What is Drop Shipping?
Drop shipping is a fulfillment technique where retailers offer products that they don’t stock on site. When a customer places an order, the company will purchase and fulfill items directly from their supplier. As a result, the company never actually “touches” the product.
Why do Companies Use Drop Shipping?
Most often, companies use drop shipping as a method to increase their product selection, or to simplify their fulfillment process. Because of the cost savings associated with the practice, many businesses find it as a suitable way to expand, save, and increase sales.
Pros of Drop Shipping
Lower Inventory Levels
By not stocking inventory, companies receive a number of benefits. First of all, inventory can take up a lot of space. As a result, companies that stock a significant number of products will need the storage capacity to house them. Additionally, you need to maintain the inventory—checking levels, quality, proper storage, etc. By utilizing this drop shipping, many businesses are able to spend less time worrying about inventory and more time growing their business.
Lower Cost
There are lower barriers to entry to start drop shipping because it doesn’t require a tremendous about of capital. This is because you are purchasing the products as you are selling them. As a result, many businesses are expanding their offering—or even starting a business—using this method. Because you purchase the product once an order is made, you don’t have to worry about carrying the cost of inventory.
Lower Overhead
The carrying costs associated with inventory add up quickly. First, there is storage costs—warehousing, utilities, warehouse equipment, etc. Second, there are fulfillment costs—employee salaries, shipping and receiving equipment, shipping material, etc. Finally, there are financial costs—insurance, depreciation, perishability, shrink (theft), etc. Consequently, drop shipping can offer a significant cost savings when compared to stocking items.
Low Risk
Stocking inventory comes with a significant amount of risk. Most of all, you have huge up-front costs for products that may or may not sell. Alternatively, drop shipping allows companies the ability to fulfill orders as they are placed, lowering the risk of carrying the product. Secondly, by placing the burden of inventory management on your suppliers, you are able to focus on ways of growing your business without incurring additional costs associated with inventory. Businesses are able to consider and test out new products with their customer base without investing the capital.
More Flexibility
Drop shipping offers your business a great deal of flexibility. A business that uses drop shipping can be run from basically anywhere in the world that has an internet connection. Also, it allows you the flexibility to travel while you work—just as long as you can continue communicating with your customers and suppliers.
Drop shipping allows you to scale easily. In additional to leveraging the stock of your suppliers, you are also leveraging their work force. As sales increase, customer service and shipping and receiving increase as well. With drop shipping, shipping and receiving is taken care of, allow you more time to spend on customer service, and building your business.
Cons of Drop Shipping
Slim Profit Margins
Typically, the biggest drawback to drop shipping is the cost of the products. Because of the added service requirement from the supplier, margins often become very thin. Often times suppliers may charge a premium for drop shipped orders. In addition, drop ship orders typically don’t qualify for quantity discounts, and there may be a surcharge for each item shipped—often a nominal fee of about $1-5 per order.
Note: Using the Versa Cloud ERP system, allows users to mitigate lower profit margins but increasing automation. By automating the ordering process, you are able to spend less time converting orders in the supplier orders and manually sending sale information.
Less Control, and Inefficiencies
Another disadvantage of drop shipping is the uncertainty of stock availability. Many suppliers don’t offer a dealer portal (see our article on The Gravity Cartel and how they offer a dealer portal using VersAccounts). Because of this, when a customer orders from you—you may be forced to cancel the order due to the product not being available.
In addition, shipping delays can add up quickly. If a customer orders from you on Wednesday, you verify and submit the order on Thursday, chances are that order won’t go out till Monday (or later). As a result, giving accurate shipping times and tracking information to your customers can be difficult.
Note: The Versa Cloud ERP system is capable of connecting to 3rd parting inventory feeds allowing you full access to your supplier’s inventory levels. As a result, you are able to know which products are unavailable and prevent orders for products that are out of stock. Additionally, the need to manually send orders to your suppliers can be automated, increasing the speed and accuracy of fulfillment.
More Competition
There are many companies out there that solely rely on drop shipping as the model for their business. These companies are often more about quantity, than quality. As a result, selling similar products at a higher cost poses a problem. Even if the competitor’s website, service, or selection isn’t up to par with yours, many consumers are still price sensitive. To learn more about pricing, check out our blog on The Rules of Price Optimization.
In addition, suppliers may try and steal your customers. They do this by placing their promotional content in orders they fulfill on your behalf. Or worse, “accidentally” put your sales order in on accident, indicating to your customer what you paid for it. Establishing strong agreements with your suppliers can prevent this.
Note: Automating this process by providing unique shipping information and packing lists to your supplier is now available in Versa Cloud ERP. Once set up, orders will automatically generate the required documentation and send to the supplier—saving you time and money.
Errors
One of the most frustrating parts of drop shipping (and frankly all retail fulfillment) is errors. In addition to potential shipping errors, product errors can rise from incorrect product descriptions, images, and/or dimensions. As a result, your customers will be holding you accountable to remedying the problem. And, suppliers often won’t accept returns that are not Wrong Item Shipped or Damage Item Shipped. Not only will you be needing to refund the customer, you may have to absorb the product.
Note: Errors are inevitable. However, using the Versa Cloud ERP system has been shown to reduce errors by automating processes. Automation takes the manual work out of submitting information to your suppliers. This in turn promotes accuracy and reduces errors.
Conclusion on Drop Shipping
Drop shipping is a great way to either start a business, or to expand your product offerings. We believe that drop shipping can help grow your business. However, you need the right tools to accomplish this. For more information on ways of using modern technology to help your business grow, check out our new eBook. In it you’ll learn six hard questions that every business owner should be asking themselves and how to compete in the Age of Amazon.
We at Versa Cloud ERP can help!
