There are many moving parts of eCommerce to consider when you’re starting a business, from the front-end website functionality to the back-end order fulfillment process. Getting a product into the customer’s hands can take different forms nowadays — meaning companies can either go the traditional route of storing an inventory and shipping it out themselves or they can outsource this part of the process to suppliers. The latter business model is known as drop-shipping.
Keep reading to learn more about what a drop-ship business is — along with some of the advantages and risks of this model worth considering.
The Basics of Drop-Shipping
At the heart of dropshipping is the question: Where did the product come from? This location can either be the same or different than the company that made the sale.
Some companies maintain complete control over the eCommerce journey from start to finish, including facilitating customer transactions, maintaining their own inventory of products, boxing up orders, shipping packages to customers, and facilitating returns.
Other organizations focus more on the transaction and customer service component of running a retail business, choosing to pay a fee to outsource the manufacturing, shipping, delivery, and return processing parts of the journey — known as drop-shipping.
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Drop-shipping makes it possible for an entrepreneur to sell products and collect revenue on products they have never physically handled. As you can imagine, this business model opens up a host of potential advantages for retail businesses. It’s also important to weigh the potential risks of doing business this way, however, as it is by no means a magic solution to the various risks of eCommerce.
Advantages of Drop-Shipping
What are some of the leading advantages of drop-shipping? According to HubSpot, some key upsides to taking advantage of drop-shipping include:
- It reduces the amount of capital you need to invest to build up your inventory. Many drop-shipping payment models involve collecting a fee after a product sells rather than requiring entrepreneurs to forecast demand and pay ahead of time. So, if a product doesn’t sell very well, the associated drop-shipping fee will be nonexistent or low.
- It allows entrepreneurs to focus more on the front-end logistics of their drop-ship business, such as website design, content marketing, and customer service, rather than having to expend so much effort upkeeping the order fulfillment processes.
- Companies can offer a wider variety of products because they do not have to assume the risk or expense of physically stockpiling an inventory — which could potentially lead to unsold deadstock at a loss.
Disadvantages of Drop-Shipping
Now that we’ve covered some of the reasons why drop-shipping can be an exciting and compelling model for doing business, let’s take an honest look at some of the risks associated with it. The primary disadvantage is loss of control — namely when it comes to the reliability of the supplier and/or the quality of the products they send out.
As one expert writes for Entrepreneur, this is why it’s so important to carefully vet any potential drop-shipping partners before signing any contracts. This can be challenging if the supplier is located internationally, but there are still ways to inspect the business practices and product output from afar if necessary. Any product worth its weight in salt should have a solid rating with many positive reviews. You should also request samples before entering into any business agreement with a potential partner.
Another potential risk associated with drop-shipping is a supplier experiencing a shortage — resulting in customers getting their products late or not at all. Unfortunately, this reflects poorly on your business as the site of the transaction rather than upon the supplier, meaning it’s your responsibility to make sure any potential partners can accommodate ebbs and flows in demand with ease. The projected sales volume should be part of your initial talks and contract. If one supplier is unable to meet your needs, it’s a smart idea to have at least one backup supplier to whom you can turn as the need arises.
The need to vet drop-ship partners includes the products and shipping methods as well as the packaging. Packaging mistakes and shoddy packaging can adversely affect your reputation, so make sure your supply partner is using quality materials that you’d be proud to present to a customer.
Yet another potential risk of drop-shipping is getting conned by a scammer — an organization that seems legitimate on its face but actually is looking to take your cash without delivering its agreed-upon services. What are some potential red flags that might point to a drop-shipping company being a scam rather than a legitimate partner? According to Business Tech Weekly, it’s likely best to avoid companies that:
- Take a long time to respond to inquiries, either by phone or email. This is a partnership that works best on an expedient turnaround time, especially when any urgent situations arise — especially if your supplier is located far away geographically, meaning remote communication is all you have to keep things on track.
- Require you to place bulk orders upfront rather than allowing your orders to amass as customers make purchases. This could indicate this company will take your initial payment and run — or force you to enter into an unrealistically high-volume contract that may not necessarily reflect the actual sales demand from your target audience.
- Require you to work on a subscription-based model rather than allowing your orders to go through as customers buy products. Again, this may indicate an interest in taking your money rather than forging a partnership based on your company’s actual needs.
Drop-shipping represents an alternative to the “old-school” way of doing business in which you’d have to buy all the products you planned to sell, store them, and ship them out as orders rolled in. This model can certainly provide a more flexible way to conduct your business, allowing orders to ship out from a third-party manufacturer or vendor as customers place them through your website. As always, there are both pros and cons to consider before settling on the business model that works best for your business.