It’s common for people to ask, “What is drop shipping and how does it work?” Currently, a lot of people practice this kind of marketing without knowing it is called drop-shipping. As we progress, you’ll learn everything there is to know about drop shipping. without further ado, let get started.
What is Drop Shipping?
What is Drop Shipping and How Does It Work? Drop shipping is a marketing model in which a person or company puts goods up for sale on their website without having such goods in stock.
Once orders are placed for goods posted on their site, they forward the orders to the company and make provisions for the goods to be shipped to the persons who placed the orders.
In this model, the advertiser (drop shipper) acts as a third party or middleman for the marketer who has the goods to be sold in stock.
The drop shipper advertises goods at a price higher than the actual market prices of the goods and makes his income from the extra charges on the goods.
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How Does Drop Shipping Work?
The drop shipping business model is pretty straightforward and so simple even a newbie would learn the rope without a bead of sweat. Below is a summary of how the model works:
1. The drop shipper (an entrepreneur or company) signs an agreement with a manufacturer, wholesaler, or retailer to supply the goods they advertise on their site.
2. Advertisements are posted by the drop shipper
3. A customer places an order
4. The drop shipping company receives the order
5. The customer receives a confirmation of the order
6. The advertising company forwards the order to the supplying company
7. The company ships the product to the address of the person who made the order
What are the Pros of Drop Shipping?
As opposed to popular belief, dropshipping is not some get-rich-quick scheme. However, you can make a good amount of money if you put in the required work.
Either way, the model comes with many other benefits for both experienced and inexperienced entrepreneurs. Let’s discuss some of the benefits below:
1. Starting is Easy
Unlike business conducted in physical retail stores where substantial amounts of money and other resources are required to get started, drop shipping does not demand so much.
Since the drop shipper does not have to worry about handling physical goods, they would have little to no business worrying about:
- Acquiring and managing a warehouse
- Stocking, managing, and shipping of orders
- Inventory tracking and management
- Tracking of orders
- Supervision of returns and inbound good shipments
2. Requires Little Startup Capital
This is the main reason why many young people venture into the drop-shipping business mode. An entrepreneur does not need capital running into several thousands of dollars to start.
A drop shipper does not need to buy a product unless a customer places an order and makes payment for the items. This cuts out the risk associated with managing an inventory.
3. Easy Scalability
With the regular retail model, the workload on the retailer increases with the amount of orders. The supplier in the dropshipping model takes care of all the extra work, making the work lighter for the dropshipper.
This creates room for the middleman to focus on the needed work, like customer support, required for growth. That way, the business is able to grow and expand to other platforms.
4. Flexibility of Location
With a good internet connection and a laptop or smartphone, you can run a drop shipping business. This means that you can manage your drop shipping business from any location.
So, you can be a drop shipper while you have a normal nine-to-five job or any other business that demands your physical presence, provided you are able to communicate with the suppliers and also provide adequate customer support.
5. Easy Testability
A drop shipper has room to test how well different products will perform in the market even without spending money to buy a large amount of such products.
Business owners and persons looking to open a new store can use this model to test the appetite of customers for new products they wish to sell.
6. Wide Variety of Product Options to Explore
As discussed earlier, you do not have to purchase a large inventory of goods before selling. Entrepreneurs can hop on product trends in the market to draw potential customers.
More so, you can alternate your product niches with zero worries about unsold stock. Plus, you can list items your supplier has in stock on your website or social media page at no extra cost.
What are the Cons of Drop Shipping?
Of course, it would be unfair to make you jump into drop shipping by showing you the bright side of the model without warning you of the risks and pitfalls you may encounter along the line.
Like many other things that have advantages, you should expect to find some disadvantages. So, let’s get to it.
1. Issues with Inventory Management
Business owners who manage their inventory themselves find it relatively easier to keep track of items available in stock. We can’t say the same for drop shippers.
Suppliers typically have other customers they directly transact with and orders that they fulfill daily. As such, they may run out of stock without the drop shipper knowing on time.
This can lead to issues between the customer and the drop shipper when orders are not fulfilled on time. Thankfully, technology can help maneuver this barrier, but with additional effort and cost.
2. Error from Supplier
If you’ve never had to accept responsibility for faults that were not yours, you should be ready to do so when you become a drop shipper.
This typically happens when a supplier makes mistakes like packing a wrong, low-quality, or faulty product when fulfilling orders. This can dent your brand’s image if you can’t handle the situation properly.
3. Little Room for Branding and Customization
If you’re looking to strengthen your brand voice using your products, then dropshipping isn’t the business model for you. This is because you have limited control over the product.
The supplier is responsible for the branding of the product. Even when suppliers accommodate a drop shipper’s request to rebrand products in their favor, they still have the final say.
4. Limited Control Over Products’ Supply Chain
Shipping complexities may arise in cases where a drop shipper has multiple suppliers they work with. Say a drop shipper has to fulfill an order for six products from different suppliers to a client.
5. Low Profit Margins
The low cost of starting drop shipping in the US makes it a highly competitive venture because lots of entrepreneurs flock to it. This makes it advisable for drop shippers to sell at low prices.
The low-price sale is in an attempt to generate revenue, thereby, lowering the profit margin. However, you can maneuver this issue by choosing the right niche and products that best suit drop shipping.
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Drop shipping is gaining wider popularity by the day owing to the many pros it has – which far outweigh its cons. For people who don’t know what is drop shipping, it can be easily confused with affiliate marketing.
Dropshipping is a business model that enables people to sell products stocked by another company or person, through their website without necessarily interacting with the products.
In affiliate marketing, on the other hand, a third party helps a brand, product or merchant gain popularity by advertising them and creating leads for the company itself.
We have shared with you, all that you need to know about drop shipping. So, it is up to you to do the necessary due diligence before choosing a product, niche, and supplier.
Your niche and product choice are major influencers of the scalability of your business as a drop shipper. While it may not be very demanding to start, keep in mind that you’ll need to put in more work as you expand.