What is drop shipping and how does it work? Is it really a valid supply chain management model? Can anyone take advantage of this technique? The truth is that drop shipping is actually a very simple process and a low cost entry point to buying and selling online.
The drop shipping business model works as follows: a retailer finds a product from a company that is willing to drop ship, and then lists that product on an online auction or an eCommerce website. The retailer, then, is in charge of the promotion of that product and collecting the payment for it, but they are never actually in possession of the item.
Here are the first two benefits of drop shipping. Probably the most important one is that you never have to stock the inventory yourself. What this means to you as the retailer is that you don’t have a huge capitol investment requirement when you start your business – you don’t have to purchase all of your products up front. You simply list the item that the supplier is willing to drop ship and then collect the payment. And this is the second benefit of drop shipping: a positive cash flow cycle – meaning you receive the money before paying the supplier for the product.
This brings us to the next step of the drop shipping business model – collecting the payment and transferring the order. Once a customer has chosen your product and made their payment (including the shipping costs) you then send the wholesale price and the shipping fee to the supplier, along with the order for the product. The supplier, then, is in charge of fulfillment and will deliver the item to the customer. As you can see, the retailer is left with the difference in prices, without ever having to see, package, ship, or store the products.
The benefits from this step should also be apparent. Not having any inventory on hand yourself means that you don’t have to worry as much about sudden customer or market shifts. You’ll never get stuck with rooms full of outdated equipment because you’ve never actually bought any inventory. You’ve merely handled the payment and the order. The supplier is the one who handles the other parts of this supply chain equation.
And the part of the equation that the drop shipper takes care of is no small thing. Drop shipping frees up large amounts of your time that would normally be taken up with activities such as stocking inventory, packaging products, and standing in line after line after endless line at the post office.
These are the basics of drop shipping, but there are some other advantages that are a natural outgrowth from those already stated.
Without the need of a warehouse or other location to store your products you will cut down on your overhead costs, and without the requirement to buy stock in large quantities, you can minimize the risks of overshooting projections and getting stuck with unwanted merchandise.
When you use the drop shipping model you can use all this freed-up time to research your market and discover all the products that can perform the best for your business. Markets and industries fluctuate all the time, and a drop shipper can help you be flexible enough to keep up with those changes.
Drop shipping also gives you a chance to look like one of the “big guys.” You can offer as many or as few products as you like. Specialize in a single product or become a one-stop-shop for a huge variety of high-demand items.
The products you offer will, of course, depend on the suppliers you can find. Some are larger than others, but if you want to succeed at online selling, reliability is much more important that just size. As you begin to reach the huge potential on the Internet, you need to know you’ll be able to quickly and reliably fill consumer demand.