Drop Shipping Explained

by Startacus Admin

It may sound like a delivery service run by butter-fingered workers, but drop shipping is increasingly becoming the mechanism of choice for a broad range of small, medium, and large businesses.

Specifically in recent years there has been a notable increase in the uptake of such systems by startup businesses. We reckoned it was about time we took a few moments to run you through the basics of the process, and discuss briefly the pros and cons of using drop shipping services; particularly if you happen to be a startup or SME.

So what is drop shipping?

Drop shipping is a very straightforward process, whereby a business (an online retailer or some such) doesn’t keep any of the merchandise they sell in stock; instead they have an arrangement with their wholesaler by which the details of purchases made are provided and they take care of shipping the goods to the customer. Therefore the retailer never needs to purchase any more stock than they require and don't actually need to have any stock at all to be able to sell to customers. Once an order has been placed the retailer will pay the supplier as per their agreement and the product will be delivered to the customer.

See it’s really not very complicated at all, although the uber professional business type folks (who of course, like to sound very brainy) will call the process a ‘supply chain management and logistics technique’ - which is fair enough, but a bit too much of a mouthful for us.

What sort of businesses use drop shipping?

Drop shipping is used by businesses that sell or provide any kind of physical product. It is most commonly used in e-commerce, since it provides a high level of convenience to business owners but does not usually have a negative impact on the customer. As people's shopping habits have drifted even further into the online world, the demand for such agreements has increased dramatically.

Drop shipping is also used by stores with a physical location, especially when it comes to big ticket items, that would be impractical to sell direct to the public from a traditional commercial premises. The system has become a standard for the sale of products such as televisions, white goods and furniture, where costs or sheer bulk of the items prohibits retailers from holding stock.

What are the retailer benefits of drop shipping?

For a retailer, one of the most appealing benefits of drop shipping is that it creates a situation in which you have a ‘positive cash-flow’; all that means is that there is a period of time during which you have been paid by the customer, but you have not yet paid your supplier… positive cash flow!

We’re sure there is no need to describe further why that is a good situation to be in, but there are a number of other benefits which come hand in hand with drop shipping, that are certainly worth a mention.

• A wider product range. Since you do not have to hold any stock, you can offer a much wider range of products to your customer.

• It significantly reduces the seed capital needed to get your business up and running

• It can be a great way to sell products that are bulky and difficult to handle / store

• It saves time in offering new product lines because you don't have to wait for them to be delivered to you.

• Overall it saves you an enormous amount of time because you never come into contact with the product

• It allows you to test new product ranges with no / very little risk

• It can extend the practical geographical reach of your company. For example, if you are based in the UK but wish to sell to the German market, you can use a distribution centre in Germany, vastly reducing the time taken for delivery

• It’s virtually impossible to run out of stock

What are the limitations / cons of drop shipping?

As with anything there are negative issues to consider with regards to drop shipping. The most obvious problem is that it adds an extra party into the delivery of your business activity, which means you are essentially handing the reigns of your distribution to an outside organisation. Most of the time there will be a happy symbiosis between you and your distributer, however when issues regarding quality, state of delivery, mistakes, or failed deliveries crop up, they can be more complicated to sort out.

Some other possible issues with drop shipping include;

• You often have little control over packaging

• You are not given the opportunity to ensure quality control over the products

• There is usually a way of ensuring that dispatches are made promptly

• Having a drop ship only policy reduces the range of products that you can sell since not all vendors make provision for this system

If you are interested to learn more about ecommerce, you might like to take a look at some of these recent posts.

Setting up an ecommerce business, we chat to Barry from Naughty B

The Shopify Build a business competition

Online retail, we chat to the founder of Girl Meets Dress

 

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Published on: 13th February 2015