When you build your eCommerce company, one major component you must consider is how to get the merchandise to your customers. Drop shipping has become a very popular option for many retailers due to its numerous benefits to both retailers and consumers. Studies have shown that drop shipping increases profit margins for companies.
A 2009 study published in the Journal of the Operational Research Society demonstrated that retailers who utilized drop shipping increased their profits by 5.18 percent. There are a few things you should consider before choosing it as a reliable option.
How it Works
When a company uses drop shipping, it does not actually keep any of the items in stock themselves. Instead, as soon as an order comes in, you purchase it from the supplier who then ships it to the customer. The customer never interacts with the third party supplier; instead, you will inform the customer when to expect the shipping. If you have a lot of concerns about using drop shipping, you can always join a discussion in a drop shipping forum to discuss it as much as you want.
Drop shipping boosts profit because you can easily offer a broader product line and not have the expense of inventory. When you use drop shipping, you have low overhead costs because you do not have any actual inventory in which you must invest. You can have a wider selection of products because you just contact the necessary retailer as the orders come in. Furthermore, you do not have to put the capital upfront for your inventory because you will not actually order anything until the order from your customer gets in. You also do not have to worry about having a large location and warehouse since you will not have any warehouse. This makes it easy to start your business and hit the market, while still having a high profit margin. You also do not have to worry about shipping the item yourself.
However, as great as drop shipping can be for an online retailer, it does come with risks and potential problems. Although on the one hand drop shipping is easy, it does complicate things through having a third party involved. The supplier may have inventory issues. Furthermore, it requires excellent communication between your company and the supplier, especially about the available inventory. You must be able to have instantaneous communication with your suppliers; otherwise, drop shipping will not work. Furthermore, there are potential problems with shipping and customer service. Because you do not handle the actual shipping yourself, then you cannot help your customers with any questions about this, unless you have the proper communication portals. It also complicates some parts of the shipping process. Although you do not have to worry about actually shipping it out, someone does and it still costs money to ship. If your customer buys four products from four different suppliers, he or she will get four separate boxes shipped out, rather than one.