If you sell products to customers remotely, then drop shipping is a sourcing and fulfillment model worth considering. Essentially, it’s a system in which you, the retailer, act as an intermediary between the wholesaler and the consumer without the actual product ever touching your hands. Done properly and effectively, in can radically reduce shipping costs and other expenses associated with maintaining an inventory. However, before researching more, you should first see: what is drop shipping?
It can also narrow profit margins to almost negligible proportions. Also, in the worst of cases, it can end up costing you more than you make. In this article, you’ll learn what is drop shipping and who it benefits most. You can also read on how much money is generally spent on drop shipping and how a business might reduce these costs and increase profits.
What Is Drop Shipping?
Drop shipping is a method of product fulfillment that allows retail businesses to purchase individual products from a wholesaler. Then, these products have transportation directly to the customer. No longer do businesses need to house large inventories of products to make sales. Rather, they partner with drop shippers, marketing the drop shipper’s merchandise to their customers.
Drop shipping avoids the costly and timely processes of shipping products:
- First, from the wholesaler to the retailer;
- Then, from the retailer to the customer.
A retailer can partner with as many drop shippers as necessary in order to keep their catalog competitive.
Who Needs Drop Shipping the Most?
When examining what is drop shipping able to offer your business, consider that retail businesses of all sorts can benefit from drop shipping, particularly eCommerce businesses. Here, consumers conduct most, if not all, of their shopping transactions remotely.
- Retail businesses lacking a physical location in which to warehouse inventory might very well depend on drop shipping in order to function.
- Other businesses might opt for this model as a means of cutting down on upfront costs and reducing inventory risks. Some of these can be leftovers and theft or damage.
- Drop shipping is particularly beneficial to those businesses serving a niche market.
How Much is Usually Spent on Drop Shipping?
What is drop shipping going to cost your business?
- Initial startup expenses for a drop shipping business include the cost to set up an online store, marketing costs and standard business administrative costs like licenses.
- Furthermore, many drop shipping wholesalers charge upfront fees to utilize their services. Researchers noted information on this topic in a study called Dropshipping: Accounting and Mathematical Models published in 2016 in the Journal of Applied Economic Sciences. While advantageous for businesses with limited capital, the model does place a cost-burden on retailers who use it.
The seller is obliged to pursue the profit for each order, he having advantages only if the price of the supplier does not increase and if the delivery costs do not change.
According to statistics from eCommerce Drop Shipping Standards, in 2014, retail commerce was a $220 billion market in just the U.S., growing at a rate of almost 17% per year and expected to reach $370 billion by this year, 2017. E-DSS.org reported that 22-33% of online retail businesses primarily use drop shipping for fulfillment, while Forester Research reported that 34% of all products sold on Amazon in 2011, totaling about $14.2 billion in sales, used the drop shipping model.
4 Ways in Which You Can Reduce Your Drop Shipping Spending
1. Prevent Back Orders
One of the costliest and most unnecessary drop shipping expenses is the cost of back orders. This occurs when your wholesaler runs out of a product that you’ve already sold, leaving you unable to fulfill the order. This costs you not only in a lost sale but likely in a lost future customer and a tarnished reputation as well. Here are a few ways to avoid back orders.
- Stock a handful of the items you sell so you can ship them out if needed.
- Use more than one supplier for the same products.
- And inform your customers from the outset where their shipment will originate. This way, they can have realistic expectations about the delivery.
2. Use Existing Marketplaces
Many drop shippers rush to opening their own store. However, this involves a slew of upfront and ongoing maintenance costs that can quickly cut into capital and reduce profits. Whether instead of running your own store or in addition to it, consider making use of the various online marketplaces out there that already have a system, reputation and audience in place for helping you convert sales and complete transactions.
By placing your products in marketplaces like Amazon and eBay where people are already searching for them, you can be the retailer those consumers find to fulfill their order instead of your competitors.
3. Sell What No One Else Is Selling
By selling the trendiest items that buyers can get anywhere, you’re competing in an already overcrowded market. This means you have to spend more marketing dollars for a share of that pie, no matter how large it may appear to be. Also, you have to compete on price in order convert those leads into sales.
By selling niche products that consumers can’t easily find elsewhere, you can:
- Target your marketing;
- Increase conversions;
- Even raise your prices to account for the product’s relative scarcity.
4. Complement Your Current Inventory
Existing customers always make the best leads. If someone has purchased from you successfully before, they are much more likely to purchase from you again rather than a competitor. This is if you’re selling what they’re seeking.
One way to help increase the odds of this being the case is to sell products that associate with your existing inventory. Accessories for your existing merchandise can help attract return business from customers who’ve already purchased that merchandise.
To the Sale
In closing, drop shipping can be an easy inroad to eCommerce for the entrepreneurs minded with limited funds. There are, however, definite costs to consider. In this article, we looked at what is drop shipping, what costs are involved and how a business can rein in those costs as much as possible. By limiting risk and overhead using the suggestions in this article, you can have a profitable drop shipping business up and running in no time.
What is drop shipping doing to help your business save money? What ways has your business saved money on drop shipping expenses? Leave your comments below.
Images from depositphotos.com.