What Is Drop Shipping? A Beginner’s Guide

Posted April 17, 2017 | By Tricia Hussung

Various icons representing the drop shipping business model with title text overlay

Drop shipping is a retail business model; however, it differs from traditional models in that the owner only purchases product from a vendor when an order has been placed by a customer. This eliminates the need to own or store inventory and opens up a wide range of opportunities for entrepreneurs. Drop shipping refers to a process in which products ship directly from supplier to customer, rather than shipping to the business itself first, thus streamlining the process.

The core benefit of drop shipping is that it saves on resources and time. When you don’t have to pack and ship your own products, you can devote resources to other core business processes. Working with drop shipping partners “is not only a product acquisition model, but also includes product fulfillment,” according to Shopify.

How Does Drop Shipping Work?

The drop shipping model is relatively simple. It consists of the following steps:

  1. A customer places an order with an online business.
  2. The business receives the order and forwards it to the drop shipping partner.
  3. The drop shipper packs and sends the products in the order directly to the customer on behalf of the business.
  4. The customer receives the products ordered.

Pros and Cons of Drop Shipping

Aside from the central benefit of eliminating costs associated with storing, packing and shipping products, here are some of the key benefits of drop shipping:

Lower capital requirement: Due to the nature of the business model, utilizing drop shipping helps cut typical business spending. It’s a cheap way to start a business because it keeps startup costs low. It also does away with inventory management practices, typically one of the most prohibitive costs for new businesses.

Wider product selection: Because it gives you access to new products, niche items and best-sellers, Volusion says that drop shipping “can effectively increase the variety of products your online business sells.” E-commerce incubator A Better Lemonade Stand also points out that it’s easy to diversify inventory by merely adding new items to your store.

Reduced risk: Without drop shipping, businesses take on a great deal of risk when purchasing inventory due to the potential for excess inventory or under-ordering, Volusion notes. Drop shipping frees you from purchasing items you may not be able to sell.

Flexibility: Dropping shipping allows you complete location independence. This means that you can operate anywhere that has an internet connection instead of worrying about storage space.

Scalability: You can easily scale your business up and down because you don’t have to manually fulfill each order. Selling 10 or 10,000 units requires roughly the same amount of work.

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There are also complexities and potential drawbacks associated with drop shipping. Here are some of the disadvantages to the model:

High competition: More people tend to choose drop shipping because of the benefits listed above. This increases competition, meaning that businesses should have a selling point that differentiates them from the competition.

Low margins: Slim margins mean that businesses have to be able to move a lot of product in order to make enough profit. In addition, it can be difficult to execute paid marketing campaigns to attract new customers.

Limited brand control: Because it utilizes third-party shippers, drop shipping limits businesses’ ability to control branding and customer experience.

Despite these disadvantages, drop shipping is the right choice for many entrepreneurs. For example, entrepreneurs who are looking to test new products before investing a large amount of time and money into them will benefit from the flexibility of the drop shipping model. Entrepreneurs who are just starting out in e-commerce may find drop shipping to be a great business model because it is relatively low-touch and gives them a chance to gain valuable experience, A Better Lemonade Stand notes. However, it is important to note that, as is the case with all business decisions, you should think critically and understand your specific requirements before choosing drop shipping to build a successful online business.

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