work with. There is drop shippers for almost every industry, however they are not known for their online expertise. It will take time and lots of research to find the right drop shipper for you and your business to be successful.
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The Process of Drop Shipping
The process of drop shipping could be difficult to understand at first, but it is not difficult to understand once you understand the fundamentals that are attached with drop shipping. The basics are: purchase made through online retailer, online retailer to drop shipping company, drop shipping company to customer. A more in-depth explanation: the retailer receives an order from a customer, the retailer processes that order through their ecommerce store, and collects their payment after the MSP processes the credit card and takes their fee (See my post on what an MSP is by clicking this link- Merchant Service Providers). When the online retailer gets the order, they will send the customer information to the drop shipper. Typically the information will be name of the customer, shipping address, what the customer ordered, and the quantity of each item. Some drop shippers will have different requirements of what they want, but what I wrote is pretty standard. After the drop shipper receives the customer information and the products they ordered from the online retailer, the drop shipper which can be a wholesaler, manufacturer, or another retailer will ship out the products directly to the customer. The online retailer which the customer purchased from typically does not touch the physical product.
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The positives of using a drop shipper:
- You typically hold minimal if any inventory
- Low startup costs
- Could potentially run your online business from your home
- You would not need to hire someone to handle the logistics of getting product from manufacturers
- Do not need a store front or warehouse to house product
- Low overhead costs
The negatives of using a drop shipper:
- Typically lower profit margins because of the use of a middle man
- Hard to know what is in stock from your drop shipper
- You tend to have to do more customer relationship management
- Drop shippers are not always perfect, so you are leaving the final step of the sale in their hands
- If the drop shipper fails their side of operations, you are responsible for the customer relationship
- You job is essentially all online marketing which can be extremely difficult since you are not able to physically be there with the customer
- There is probably already other online companies using drop shipping services so the price point is going to be hard to beat
At the end of the day, it will be up to you to decide what the best is for your business. If you have the capital to order in bulk from the manufacturer, you could typically get the products cheaper and cut out the middle man which should increase your profit margins. On the other hand, if you do not have much capital at the beginning and you want to keep your overhead low, drop shipping may be your best option. If you need help deciding what the best option for you and your company is, I would be more than happy to help on an individual basis. Just shoot me an email at Nick@NextGenMrkt.com
Consistency is Key & Sales is King
-Nicholas Wolf, CEO of NextGen Marketing