Drop shipping has taken the world by storm while playing an important part in advancing the global ecommerce. Drop shipping is a retail fulfillment method where a merchant does not stock the products they sell; instead, they build ecommerce websites where customers can browse and place their orders. The drop shipping merchant, also known as dropshipper, then buys the product from a wholesaler or manufacturer and ships it directly to the customer.
It’s noticeable that in such transactions, the merchant never handles the product since it can be bought from the supplier and directly delivered to the customer; this is the most important element in the drop shipping process which positions the merchant as the “middleman”.
The Drop-shipping and E-commerce Connection
As more people embrace online shopping, e-commerce sites play an even bigger role. As at the end of 2017, of all the money made from online retail at least 10% of the revenue was from e-commerce sites using the drop-shipping model. Forrester Research in a study showed that online retail sales would grow to more than $500 billion and 23% of this will be from drop shipping businesses.
In a study published in the Journal of the Operational Research Society online retailers that incorporate drop shipping have the potential to be 50% more successful than those retailers who ignore the model. Since drop-shipping businesses do not have concern for product storage, safety, they can focus on growing their e-commerce sites by incorporating SEO strategies, as well as focusing on customer service on social media and via email.
How Do Drop Shipping E-commerce Sites Make Money
As you would have guessed by now, drop-shipping entrepreneurs are middlemen who give manufacturer visibility for their goods on their e-commerce sites. The merchants post the products on their website with a higher price tag than that of the manufacturer or wholesaler. After a customer purchases the drop shipping e-commerce site, they purchase the manufacturer who then arranges for the shipping of the product to the customer.
Some of the established drop-shipping merchants earn a commission for every item sold, given that they had a binding contract with the manufacturer or wholesaler. There are many reasons to go into the drop shipping business, but you must also know the drawbacks of such a business model. First, let us look at the benefits you get from a drop-shipping model.
This is the most obvious benefit of drop shipping, and your business will thrive as long as you have a robust e-commerce site. Drop shipping merchants do not have to build, buy, or rent warehouse space to store their stock. All they need is to invest in proper web development and targeted SEO strategies to acquire and convert a browser into a customer. Drop shipping entrepreneurs do not need a huge sum of startup capital or inventory. Since you do not have any expense with warehousing, invest the money you would have used on building a robust mobile friendly e-commerce website.
Drop shipping merchants have unmatched flexibility compared to their brick-and-mortar stores counterparts since they do not have to invest in advertising and marketing to push the products they already have in stock. By taking a frequent surveys of customer queries on the e-commerce site, you will know what your customers want and remove the unwanted items.
Since the drop shipping merchants only need an e-commerce website, they can run it from their home, or while at the office. Various studies show that at least 62% of smartphone and tablet users made an online purchase using their mobile devices. When digital marketing is done right, drop-shipping merchants can upscale their business with minimal effort and costs. Moreover, by staying on the customer wants pulse, you can offer them what they want and when they want it.
However, e-commerce with the intent of drop shipping is not an easy venture, and it has drawbacks. Let us look at the things you will face when you get into this business.
Since it is an easy venture to start, many people are getting into the business, and this contributes to low margins. This is because most merchants tag the products at rock bottom prices, and since their startup and operation costs are minimal, they can afford to run the business with small margins.
No matter the quality of your website, there are many more merchants with low-quality websites with even lower prices. Customers will not hesitate to compare prices despite the quality of the website. However, you can mitigate this by operating in a niche market.
Retailers who stock their products have an advantage over drop shippers because that can keep track of their inventory. However, as a drop shipper, you are sourcing your inventory from multiple manufacturers and wholesalers, and they might delay in informing you when they are out of stock. This will put you at pains to explain to the customer that their products are out of stock when they have already bought the item. You might have a system in place to synchronize your e-commerce site inventory with that of your supplier, but more often than not, they do not work as expected, and you will have inventory issues eventually.
Complexities in Shipping
A customer can order three or four different items from your e-commerce site; this means that you will have to incur triple or quadruple the shipping costs for sending each to the customer. Most drop shipping entrepreneurs first course of action is to pass the costs to the customer, remember that they will think you are overcharging for your shipping costs. They can write a bad review for your e-commerce site, and this will lead to fewer customers trusting your brand.
Fulfilling Drop Shipping Orders
Drop shipping is a service and since you are running an ecommerce site, you need to be in constant communication with your suppliers. Order fulfilment will determine whether you are successful in your drop shipping business or not. Despite the increasing challenges, you will need a robust e-commerce site to ensure that you are getting traffic from either search engine results, social media, or digital ads from other sites. Make sure that you have reliable suppliers and shipping firms to get the order to your customers on time and in the proper condition.
Drop shipping is not easy, and neither does it guarantee an immediate return on investment, however, with proper planning of your e-commerce site it can work. Consider your product options and partnerships, as this will reduce your overhead and frustration. Despite the competition using low-quality website, changing times are calling for high-quality e-commerce sites that are mobile friendly to accommodate all kinds of shoppers.