Picture this:
You want to get a full set of Harry Potter books 1-7 and you approach your friendly neighborhood bookstore guy. He doesn’t have the books but he doesn’t want to lose a customer. So, what does he do? He knows he can source it for you within the day. He gets it from a friend/supplier/retailer. Since he is a bookstore owner, he gets it at a discounted price and sells it to you at retail price. This is similar to drop shipping. The bookstore does not stock the books you ask for. But he is the one who sells it to you. He connects with other sellers to get the goods. In short, he is the middleman and gets a margin from the sale.
What is Drop shipping?
Assume that you run a drop shipping company. You liaise with several wholesalers who let you have status information of their inventory. You run a website that lists the products you can ship to customers. Once there is a sale, you pass on the information to the wholesaler and they ship it to the customer. Instead of managing and holding your own inventory, you partner with a supplier and list their merchandise. The supplier charges you for the item. You make money thanks to the margin you manage to sell it at.
What are the pros of a drop shipping business model?
Lower investments:
You don’t buy stock. You don’t require warehouses to stock goods. You need not worry about unsold stock. All this translates to the fact that your initial investment is on the lower side. If you have the supplier connections, it is relatively simple to design a website and start selling.
Location:
All you need is an internet connection to run your business. You can run it from wherever you please. This also means that you save on rental cost.
Huge range of products:
If you liaise with several wholesalers, you get to list a wide range of products from various parts of the world/country at various prices. This is the unique selling point for the drop shipping business model.
What are the cons of a drop shipping business model?
Low profits:
Face it; you make only the margin between the listed price and the wholesaler’s price. Plus, you incur shipping costs. If a single order consists of 3 different items that are available with three different suppliers, your shipping cost is on the higher side. Sometimes, you lose the margin you make in the shipping costs involved.
Dependence on suppliers:
the supplier manages his inventory and passes that to you. If he’s erroneous in his inventory management, you are at risk. You might list a product that’s impossible to get hold of. If the supplier does not ship on time, your reputation is at stake. If the product is of unsatisfactory quality, the customer holds you responsible. The supplier packages and ships it- you have no clue about quality of packaging.
Competition:
Because it’s relatively easy to run a drop shipping business, there is cut throat competition and it is tough to survive alongside bigger competitors. Veteran drop shipping companies offer unbeatable prices and they have liaisons with a lot of wholesalers.
