Drop shipping is 'a type of retailing where the retailer does not keep goods in stock, but instead passes the customer's order and shipment details to the wholesaler, who then dispatches the goods to the customer directly.' [Source: Wikipedia] The retailer then keeps the difference between the wholesale price and the retail price. If you're planning to start an online retail business, drop shipping may be just the option for you.
Let's review the process of drop shipping, and analyze the advantages that the drop shipping business model has over the others.
No Upfront Payment
First of all, you do not need to pay upfront for a stock of products before you can start selling. With drop shipping, you can simply get into business by displaying the products you want to sell on your website, before you've actually purchased any of the goods. After you've received your order via the internet, you can then forward the order to the drop shipper, usually through email, who will then deliver the products to your customer (s).
In essence, this is the reverse process of normal retailers. You actually 'sell high' first before 'buying low'. Since you're not making a huge upfront down-payment for your products, you're not bearing any risk at all. There is not a risk of purchasing thousands of units of a product, and realizing that you're not able to sell them because the consumer demand is insufficient.
So, by not needing to make an upfront payment to stock products, you're benefiting in two ways. One, the drop shipper bears all the risk for you. If the products are not in-demand, it's the drop shipper who is potentially making a loss, not you. Second, your startup costs are extremely low. All you need to invest in your drop shipping business is an initial deposit or down-payment, to demonstrate your commitment to the drop shipper, and also ongoing web hosting fees and advertising fees. This is a huge difference from retailers who have to invest on a fortune to purchase huge stocks of goods to get into business.
Product Delivery Taken Care Of
The second feature of drop shippers is that they take care of the products delivery and shipment for you. This is highly advantageous if you're just starting out in business because you can focus all your time and efforts on marketing your business, instead of worrying about order fulfillment or delivery.
Order fulfillment can be a very tedious and time-consuming process if your monthly orders number in the hundreds or thousands. You need to spend generous amounts of time keeping track of your inventory, packaging the products and shipping them to your customers individually. On the other hand, if a drop shipper takes care of product fulfillment for you, you're automating the process of shipping the products, and you can focus on your core competency – marketing your business to bring in more customers. This is another great advantage of using drop shipping as your business model.
No Need For Warehousing
Since you do not need to purchase a huge inventory of stocks from the drop shipper, there's no need for warehousing costs as well.
This is highly advantageous if you consider this opposite scenario: If you rely on the usual wholesaling business model instead of drop shipping, you need a location to store your products after purchasing your initial stock. Depending on the space you need, your monthly warehouse rental costs can cut into your profit margin significantly. You may even be operating your business at a loss. Why not let the drop shipper stock the products at their warehouse until your customer makes a purchase instead?
Flexibility Of Product Catalog
With drop shipping, you have the choice of promoting any number of products you want on your website catalog. Since you do not need to make upfront capital investments, you have the flexibility of promoting as many products as you want, as long as the products are all related to the category of products you sell.
However, it's essential to strike a balance between the range of products you have, and the 'product focus' of your business. Your business should focus on a single category of products – you can not be a supplier of everything to everyone, like Wal-Mart. Be sure to include only the products you think are related to your core 'product focus', and avoid promoting too many unrelated products on your web catalog.
No Minimum Quantity Restriction
The last advantage of drop shipping is that most drop shippers do not make a minimum quantity order. When your customers place orders at your website, you can forward your orders to your drop shipper one-by-one. Most drop shippers do not have a problem with that. So, drop shipping is very beneficial for your business because it offers the greatest flexibility.
In conclusion, drop shipping is definitely an option you want to consider if you're planning to start an online retail business without all the hassles of inventory and product delivery. If you evaluate the above advantages carefully, you'll realize that drop shipping is unduly a viable option for the small-business retailer. Large retailers, on the other hand, will have sufficient resources like capital to use the wholesaling model for their business.