Drop shipping is a system of retailing in which the retailer does not actually stock up his product range in an inventory, but accepts orders and uses wholesalers of the product to ship the order to the customer directly. Drop shipping has become a lucrative business model for thousands of online merchants, since all that is needed is reliable connections with wholesalers and manufacturers and a way to sell persuasively in order to get orders. It offers numerous advantages which explains the success of this business.
Drop shipping works simply. Customers zero in on the drop shipping website while conducting an online search for the product they wish to buy. Once they place the order, the retailer accepts the payment and then passes on customer information to the wholesaler or manufacturer along with the shipping address, so that the order can be dispatched as per schedule. The producer gets his price and the retailer gets to keep a margin as profit for only booking the order.
Some of the benefits of drop shipping are:
- Low establishment costs – online businesses do not need the investment required for setting up physical, real word stores. Ecommerce businesses set up stores online which are essentially websites, and the only expenses incurred, are those for designing the websites and using a web hosting service.
- Wider product range- retailers, both online and in the physical world, are somewhat restricted in the range of products they offer due to the expense and investment involved in stocking products, getting a warehouse for inventory and other related expenses. But with drop shipping, no investment is required since products do not have to be bought, no warehouses are needed, and all related issues get resolved as well. All that is needed is a landing page for each product being offered, index page for search engines and other similar website features that cost a fraction of the store cost.
- Fast entry into market- The Drop shipping business model can start much faster than any other business. Once products and their manufacturers or wholesalers have been indentified who are supportive, and the website has been designed, serious business can start. There is nothing like a waiting period or a gestation period for business to bring in profits.
- Introduce new products- Drop shipping is a perfect platform for the launch of new products. All that is needed is a landing page on the website without any risk of investing in an untested product. This is also a perfect trial method to gauge public response to a new product.
- Loans and funding requirements are low- When a website with multiple landing pages is the only requirement for the retail drop shipping business, investment and loans become unnecessary. No stores, stocks and overhead expenses are to be made and the startup business becomes less risky.
- Less time involved- retailers often find themselves cash strapped when inventory level is high and goods are not sold-this means their capital invested is blocked and the time span between investing and getting returns is high. With drop shipping there is hardly any investment and capital need not be blocked at all.
Such advantages make drop shipping a tempting and lucrative business proposition. But it has its fair share of problems and challenges. The biggest challenge faced by drop shippers is providing excellent customer service with no hiccups in deliveries through wholesalers. Additionally, this is a low margin business, since the markup a drop shipper can charge will be the discount the wholesaler is able to offer him for the volume of orders he manages to get. The price he charges has to be at par if not lower than that offered by competing sites. Additional expenses like card payment fees etc further eat into the thin margins.
This post has been submitted by Neil from eMobileScan, who are a dedicated B2B supplier of the latest handheld technology like the Motorola ES400 and the Zebra GK420T which allows them their customers to reduce costs and improve efficiency